SIGNIFICANT ACCOUNTING POLICIES 1. BASIS OF brPARATION OF FINANCIAL STATEMENTS. (a) Accounting Convention: - The financial statements are brpared under the historical cost convention on accrual basis and in accordance with generally accepted accounting principles and accounting standards as applicable under Section 133 of the Companies Act, 2013 read with General Circular No. 15/2013 dated 13th September 2013. The financial statements adhere to the relevant brsentational requirement of the Companies Act, 2013. (b) Use of Estimates: - The brparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumption that affect the reported amounts of assets and liabilities and disclosure thereof at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Difference between the actual results and estimates are recognized in the period in which results materialize. 2. INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING. The Corporation has formulated its own detailed Prudential Norms. Accounting is done in accordance with these Prudential Norms of REC and the salient features of the same for Income Recognition, Asset classification and Provisioning are as under in the Paras 2.1a, 2.1f, 2.2, 2.3 and 2.4: 2.1. Income Recognition a. Income on Non Performing Assets where interest/ principal has become overdue for two quarters or more is recognized as and when received and appropriated. Any such income recognized before the asset becomes non-performing and remaining unrealized is reversed. Unless otherwise agreed, the recoveries from the borrowers are appropriated in the order of (i) costs and expenses of REC (ii) penal interest including interest tax, if any (iii) overdue interest including interest tax, if any and (iv) repayment of principal, the oldest being adjusted first. In respect of standard loans including those whose terms are renegotiated/rescheduled/ restructured and retained as Standard Loans, income is recognized on accrual basis. In respect of loans (Non Performing Assets), income is recognized on accrual basis when it is reasonably expected that there is no uncertainty of receipt of dues from the borrowers and there has been satisfactory performance under the renegotiated or rescheduled or restructured terms until the expiry of one year of satisfactory performance under the renegotiated or rescheduled or restructured terms. b. Income of agency charges of RGGVY Schemes is recognized on the basis of the services rendered and amount sanctioned by the Ministry of Power. c. Income of agency charges of DDUGJY Schemes is recognized on the basis of the services rendered and amount sanctioned by the Ministry of Power. d. Income of service charges of NEF (Interest Subsidy) Scheme is recognized on the basis of the services rendered and amount of service charges sanctioned by the Ministry of Power. e. Income under the head processing fee, upfront fee, lead fee, fees/ charges received under the mutatis-mutandis clause and brpayment brmium is accounted for in the year in which it is received by the company. f. Income from investments (1) Income from dividend on shares of corporate bodies and units of mutual funds shall be taken into account on accrual basis when REC's right to receive payment is established. (2) Income from bonds and debentures of corporate bodies and from Government securities/bonds shall be taken into account on accrual basis. Provided that the interest rate on these instruments is br-determined and interest is serviced regularly and is not in arrears. (3) Income on securities of corporate bodies or public sector undertakings, the payment of interest and repayment of principal of which have been guaranteed by Central Government or a State Government shall be taken into account on accrual basis. 2.2 Assets Classification Loans and advances and any other form of credit are classified into the following classes, namely: (i) Standard Assets: 'Standard asset' means an asset which is not an NPA and in respect of which no default in repayment of principal or payment of interest is perceived and which does not disclose any problem or carry more than normal risk attached to the business. The rescheduling or restructuring or renegotiation of a standard infrastructure loan asset shall not cause it to be reclassified if the revised project is found to be viable by the competent authority. (ii) Sub-Standard Assets: 'Sub-standard asset' means: (a) an asset which has been classified as non-performing asset for a period not exceeding 18 months; (b) an asset where the terms of the agreement regarding interest and / or principal have been renegotiated or rescheduled or restructured, until the expiry of one year of satisfactory performance under the renegotiated or rescheduled or restructured terms. (iii) Doubtful Assets: Doubtful asset means an asset which remains a substandard asset for a period exceeding 