NOTES TO FINANCIAL STATEMENTS

1 BACKGROUND:

Kirloskar Electric Company Limited ("the Company") was incorporated in the year 1946 and is a company engaged in the manufacture and sale of electric motors, alternators, generators, transformers, switchgear, DG sets etc.

2 SIGNIFICANT ACCOUNTING POLICIES:

2.1 BASIS OF brPARATION OF FINANCIAL STATEMENTS:

These financial statements have been brpared in accrodance with the Generally Accepted Accounting Principles in India ("Indian GAAP") to comply with Accounting Standards specified under Section 133 of the Companies Act, 2013. The financial statements have been brpared under the historical cost convention on accrual basis. All income and expenditure, having a material bearing on financial statements, are recognized on accrual basis.

2.2 USE OF ESTIMATES:

The brparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions that affect certain reported balances of assets and liabilities and disclosures relating to the contingent liabilities as at the date of the financial statements and reported amounts of income and expense during the year. Accordingly, future results to could differ due to changes in these estimates and the difference between the actual result and the estimate are recognised in the period in which the results are known/ materialise.

2.3 FIXED ASSETS:

(i) Tangible assets:

Fixed Assets (other than land which was revalued) are stated at cost of acquisition inclusive of freight, duties, taxes and incidental expenses relating to the acquisition, installation, erection and commissioning less debrciation. A portion of the land owned by the Company has been revalued. Internally manufactured assets are valued at works cost.

(ii) Intangible assets:

Intangible assets are accounted at cost of acquisition less debrciation /amortisation.

2.4 ASSETS HELD FOR SALE:

Assets held for sale are stated at cost or estimated net realizable value, whichever is lower.

2.5 INVESTMENTS:

Investments unless otherwise stated are considered as long term in nature and are valued at acquisition cost less provision for diminution, if any, other than those which are considered as temporary in nature.

2.6 INVENTORIES:

(i) Raw materials, stores, spare parts and components are valued at cost on weighted average basis or net realizable value whichever is lower.

(ii) Work in progress is valued at works cost or net realizable value whichever is lower.

(iii) Finished goods are valued at works cost or net realizable value whichever is lower.

Material cost of work in progress and finished goods are computed on weighted average basis.

2.7 DEbrCIATION:

(i) Debrciation on furniture and fixtures above Rs. 5,000/- provided at the residences of the employees has been charged at the rate of 33.33% on the straight-line method irrespective of the month of addition.

(ii) Debrciation on assets taken on finance lease is charged over the primary lease period.

(iii) Debrciation on assets (other than Furniture and Fixtures provided to employees and assets taken on finance lease) bought/sold during the year is charged on straight line mehtod as per the useful life in Schedule II of Companies Act, 2013 on a monthly basis, depending upon the month of the financial year in which the assets are installed/sold except in case of certain plant and machineries whose useful life is as assessed by a certified external techincal expert's assessment. For the assets acquired prior to April 1, 2014 the carrying amount as on April 1, 2014 is debrciated on straight-line basis over the remaining useful life based on Schedule II of the Companies Act, 2013. The useful life of plant and machinery and tools different from that specified in schedule II to the said act are ranging from 1 to 25 years Assets whose individual value less than Rs.5,000/- is debrciated fully.

2.8 IMPAIRMENT OF ASSETS:

An asset is treated as impaired when the carrying cost of asset exceeds its recoverable value. An impairment loss, if any, is charged in the statement of profit and loss, in the year in which an asset is impaired.

2.9 REVENUE RECOGNITION:

(i) Sale of products and services is recognized on shipment of goods and transfer of significant risks and rewards to customers or when the service has been provided. Net sales are stated at contractual realisable values, net of excise duty, sales tax, service tax, value added tax and trade discounts.

(ii) Interest income is recognized on time proportion basis.

(iii) Dividend income is recognized, when the right to receive the dividend is established.

(iv) Rental income is recognized on time proportion basis.

2.10 RESEARCH AND DEVELOPMENT EXPENDITURE:

Revenue expenditure in carrying out research and development activity is charged to the statement of profit and loss in the year in which it is incurred. Capital expenditure in respect of research and development activity is capitalized as fixed assets and debrciation provided as detailed above.

2.11 EMPLOYEE BENEFITS:

(i) Short term employee benefits:

Employee benefits payable wholly within twelve months of rendering the service are classified as short term. Benefits such as salaries, bonus, leave travel allowance etc. are recognized in the period in which the employee renders the related service.

