Schedule 16 A. Significant Accounting Policies : 1. Basis for preparation of Financial Statements The financial statements are prepared under the historical cost convention, in accordance with the Generally Accepted Accounting Principles, the applicable guidelines issued by the Reserve Bank of India and the Provisions of the Companies Act, 1956, as adopted consistently by the Company. 2. Revenue Recognition (a) Lease Income in respect of assets given on finance lease is recognised in accordance with the accounting treatment provided in Accounting Standard -19. Lease Rentals on assets taken on lease and sub-leased to Ministry of Railways (MOR) prior to 01.04.2001, are accounted for at the rates of lease rentals provided in the agreements with the respective lessors and the sub-lessee (MOR), on accrual basis, as per the Revised Guidance Note on accounting for Leases issued by the Institute of Chartered Accountants of India (ICAI). In case of non performing assets, classified as per the Reserve Bank of India guidelines for income recognition, interest/income is accounted for on receipt basis. 3. Foreign Currency Transactions Foreign currency transactions have been recorded: (a) At the rates prevailing on the date of payment (i) for acquisition of assets, and (ii) for interest payment on Loans, Commitment Charges and expenses. At the rate prevailing at the end of the year for foreign currency deposits, lease receivables, loans and current liabilities. The portion of the Foreign Currency Loans swapped into Indian Rupee is stated at the reference rate fixed in the swap transactions, and not translated at the year end rate. Increase/Decrease in foreign currency loans on account of exchange rate variation relating to Leased assets, if not recoverable separately from the lessee under the lease agreements, is adjusted in the Profit & Loss Account. 4. Leased Assets All assets acquired by the Company and given on finance lease are shown as Lease Receivable at an amount equal to the net investment in the leased assets in accordance with the Accounting Standard (AS) 19 issued by the Institute of Chartered Accountants of India. 5. Other Fixed Assets (a) Fixed Assets are stated at cost less accumulated depreciation. Where the cost of depreciable assets has undergone a change during the year, due to exchange rate variation on foreign currency loans, such amount is depreciated prospectively over the residual life of the asset determined on the basis of rate of depreciation. Depreciation on fixed assets is charged on straight line method at the rates prescribed in Schedule XIV to the Companies Act, 1956, on pro-rata basis. 6. Investments (a) Investments are carried at cost. Provision for diminution in the value of quoted investments is made on the basis of market value as at the year end. 46
7. Assets Securitisation Securitisation of lease receivables is accounted for in accordance with the Guidance Note on Accounting for Securitisation issued by the Institute of Chartered Accountants of India (ICAI). 8. Bond Issue Expenses and Expenses on Loans, Leases. (a) Bond Issue expenses including management fee on issue of bonds (except discount on deep discount bonds) incurred during the year are charged to Profit and Loss Account. Upfront discount on deep discount bonds is amortised over the tenure of the bonds. Documentation, processing & other charges paid on Long Term Loans are charged to the Profit & Loss Account in the year loan is sanctioned / availed. Lease management fee paid for acquiring assets on lease, is charged to Profit & Loss Account in the year of acquisition. 9. Taxes on Income Provision for current tax is made in accordance with the provisions of the Income Tax Act,1961. Deferred tax on account of timing difference between taxable and accounting income is provided considering the tax rates and tax laws enacted or substantively enacted by the Balance Sheet date in accordance with Accounting Standard - 22 Accounting for Taxes on Income issued by the Institute of Chartered Accountants of India. The accumulated deferred tax liability is amortised by adjustment from the reserves in three years. 