18 months. (iv) Loss Assets: Loss asset means - a) An asset which has been identified as loss asset by REC to the extent it is not written off by REC or the asset remains doubtful for a period exceeding 5 years, whichever is earlier. b) An asset which is adversely affected by a potential threat of non-recoverability due to either erosion in the value of security or non availability of security or due to any fraudulent act or omission on the part of the borrower. For the purpose of classification of assets into standard, sub-standard, doubtful and loss categories, facilities shall be classified borrower wise with the following exception: Government Sector loans, where cash flows from each project are separately identifiable and applied to the same project, REC shall classify such loans on project wise basis. 2.3 Provisioning against Loans The provisioning requirement in respect of loans, advances and other credit facilities including bills purchased and discounted shall be as under: (i) Loss assets - The entire asset shall be written off. If the assets are permitted to remain in the books for any reason, 100% of the outstanding shall be provided for: Doubtful assets - (a) 100% provision to the extent to which the advance is not covered by the realizable value of the security to which REC has a valid recourse shall be made. The realizable value is to be estimated on a realistic basis; Loans covered by Central/State Govt. guarantee or loans to any State Govt. shall be treated as secured (iii) Sub-standard assets - A provision of 10% shall be made. An asset which has been renegotiated or rescheduled or restructured shall be a sub-standard asset or continue to remain in the same category in which it was prior to its renegotiation or re-schedulement or restructuring, as a doubtful asset or a loss asset as the case may be. Necessary provision is required to be made as applicable to such asset till it is upgraded. .4 Treatment of Provisions held The provisions in respect of Non Performing Assets (NPAs) is reversed only after the complete recovery of the outstanding/ regularization of the account. 3. FIXED ASSETS. Fixed Assets are shown at historical cost less accumulated debrciation. The cost includes any cost attributable of bringing the assets to its working condition for its intended use. 4. DEbrCIATION. 4.1. Debrciation on assets is provided on straight-line method in accordance with the useful lives brscribed under Schedule II to the Companies Act, 2013. 4.2. Debrciation on assets purchased / sold during the year is charged for the full month if the asset is in use for more than 15 days, instead of charging the same on pro-rata basis from the date of purchase/sale. 4.3. Debrciation on assets purchased during the year up to Rs. 5,000/- is provided @ 100%. 4.4. Leasehold land is amortized over the lease period. 5. INTANGIBLE ASSETS. An Intangible Asset is recognized where it is probable that the future economic benefits attributable to the assets will flow to the company. The debrciable amount of an intangible asset is allocated on a systematic basis over the best estimate of its useful life. 6. INVESTMENTS. Long term investments are carried at cost. However, provision for diminution is made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. Quoted current investments are carried individually at the cost or market value whichever is lower. Unquoted current investments are carried individually at the cost or fair value whichever is lower. 7. CURRENT TAX AND DEFERRED TAX. Income Tax expense comprises current Income Tax (Amount of tax for the period determined in accordance with the income tax law) and deferred tax charge or credit (reflecting the tax effects of timing differences between accounting income and taxable income for the period) is determined in accordance with Accounting Standard- 22. The deferred tax charge or credit and the corresponding deferred tax liabilities or assets are recognized using the tax rates that have been enacted or substantially established by the Balance Sheet date. Deferred Tax Assets are recognized and carry forward to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such Deferred Tax Assets can be realized. 8. IMPAIRMENT OF ASSETS. At each balance sheet date, the Company reviews the carrying amounts of its fixed assets to determine whether there is any indication that those assets suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Recoverable amount is the higher of assets net selling prices and value in use. 9. PROVISIONS A provision is recognized when the company has a brsent obligation as a result of past event and it is probable that an outflow of resources will be required to settle the obligation and reliable estimate of amount of the obligation can be made. Provisions are determined based on management 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 management estimates. 