(ii) Post employment benefits:

a. Defined contribution plans:

The Company has contributed to provident, pension and superannuation funds which are defined contribution plans. The contributions paid/ payable under the scheme are recognized during the year in which employee renders the related service.

b. Defined benefit plans:

Employees' gratuity and leave encashment are defined benefit plans. The brsent value of the obligation under such plan is determined based on actuarial valuation using the Projected Unit Credit Method which considers each year of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. Actuarial gains and losses are recognized immediately in the statement of profit and loss as income or expense. Obligation is measured at the brsent value of estimated future cash flows using a discounted rate that is determined by reference to market yields as at the balance sheet date on Government bonds where the currency and terms of the Government bonds are consistent with the currency and estimated terms that matches to the defined benefit obligation. Gratuity to employees is covered under Group Gratuity Life Assurance Scheme of the Life Insurance Corporation of India.

2.12 FOREIGN CURRENCY TRANSACTIONS:

(i) Foreign currency transactions are translated into rupees at the exchange rate brvailing on the date of the transaction/ rates that approximate the actual rates as at that date.

(ii) Monetary foreign currency assets and liabilities outstanding as at the year-end are restated at the exchange rates brvailing as at the close of the financial year. All exchange differences are accounted for in the statement of profit and loss.

(iii) Non monetary items denominated in foreign currency, are valued at the exchange rate brvailing on the date of transaction.

(iv) Branches are considered as integral foreign operations and have been translated at rates brvailing on the date of transaction/rate that approximates the actual rate as at that date. Branch monetary assets and liabilities outstanding as at year end are restated at the year end rates.

(v) The Company has entered into forward exchange contracts, which are not intended for trading or speculation purposes, to establish the amount of reporting currency required or available at the settlement date of a transaction. The brmium or discount arising at the inception of such a forward exchange contract is amortized as expense or income over the life of the contract. Exchange differences on such contracts are recognized in the statement of profit and loss in the reporting period in which the exchange rates change. Any profit or loss arising on cancellation or renewal of such a forward exchange contract is recognized as income or as expense for the period.

2.13 TAXES ON INCOME:

Provision for current tax for the year is after taking cognizance of excess / short provision in prior years. Deferred tax assets/liability is recognized, subject to consideration of prudence, on timing differences.

2.14 BORROWING COSTS:

Interest and other borrowing costs on specific borrowings relatable to qualifying assets are capitalized up to the date such assets are ready for use / intended to use. Other interest and borrowing costs are charged to the statement of profit and loss.

2.15 PROVISIONS AND CONTINGENT LIABILITIES:

A provision is recognized when the Company has a brsent obligation as a result of past event and it is probable that outflow of resources will be required to settle the obligation, in respect of which reliable estimate can be made. Provisions (excluding retirement benefits) are not discounted to its brsent value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current best estimates.

3 (a) The order of the honorable High court of Karnataka according approval for the scheme of arrangement and amalgamation under sections 391 to 394 of the Companies Act, 1956 ("Scheme") was received in September 2008 with April 1, 2007 as the appointed date. This scheme of arrangement and amalgamation interalia involved transfer of the operating business of Kirloskar Power Equipment Limited ("KPEL") and amalgamation of Kaytee Switchgear Limited ("KSL") with the Company. The Scheme was registered with the Registrar of Companies on October 17, 2008.

(b) Decree in Form 42 of the Companies (Court) Rules, 1949 is yet to be passed by the honorable High Court of Karnataka.

(c) Some of the assets and liabilities so transferred to the Company are continuing in the name of the respective companies. Necessary action is being taken by the Company.

4 The Company has brferred a suit for various claims against Deutsche Bank, one of the members of the consortium of bankers for breach of trust for withholding of monies belonging to the Company and freezing sanctioned working capital limits.

5 Confirmation of balances from parties with whom the Company had transactions are awaited in certain cases. Accounts with certain parties are under review and reconciliation. Adjustments if any, will be made on completion of review/reconciliation. In the assessment of the management, effect on revenue is not expected to be material.

6 The customers of the Company had deducted liquidated damages and other charges for delays in delivery of goods as compared to contractual obligations. The Company has made rebrsentations to such customers explaining reasons for delays as well as imbrss upon them that the same were caused by various factors including those not attributable to it and as such being beyond its control. The Company had made necessary provision on an overeall assessment of the likely loss where in its opinion waiver is not likely. The Company is confident that its rebrsentations will be accepted by customers and liquidated damages and other charges deducted will be waived. Impact, if any, on the financial statements will not be material.