10. Staff Benefits (a) Provision for gratuity is determined on the basis of 15 days last drawn salary for each completed year of service or part thereof in excess of six months, taking month of 26 days for all employees. Provision for Leave encashment is determined on the basis of leave accrued to the respective employees at the close of the year on last drawn salary taking month of 26 days. B. Notes on Accounts 1. (a) Lease rental has been charged on the assets leased from the first day of the month in which the assets have been identified and placed on line. Ministry of Railways (MOR) has charged interest on the value of the assets identified prior to the payments made by the company, from the first day of the month in which the assets have been identified and placed on line to the first day of the month in which the money is paid to the MOR. However, no interest is charged from the MOR on the amount paid by the company prior to the identification of Rolling stock by them. Interest rate variation on the floating rate linked rupee borrowings and Interest rate and exchange rate variation on interest payments in case of the foreign currency borrowings are adjusted against the Lease Income in terms of the variation clauses in the lease agreements executed with the Ministry of Railways. During the year, such benefit to the extent of Rs.115.54 crore (P.Y. Rs.132.25 crore) has been adjusted against the Lease Income. 2. (a) In terms of Reserve Bank of India Notification No.DNBS.135/CGM (VSNM) 2000 dated 13th January, 2000, the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 do not apply to the Company. In terms of Reserve Bank of India Notification No.DNBC.138/CGM (VSNM) - 2000 dated 13th January, 2000, the provisions of Section 45 IC of the Reserve Bank of India Act, 1934 (2 of 1934), do not apply 47
to the Company. 3. The Finance Act, 2001 provides for levy of service tax on the finance and interest charges recovered through lease rental instalments on the Financial Leases entered on or after 1.7.2001. The Central Govt. vide Order No.1/1/2003-ST dated 30 th April,2003 has exempted the Lease Agreements entered between the Company and Ministry of Railways from the levy of Service Tax thereon. 4. Increase in liability due to exchange rate variation on foreign currency loans for purchase of leased assets, amounting to Rs.14.60 crore (P.Y. decrease in liability Rs.51.36 crore) for the year has not been considered as revenue as the same is recoverable from / payable to the Ministry of Railways (lessee) separately as per lease agreements. The exchange rate variation on foreign currency loans repaid during the year amounting to Rs. 137.50 crore (P.Y. Rs. 2.07 crore) has been recovered from the Lessee, leaving a balance of Rs. 15.58 crore recoverable as on 31.3.2005(P.Y. Rs. 138.48 crore). 5. Office Building including parking area has been capitalised from the date of taking possession. However, the sale/transfer deed is still pending for execution in favour of the company. 6. Contracts for import of Rolling Stock assets between the Ministry of Railways (MOR) and the overseas suppliers, which were funded by the company, were assigned in its favour. These contracts provide for payment of commission to agents of suppliers on certification by MOR of satisfactory execution of the contracts. Pending certification by the MOR, the commission amounting to Rs.10.04 crore (P.Y. Rs.10.04 crore) is still to be paid. The amount, whenever paid, will be appropriately recovered from MOR. 7. Syndicated Japanese Yen Loan (a) During the year 1998-99, the company raised JY 8854.65 million through Syndicated Japanese Yen Loan on behalf of Ministry of Finance (MOF) and repaid an outstanding loan of Exim Bank of Japan through refinancing. The said Syndicated loan was renegotiated during the year 2002-03. The interest as well as repayment of loan is serviced by the MOF. JY 5755.54 million of the refinanced loan has been repaid leaving a balance of JY 3099.11 million (Rs.127.06 crore) as on 31.3.2005 (P.Y. 3984.58 Million Rs.166.52 crore). Due to exchange rate variation, the Rupee liability at the year end in respect of Syndicated Japanese Yen Loan has decreased by Rs.2,68,75,933/-(P.Y. increase by Rs.7,15,44,865/-) and accordingly, the loan recoverable from the Ministry of Finance has been adjusted. 