10. BOND / DEBT ISSUE. 10.1. Expenditure on raising of funds by way of bonds is charged to revenue in the year of issue of such bonds. 10.2. The Corporation discharges its obligation towards payment of principal and interest relating to bonds by depositing the amount in the designated Bank Accounts. Accordingly, the payments are treated as final payments and these amounts are not exhibited in the books till the validity of the instruments but reconciliation thereof is carried out. 10.3. Expenditure incurred on raising of funds is charged to the Statement of Profit & Loss in the year in which it is incurred except the discount/ interest on the Commercial Papers/ Reg-S-Bonds (External Commercial Borrowings), which is amortized proportionately over the period of its tenure. 11. CASH FLOW STATEMENT Cash flows are reported using the indirect method, whereby profit before tax is adjusted for the effects of transactions of a non-cash nature and any deferrals or accruals of past or future cash receipts or payments. The cash flows from regular operating, financing and investing activities of the Company are segregated. 12. PRIOR PERIOD/ brPAID ADJUSTMENTS 12.1. Considering the nature of business, interest income/expenditure for the earlier years ascertained and determined during the year is accounted for in the year in which it is so ascertained/determined. 12.2. Other items not exceeding Rs. 5,00,000/- in each case are accounted for under natural heads of account. 13. EMPLOYEES BENEFITS 13.1. The liability for employees benefit in respect of Gratuity ascertained on actuarial valuation is provided and funded to a separate trust. 13.2. Post employment and other long term employee benefits are recognized as an expense in the Statement of Profit & Loss for the year in which the employee has rendered services. The expense is recognized at the brsent value of the amounts payable determined using actuarial valuation techniques. Actuarial gains and losses in respect of post employment and other long term benefits are charged to the Statement of Profit & Loss. 14. TRANSACTION IN FOREIGN CURRENCY 14.1. Foreign Currency transactions are initially recorded at the exchange rate brvailing on the date of transaction. In respect of accounting periods commencing on or after the 1st April, 2011, the exchange differences arising on reporting of long-term foreign currency monetary items (having a term of twelve months or more at the date of origination) at RBI reference rates brvailing at the end of each reporting period or where the RBI reference rate is not available for any currency, the closing rate for the same date quoted on Bloomberg, different from those at which they were initially recorded during the period, or reported in brvious financial statements, are accumulated in a "Foreign Currency Monetary Item Translation Difference Account" and amortized over the balance period of such long term monetary item, by recognition as income or expense in each of such periods. Short-term foreign currency monetary items (having a term of less than twelve months at the date of origination) are translated at RBI reference rates brvailing at the end of each reporting period or where the RBI reference rate is not available for any currency, the closing rate for the same date quoted on Bloomberg. The resultant exchange fluctuation is recognized as income or expense in each of such periods. 14.2. The portion of Foreign Currency loans swapped into Indian rupees is stated at the rate fixed in the swap transaction, and not translated at the year end rate. 15. GRANTS/FUNDS FROM GOVERNMENT Un-disbursed funds of grant received for further disbursements are classified as current liabilities. Interest wherever earned on such funds is credited to respective grant account. 16. DERIVATIVE TRANSACTIONS 16.1. Derivative transactions include forwards, interest rate swaps, cross currency swaps and currency and cross currency options to hedge assets and liabilities. 16.2. These derivative transactions are done for hedging purpose and not for trading or speculative purpose. These are accounted for on accrual basis and are not marked to market. 2.2 Debenture Redemption Reserve (DRR) In accordance with provisions of Section 71(4) of the Companies Act, 2013 as further clarified by the Companies (Share Capital and Debentures) Rules, 2014 issued by Ministry of Corporate Affairs, Govt. of India, the company creates Debenture Redemption Reserve (DRR) upto 25% of the value of debentures issued through public issue as per brsent SEBI (Issue and Listing of Debt Securities) Regulations, 2008 during the maturity period of such debentures, and no DRR is required in the case of privately placed debentures. Accordingly, during the year, the company has created DRR amounting to Rs. 185.79 Crores (Previous year Rs. 185.79 Crores). 