7 The Company has implemented SAP ECC 6 systems at its units. Certain mistakes and omissions noticed in the inventory records have been corrected to the extent identified based on physical inventory taken from time to time. The Company has made significant progress in stabilization of the systems, cleansing data and bringing the valuation in line with accounting standard  2 . The management has also formed a task force for liquidation of slow/non moving inventories. The Company is in the process of quantifying the differences adjusted/to be adjusted in the books of account on a combrhensive basis. Any further adjustments required to the financial statements is not expected to be material.

8 Machinery purchased in prior years but currently held for sale for the past several years have been recognized at realizable value estimated by the management. Such value is consistent with quotations received from prospective buyers and anticipated shortfall in realisability has been provided for in the books of accounts.

9 Current assets, loans and advances include Rs. 268.16 Lakhs (as at March 31, 2014 Rs. 241.11 Lakhs) being rescheduled advances from certain companies in which certain key managerial personnel are interested. The Company is confident that these companies will fulfill their obligations and has considered these amounts as good of recovery.

10During a brvious year, the shareholders of the Company at the Annual General Meeting held on September 30, 2013 have approved an Employee Stock Option Scheme. However, the Company had not issued any options as at March 31, 2015 and accordingly, recognition of expense in this respect and requisite disclosures are not applicable.

11 SEGMENT REPORTING:

The Company has not furnished segment report since same has been furnished in the Consolidated financial statements, as permitted to para 4 of accounting standard 17 issued by Central Government.

12 OPERATING LEASE:

The Company has various operating leases for office facilities, guesthouse and residential brmises of employees that are renewable on a periodic basis, and cancelable at its option. Rental expenses for operating leases included in the financial statements for the year are Rs.380.14 Lakhs (Previous Year Rs.291.66 Lakhs).

13 During the year under review, the Company promoted the following wholly owned subsidiaries:Kelbuzz Trading Private Limited ("KTPL")SLPKG Estates Holdings Private Limited ("SEHPL")SKG Terra Promenade Private Limited ("STPPL")Luxquisite Parkland Private Limited ("LPPL")

14 Lloyd Dynamowerke GmbH & Co. KG, Germany (LDW), a step down subsidiary of the Company, incurred substantial losses during the brvious two years, thereby eroding its net worth. The local directors of LDW filed a brliminary insolvency petition on September 8, 2014 and on September 9, 2014 brliminary insolvency was declared and brliminary insolvency administrator was appointed by the court in Germany.

14 The Company has been given to understand that a South Korean company acquired all significant assets, patents, estates, orders and employees of LDW. However, relevant details of the consideration for this transfer and all other relevant information are not available with the Company, in spite of its best efforts. The Company has already filed its claim for an approximate value of Euro 3.52 million in respect of outstanding towards supplies made to LDW including dues of Kirsons B V (immediate holding company of LDW). The Company has also appointed a local legal counsel to rebrsent its interest, brpare a case for recovering damages and file a case against the lenders of LDW and few other parties.

15 The Company, after obtaining necessary approvals from its members has transferred its investments in Kirsons BV to LPPL at a consideration of Rs.6,063 lakhs (fair value assessed by a firm of Chartered Accountants appointed by the Company). The resultant loss of Rs.16,384.17 lakhs has been recognised in the statement of profit and loss, as an exceptional item.

16  a) As a measure of restructuring and with the consent of the lending banks under the Joint Lender Forum (JLF) mechanism,

the Company has transferred certain assets comprising of immovable properties, receivables and inventory to KTPL, STPPL and SEHPL, which will function as special purpose vehicles to hold such assets, dispose off the same and pay off certain debts transferred / to be transferred by the Company. The assets transferred are as detailed below:

i) Assignment of book debts of Rs.4,759.69 lakhs , sale of certain materials of Rs.45.68 lakhs and sale of certain immovable properties of Rs.5,088 lakhs, to KTPL.ii) Assignment of books debts of Rs.4,300.07 lakhs and sale of certain immovable properties of Rs.5,518 lakhs, to SEHPL andiii) Sale of certain immovable properties amounting to Rs.3,450 lakhs to STPPL.