8. Amount Recoverable from Canbank Financial Services Ltd.(CANFINA) As per the agreement dated 9 th April,1999 with CANFINA, the consolidated amount recoverable from CANFINA worked out to Rs.624.16 crore, out of which Rs.156.04 crore(being 25% of the total amount due) was paid by CANFINA upfront and the balance amount of Rs.468.12 crore is recoverable in 7 equal yearly instalments of Rs.66.874 crore starting from 9 th April,2000. The balance outstanding as on 31 st March,2005 is Rs.133.75 crore (P.Y.-Rs.200.62 crore). 9. Investments Market value of quoted investments has been calculated on the basis of closing rate on the Bombay Stock Exchange. 10. Salary, Allowances and other benefits to Directors of the Company: (a) Salary / Allowances: Rs.1,58,755/- (Previous Year NIL) Incentive: Rs. 1,27,800/- (Previous year: Rs. 1,27,161/-) Managing Director has been allowed use of staff car for personal use upto 1000 kms on payment of Rs.600/- per month, in accordance with the notification of the Govt. of India, Ministry of Finance, Department of Public Enterprises OM No.2(18)/PC/64 dated 20 th November, 1964 as amended. 48
11. Contingent Liabilities (a) Claims against the Company not acknowledged as debts - Claims by bondholders in the Consumer Courts : Rs.0.10 crore. The Income Tax department raised demands of Rs.15.81 crore towards Income Tax & Interest for the assessment year 1997-98, by adding provisions made for bad &doubtful debts and diminution in value of investments to book profit. The Company has filed appeals against the assessment orders before the Income Tax Appellate Tribunal (ITAT) for which the approval of the Committee On Disputes (COD) has been obtained. The appeals are pending at ITAT / CIT (Appeals) for hearing and final decision. However, the demand amount has been deposited with the Income Tax authorities, under protest. For the Assessment Year 2001-02, the Income Tax Department raised demand of Rs.16.50 crore towards income tax, interest etc. by adding lease equalisation charge to Book Profit. Appeal has been filed against the Assessment Order before the ITAT, for which approval of the COD is being obtained. However, similar additions made by the Income Tax Department for the earlier assessment years have been deleted in appeals, and the company is confident of similar appellate decision for the Assessment Year 2001-02. Though the company has paid the demand amount under protest, no provision is considered necessary in the accounts. (d) For the Assessment Year 2002-03, the Income Tax Department raised demand of Rs.4.31 crore towards income tax, interest etc. by adding the difference between capital recovery and depreciation as per the Companies Act,1956 on leased assets to Book Profit. Appeal has been filed against the Assessment Order before the CIT(Appeals). However, similar additions made by the Income Tax Department for the earlier assessment years have been deleted in appeals, and the company is confident of similar appellate decision for the Assessment Year 2002-03. Though the company has paid the demand amount under protest, no provision is considered necessary in the accounts. (e) The sales tax on the purchase / lease of rolling stock, if payable, is recoverable from Ministry of Railways as per the lease agreements. Since, there is no sales tax demand and the amount is unascertainable, no provision is made in the accounts. (f) The Companies (Second Amendment) Act, 2002 provides for levy of cess, towards rehabilitation/ revival of sick industrial companies, which shall not be less than 0.005% but not more than 0.10% of the turnover or the gross receipts as the Central Govt. may from time to time specify by notification in the Official Gazette. Since, no notification has been issued, provision for cess has not been made. 12. Payments in Foreign Currency ( on payment basis):- (a) Travelling Expenses = Rs.29,61,948/- ( Previous Year Rs.3,96,570/-). Export Development Corporation, Canada Fee and Expenses- Nil (Previous Year Rs. 61,36,357/-). Interest paid on Foreign Currency Borrowings Rs.39,73,34,518/- (Previous Year Rs. 36,30,06,566/-). Amount recovered from Ministry of Finance- Rs.4,20,16,747/-(Previous Year Rs.4,27,80,035/-). (d) Payment to International Credit Rating Agencies Rs.22,55,559/-(Previous Year-Rs.23,32,463/- ). (e) Training, Conference and Seminar Expenses- Rs.9,45,450/- (Previous Year-Rs. 2,01,275). (f) Processing Agent / Fiscal Agent Fees- Rs.36,44,993/- (Previous Year Rs. 17,36,893/-). Amount recovered from Ministry of Finance- Rs.4,50,025/- (Previous Year Rs. 4,59,010 /-). 49