2.3 Foreign Currency Monetary Item Translation Difference Account The company has opted towards an irrevocable option for amortising the foreign exchange fluctuation loss/gain on the long term foreign currency monetary items over the balance period of such items in accordance with Para 46A of Accounting Standard 11 'The Effects of Changes in Foreign Exchange Rates'. Amount remaining to be amortised in 'Foreign Currency Monetary Item Translation Difference Account' as on 31st March, 2015 is Rs. 335.46 Crores (Previous year Rs. 532.65 Crores). 11.2.3 As at 31st March 2015, the dues of one of the borrowers were overdue for more than 6 months, thus, exceeding the time limit for classification of the borrower as 'Standard Asset'. Tariff order awarded by State Regulator in November 2013 and the concerned Appellate Tribunal in November 2014 for additional revenue in favour of the borrower had been challenged by the concerned Discom in Hon'ble Subrme Court. Since the matter was sub-judice in the Hon'ble Subrme Court, the borrower failed to pay the dues to the Company. Hon'ble Subrme Court vide order dated 24th April 2015 quashed the appeal of the concerned discom and consequently, the State Regulator in its order dated 13th May, 2015 directed the Discom to pay the dues to the borrower at the earliest. Subsequently, the entire dues of the Company amounting to Rs. 54.15 crore have been cleared on 15th May 2015 i.e. before the date of signing of balance sheet. Therefore, in accordance with the provisions of Accounting Standard 4 (AS-4), 'Contingencies and Events Occurring after the Balance Sheet Date', the classification of the borrower has been retained as 'Standard Asset'. Due to the treatment as specified above in compliance of AS-4, the Profit before Tax for the year 2014-15 is higher by Rs. 66.73 crores. 11.2.4 Alaknanda Hydro Power Company Limited (AHPCL) Shrinagar HEP is located at Uttarakhand. Ministry of Finance, considering the natural disaster in June 2013 at Uttarakhand had taken a decision that Banks should announce a moratorium on repayment of loan and interest for a period of one year in respect of all project loans that are outstanding in Uttarakhand. Ministry of Power vide their letter dated 6th December 2013 extended such benefit to AHPCL. Accordingly, REC sanctioned Funded Interest Term Loan (FITL) to AHPCL in June 2014. RBI had issued circular dated 23rd January 2014, the Norms on restructuring of advance by NBFCs, which inter-alia stated that "the unrealized income rebrsented by FITL should have a corresponding credit in an account styled as Sundry Liabilities Account (Interest Capitalisation)". In response to applicability of above circular, REC rebrsented vide letter dated 28th April 2014 to RBI requesting among other that, "Hydro projects in Himalayan region and power projects affected by natural disaster may be kept outside the restructuring norms". In response to the above request, RBI Vide letter dated 11th June 2014, allowed that the Transmission & Distribution, Renovation & Modernization and Life Extension projects as also the Hydro projects in Himalayan region or affected by natural disaster (new loans and outstanding stock of loans as on March 31, 2014) may be regulated by the REC's existing restructuring norms till March 31, 2017. The Company inferred about non creation of SLA for FITL and they can directly book the unrealized income rebrsented by FITL as income without receiving the equivalent cash because of exemption from RBI guidelines dated 23rd January 2014 for provisioning of restructured Loans. Accordingly the Company has booked the unrealized income rebrsented by FITL of AHPCL for Rs. 86.42 crore as income and referred the issue to RBI for clarification. Pending clarification from RBI for the above, instead of creating a corresponding Sundry Liabilities Account (Interest Capitalisation), 100% allowance has been created in the books of accounts for the FITL in respect of AHPCL for Rs. 86.42 crores and the same shall be reviewed on receipt of clarification from RBI. 11.2.5 M/s Teesta Urja Limited (TUL) is executing Hydro Electric Project in the North Eastern State of Sikkim. Substantial physical progress has been achieved in the project and as per the latest report of Lenders Independent Engineer, cumulative physical progress of the project is 91.6%. TUL had fully tied up the project cost till 1st cost overrun. Accordingly, the charge on assets has been created as per the security documents carried out in consortium. All the lenders, except one have sanctioned their proportionate shares towards debt requirement of 2nd cost overrun. In the meantime, the project faced issue of infusion of equity from its promoters. The issue regarding equity infusion was discussed in detail among stakeholders/ lenders of the company. As per the understanding in the meeting, Sikkim