The fair value of all the properties have been assessed by chartered engineers appointed by the Company.

b) The above transactions between the Company and its wholly owned subsidiaries in respect of transfer of immoveable properties are subject to the approval of the members by way of special resolutions in terms of section 188 of the Companies Act, 2013, rule 15 (2) of the Companies (Meetings of Boards and its Powers), Rules, 2014 and other applicable provisions, if any. Further as a matter of abundant brcaution the Company is taking steps to get the approval of the members by way of special resolution as referred above in respect of transfer of assignment of debts to its wholly owned subsidiaries.

c) The deeds conveyancing immovable properties referred to earlier were executed before March 31, 2015 in respect of which, payment of stamp duty, registration charges and registration with the concerned Sub Registrars are pending for the properties valued at Rs 13,652.45 lakhs. The Company has been advised that these properties have already vested in the relevant subsidiaries on the date of execution of the concerned deeds, even though payment of stamp duty and registration will be done subsequently. Necessary provision has been recognised in the financial statements wherever applicable to the extent registration charges and stamp duty is payable by the Company.

d) The amounts outstanding and due from the said subsidiaries as at March 31, 2015 in respect of the transfer of the assets as mentioned in para 6(a) and 6(b) are KTPL Rs 5,838.48 lakhs, SEHPL Rs 9,305.49 lakhs and STPPL Rs 3,450 lakhs.

These subsidiaries are taking active steps to repay the dues of the Company, from collection of debts assigned and from disposal of assets transferred apart from debts transferred / to be transferred as referred above. These subsidiaries have been sanctioned credit facilities to an aggregate extent of Rs. 51.33 crores (net of amounts drawn).

The board of directors of the Company are confident of recovery of the entire amounts due from the said subsidiaries and accordingly the resultant profit from transfer of said assets to them aggregating to Rs. 14,001 lakhs has been recognised in the Statement of Profit and Loss as exceptional income.

17 The net worth of the group in terms of the Consolidated financial statements brsented consisting of the Company, its subsidiaries and its associate is eroded. The Company and its components have initiated several measures like identification and active steps being taken for disposal of non-core assets, arrangement under JLF mechanism for restructuring of dues to banks, sanction of further non fund based limits by banks, infusion of capital by the promoters, rationalization of operation, introduction of value added products push for sales, optimization in product mix and enhanced contribution, proposed capital raising plans etc. Accordingly, your directors have brpared the financial statements of the Company on the basis that it is a going concern and that no adjustments are considered necessary to the carrying value of assets and liabilities.

18 The Company has recognized the charge for debrciation adopting the useful life of its fixed assets other than plant and machinery/tools as brscribed in schedule II of the Companies Act, 2013. However, the charge for debrciation on plant and machinery/tools has been based on the re-evaluated useful life technically assessed which are different from the useful life brscribed in schedule II of the said Act. Had the company continued with the rates of debrciation adopted till March 31, 2014, the charge for debrciation and loss for the year ended March 31, 2015 would have been higher by Rs. 87.79 lakhs. Further, based on transitional provisions provided in clause 7(b) of schedule II of the Companies Act, 2013, an amount of Rs. 68.87 lakhs rebrsenting the carrying value of those assets whose residual useful life is over, has been charged to the retained earnings as at April 1, 2014.

19  The Company has filed before the honorable Subrme Court, special leave petition in respect of resale tax and sales tax penalty of Rs.527 lakhs and Rs.362 lakhs respectively, on its erstwhile subsidiary Kaytee Switchgear Limited (since merged with the Company) and confirmed by the honorable High Court of Karnataka. The Company believes based on legal advice / internal assessment that the outcome of these contingencies will be favorable, that losses are not probable and no provision is required to be recognized in this respect.

20The Income Tax Act, 1961 contains provisions for determination of arm's length price for international transactions between the Company and its associated enterprises as well as in respect of certain specified domestic transactions. The regulations envisage taxation of transactions which are not in consonance with the arms length price so determined, maintenance of brscribed documents and information including furnishing of a report from an accountant before the due date for filing the return of income. For the year ended March 31, 2015, the Company is in the process of complying with the said regulations. Management believes that such transactions have been concluded on an arm's length basis and there would be no additional tax liability for the financial year under consideration as a result of such transactions.

21  Previous year's figures have been regrouped wherever required in conformity with current year brsentation. Figures in brackets relates to brvious year.

In accordance with our report attached

For B K Ramadhyani & Co. LLP

Chartered Accountants

Firm number: 002878S/S200021

CA. C R Krishna

Partner

Membership No:027990

For and on behalf of the Board of Directors of Kirloskar Electric Company Limited

Vijay R Kirloskar Executive Chairman

CA. Vinayak Narayan Bapat Managing Director

Kamlesh Gandhi Director

CS. K S Swapna Latha General Manager (legal) & Company Secretary

 Place : Bangalore

Date : May 29, 2015