(g) Underwriting / Arranger Fee Rs.9,43,11,192/-(Previous Year- Rs.7,67,36,478/- ). (h) Repayment of Loans-Rs.760,80,45,795/- (PreviousYear-Rs.79,61,34,530/) Amount recovered from Ministry of Finance- Rs.36,76,44,101/-(Previous Year Rs. 35,83,04,184/-). (i) Out of Pocket Expenses- Rs.33,87,325/- (Previous Year Nil) 13. Receipts in Foreign Currency Loans raised during the year: (i) EDC, Canada Line of Credit Nil (Previous Year Rs.90,25,47,500/-). (ii) Syndicated Foreign Currency Loan- Rs. 444,55,00,000/- (Previous Year Rs.357,22,40,000). (iii) Issue of Yen denominated Bonds- Rs.651,23,51,477/- (Previous Year NIL). 14. (a) The company has not taken on lease any Rolling Stock assets during the year. All the assets taken on lease during the earlier years, prior to 1.4.2001, worth Rs.1970.08 crore (ownership of the same vests with the lessors) stand sub-leased to Ministry of Railways. The company has paid the future lease rental liability on all the above leases as detailed below: Year of No. of Value of Amount paid in Year of payment Lease Leases assets taken settlement of future on lease lease rentals 1996-97 2 399.26 181.39 2001-02 61.68 2003-04 1999-00 6 1,020.85 374.92 2001-02 38.41 2002-03 355.34 2003-04 2000-01 2 549.97 294.23 2001-02 223.02 2003-04 Total 10 1,970.08 1,528.99 The amount paid in settlement of future lease rentals as above, is being amortised in the accounts over the remaining period of the leases. Lease Rentals paid include Rs.188.83 crore (Previous Year Rs.111.27 crore) on account of such amortisation. Since the entire future lease rental liability has been paid, there is no liability payable during the unexpired lease period (Previous Year-Nil). During the year 1999-2000, the company entered into 6 lease agreements, with the financial institutions/ banks as lessors, for a primary period of 10 years for an aggregate amount of Rs.1020.85 crore and sub-leased the same to MOR for a period of 15 years. The company has paid upfront the future financial liability on all these leases. Though, there is a mismatch in the tenor of the lease and sub-lease, there is no overall mismatch in the present value of entire lease rentals payable and receivable. During the year, the company received lease rentals of Rs.140.88 crore and amortised (expensed) lease rentals of Rs.99.40 crore on these transactions. 50
15. The balances under some items of Loans & Advances and current liabilities are subject to confirmation and reconciliation and consequential adjustments, wherever applicable. However, in the opinion of the Management, the realisable value of the current assets, loans and advances in the ordinary course of business will not be less than the value at which they are stated in the Balance Sheet. 16. The company discharges its obligation towards payment of interest and redemption of bonds, for which warrants are issued, by depositing the amount in the designated bank accounts. The Reconciliation of such accounts is in progress. The company does not foresee any additional liability on this account. The total balance held in such specified bank accounts as on 31.3.2005 is Rs.25.83 crore (Previous Year Rs. 26.55 crore). 