Power Investment Corporation Ltd. (SPICL) would take over the project with 51% equity from its current holding of 26% equity. The stake of all other promoters is therefore likely to come down on prorata basis to enable SPICL to have 51% equity. As such, the joint documentation for the 2nd cost overrun could not take place, pending execution of the proposed change in the management/ shareholding pattern. Meanwhile, some of the lenders, including REC, adjusted their outstanding interest dues on the basis of bilateral agreement with the Company, against the loan sanctioned towards 2nd cost overrun to TUL. All the disbursements towards the 2nd cost overrun will be secured, once the joint documentation is executed and security created on project assets for the enhanced loan. Pending documentation, an amount of Rs. 202.15 crores has been classified as Unsecured. 11.2.6 REC, as a lead lender had sanctioned Rs. 650 Crore (Senior Debt: Rs. 555 Crore and Sub-Debt: Rs. 95 Crore) as initial sanction to Corporate Power Limited for 540 MW Phase-I TPP at Chandwa, Jharkhand. The Senior Debt of Rs. 555 Crore is secured by way of first charge on all the Company's , brsent and future immovable properties, movables, all bank accounts, project documents, clearances, letter of credits, guarantees, insurance contracts and insurance proceeds etc. and pledge of shares rebrsenting 51% of the total paid up equity share capital of the Company. The Sub-Debt of Rs. 95 Crore is secured by second charge over the security given for Senior Debt and it is additionally secured by the Corporate Guarantee of Corporate Ispat and Alloys Limited (CIAL). Subsequently, REC, as lead lender, has sanctioned Rs. 196 Crore as additional loan towards funding of cost overrun. The progress of Phase-I of the Project (where REC is Lead) as per last available Lender Independent Engineer's Report, is approximately 96%. However, the account has become NPA on 30th June, 2014. As per REC Prudential Norms, a provision of 10% is required to be created on the Outstanding Loan amount. Accordingly, a provision of Rs. 81.17 Crore i.e. 10% of Rs. 811.74 Crores had been created on 30 June 2014. Lenders are exploring various options for the revival of the project including change in the management. Pending outcome of such efforts, as a matter of prudence, 100% allowance of Rs. 133.02 crore (for adjusted IDC amount) has been created in the books of accounts and for the balance loan amount of Rs. 678.72 crores, 10% allowance is created in the books as per REC Prudential Norms. 11.2.7 REC has sanctioned Rs. 1,150 Crore to Jas Infrastructure & Power Limited (JIPL). An expenditure of about Rs. 2,700 Cr has been incurred in the project, wherein REC's disbursement is only Rs. 33.24 Crore. As project has been delayed considerably, lenders have constituted a Core-Committee to evaluate the further implementation strategy for the project, including change in management. The account has become NPA on 30-06-2014. As per REC Prudential Norms, an allowance of 10% is required to be created on the outstanding loan amount. Accordingly, an allowance of Rs. 3.32 Cr i.e. 10% of Rs. 33.24 Crore been created on 30th June 2014. However, depending upon the further developments, REC may approach the lead lender for independent valuation of the project assets. However, as a matter of prudence, 100% allowance of Rs. 2.29 crore (for adjusted IDC amount) for JIPL has been created in the accounts and for the balance loan amount of Rs. 30.95 crores, 10% allowance is created in the books as per REC Prudential Norms. The additional allowance shall be reviewed on the basis of outcome of the measures explained above. There are no Off-Balance Sheet SPVs sponsored by the Company, which need to be consolidated as per accounting norms. No penalties have been levied on the Company by any regulator during the financial year 2014-15 (Previous year Nil). No complaints have been received by the Company from the borrowers under the Fair Practices Code during the financial year 2014-15 (Previous year Nil). Previous year figures have been reclassified/ regrouped to conform to the current classification. Figures in Rupees have been rounded off to the nearest crores with two decimals, unless exbrssly stated. The Significant Accounting Policies and Notes to Accounts 1 to 49 are an integral part of Balance Sheet and Statement of Profit & Loss. For and on behalf of the Board J. S. Amitabh GM & Company Secretary Ajeet Kumar Agarwa Director (Finance) DIN - 02231613 Rajeev Sharma Chairman and Managing Director DIN - 00973413 In terms of our Report of even date For Raj Har Gopal & Co. Chartered Accountants Firm Reg. No.: 002074N Gopal Krishan Partner M.No. : 081085 For P. K. Chopra & Co. Chartered Accountants Firm Reg. No.: 006747N K. S. Ponnuswami Partner M.No. : 070276 Place : New Delhi Date : 28th May, 2015 |