17. (a) Provision for Income-Tax has been made based on Minimum Alternate Tax. Accounting Standard (AS) -22 Accounting for Taxes on Income issued by the Institute of Chartered Accountant of India (ICAI) became mandatory from the financial year 2001-02. AS-22 required provision to be made for deferred tax liability for the year as also the accumulated deferred tax liability upto 31.3.2001. The company is engaged only in leasing business. In view of the substantial assessed unabsorbed depreciation available to the company and the fact that the accretion to unabsorbed depreciation has been much higher than the profit for each year, the company does not envisage the incidence of tax under regular assessment even in the distant future. The Hon ble High Court of Madras, vide its Order dated 06.12.2001, has stayed the application of AS-22 in respect of leasing companies, on a writ petition filed by the Association of Leasing & Financial Services Companies, of which the company is a member. As a result, the company did not provide for deferred tax liability in the past. The company has now decided to provide for the deferred tax liability as per AS-22. However, the accumulated deferred tax liability upto 31.3.2004 amounting to Rs.1378.77 crore will be amortised in three years. Accordingly, net deferred tax liability for the year 2004-05 amounting to Rs.59.08 crore has been provided in the profit and loss account and Rs.460 crore being a part of the accumulated deferred tax liability upto 31.03.2004, has been recognised by adjusting the same from the Reserves, leaving a balance of Rs.918.77 crore to be recognised in following two years. The major components of deferred tax liability required are as under: (Rs. Crore) As at 31.3.2005 As at 31.3.2004 Liability on account of difference 4,084.83 4,076.93 between WDV as per Income Tax, Act and Companies Act. Less Deferred Tax Asset on account 2,646.90 2,698.08 of Unabsorbed Depreciation Less Deferred Tax Asset on account 0.08 0.08 of Employee benefits Net Deferred Tax Liability 1,437.85 1,378.77 Due to the change in accounting policy, the profit after tax for the year is lower by Rs.59.08 crore and the Reserves and Surplus is lower by Rs.519.08 crore. 18. Long Term Loans & Advances (Schedule 5) include Lease Receivables representing the present value of future Lease Rentals receivable on the finance lease transactions entered into by the company since inception as per the Accounting Standard (AS) 19 issued by the Institute of Chartered Accountants of India. 51
The reconciliation of the Lease Receivable amount on the Gross value of Rolling Stock assets worth Rs.29,921.05 crore owned by the company and leased to the Ministry of Railways upto 31.03.2005 is as under: Particulars As at 31.03.05 As at 31.03.04 A. Gross Value of Assets acquired 27,159.13 24,432.61 & Leased upto the end of previous Financial Year B. Less: Gross value of assets 194.91 0 securitised during the year C. Balance Gross Value of Assets (A-B) 26,964.22 24,432.61 D. Capital Recovery provided upto Last Year 10,281.09 9,067.70 E. Less Capital Recovery provided upto last 21.16 0 year on assets securitised during the year F. Balance Capital Recovery upto Last year (D-E) 10,259.93 9,067.70 G. Capital Recovery Outstanding on balance 16,704.29 15,364.91 leased assets as at the end of Last Year H. Add : Gross Value of Assets acquired 2,956.83 2,726.52 and Leased during the year I.=G+H 19,661.12 18,091.43 J. Capital Recovery for the year. 1,311.25 1,213.39 K.Less: Capital Recovery for the year 7.77 0 on assets securitised during the year L. Capital Recovery on balance leased 1,303.48 1,213.39 assets for the year (J - K) M. Net investment in Lease Receivables(I L) 18,357.64 16,878.04 The value of contractual maturity of such leases as per AS 19 is as under : Particulars As at 31.03.2005 As at 31.03.2004 Gross Investment in Lease 29,451.46 28,256.07 Unearned Finance Income 11,093.82 11,378.03 Present Value of Minimum Lease Payment (MLP) 18,357.64 16,878.04 Gross Investment in Lease and Present value of Minimum Lease Payments for each of the periods are as under: Particulars As at 31.3.2005 As at 31.3.2004 Gross Present Gross Present Investment Value of Investment Value of in lease MLP in Lease MLP Less than one year 2,954.28 1,263.39 2,830.04 1,264.62 One to five years 10,023.68 4,369.04 9,572.16 4,605.04 Greater than five years 16,473.50 12,725.21 15,853.87 11,008.38 Total 29,451.46 18,357.64 28,256.07 16,878.04 The unearned finance income as on 31.3.2005 is Rs.11,093.82crore (Previous Year-Rs. 11,378.03 crore). 52
The company has leased rolling stock assets to the Ministry of Railways (MOR). A separate lease agreement for each year of lease has been executed and as per the terms of the lease agreements, lease rentals are received half yearly in advance. The leases are non cancellable and shall remain in force until all amounts due under the lease agreements are received. 19. During the year, the company has securitised a portion of lease receivable amounting to Rs.165.98 crore, and realised a sum of Rs.195.34 crore. These lease receivables have been derecognised and the difference amounting to Rs.29.36 crore has been recognised as Gain on Asset Securitisation. The original value of assets amounted to Rs.194.91 crore leased during the year 2000-01. 20. The Company is in the business of leasing and financing. As such, there are no separate reportable business segments as per Accounting Standard (AS)-17 on Segment Reporting issued by the Institute of Chartered Accountants of India. 21. As per Accounting Standard (AS) -18 Related Party Disclosures issued by the Institute of Chartered Accountants of India (ICAI), the details are as under: Key Management personnel: a) S. Balachandran, Managing Director. b) R. Kashyap, Director (Finance). The payments to key management personnel are given under note no. 10 above. 22. The calculation of Earning Per Share as required under Accounting Standard (AS) - 20 is as under:: Year 2004-05 2003-04 a) Profit after Tax Rs.404,77,30,616/- Rs.378,85,18,385/- b) No. of equity shares of face value Rs.1000/- each 23,20,000 23,20,000 c) Earning Per Share(Basic & Diluted) (a/b) Rs.1,744.71 Rs.1,632.98 23. (a) During the year 2003-04, the company restructured the rate of interest on certain outstanding borrowings from LIC and paid Rs.24.03 crore as advance, representing a portion of the future savings in the interest cost. This advance amount is being amortised over the balance tenor of the borrowings. During the year, a sum of Rs.5.16 crore (P.Y. Rs.3.06 crore) has been amortised, leaving a balance of Rs.15.81 crore as on 31.3.2005 (P.Y. 20.97 Crore). During the year 2004-05, the company restructured the rate of interest on certain outstanding borrowings from IDBI Ltd. and paid Rs.13.78 crore as advance, representing a portion of the future savings in the interest cost. This advance amount is being amortised over the balance tenor of the borrowings. During the year, a sum of Rs.3.34 crore has been amortised, leaving a balance of Rs.10.44 crore as on 31.3.2005. 24. The company has shown Long Term Loans, Lease Receivable and Lease Rent paid in advance separately under the head Long Term Loans & Advances (Schedule 5) in order to give better disclosure. 25. Income on Loans and Deposits includes a sum of Rs.2.70 crore towards interest on Income Tax refunds. 53
26. Payment to Auditors include Rs.55,100/- as audit fees and Rs.16,530/- as Tax Audit Fees relating to earlier year. 27. The Company has a system of physical verification of assets given on lease. The physical verification is carried out on a sample basis, as 100% physical verification of rolling assets is not possible logistically nor considered necessary. In addition, Ministry of Railways (Lessee) provides a certificate each year that the leased assets are maintained in good working condition as per laid down norms, procedures and standards. In the opinion of the management, the aforesaid system is satisfactory considering the fact that the assets are maintained and operated by the Central Government. 28. Previous year figures have been regrouped / rearranged, wherever necessary, in order to make them comparable with those of the current year. Schedules 1 to 16 form integral part of the Accounts. On behalf of the Board These are Accounting Policies & Notes on Accounts referred to in our Report of even date. D.C.Garg S.K. Ajmani R.Kashyap S. Balachandran Partner Company Secretary Director (Finance) Managing Director & Addl. G. M (Bonds) for and on behalf of VINOD KUMAR & ASSOCIATES Chartered Accountants Vijayalakshmi Viswanathan Chairperson Dated : 24th August, 2005 Place : New Delhi 54