Emco Ltd. - Quarterly/Annual Result Disclosures and Notes dated 31 Dec 2020

NOTES TO THE STATEMENT OF STANDALONE UNAUDITED FINANCIAL RESULTS FOR THE QUARTER AND PERIOD ENDED 31 DECEMBER 2020

1. The unaudited standalone financial results have been prepared, reviewed, and approved by the CFO and thereafter taken on record by the Insolvency Resolution Professional at their meetings held on 1 June 2021. The Statutory Auditors of the Company have carried out a Limited Review of the results for the quarter and period ended 31 December 2020.



2. The Honourable National Company Law Tribunal, Mumbai (‘NCLT’) on 22 July 2019 admitted the Corporate Insolvency Resolution Process (‘CIRP’) application filed against the Company and appointed Mr. Kedarram Ramratan Laddha as the Interim Resolution Professional (‘IRP’) in terms of the Insolvency and Bankruptcy Code, 2016 (‘the Code’). Further, the committee of creditors constituted during the CIRP in its first meeting held on 16 September 2019, has appointed Mr. Sundaresh Bhat as the RP to manage the affairs of the Company. In view, of the pendency of the CIRP, the power and responsibilities of the Board of Directors shall vest with the RP under the provision of the Code.



3. The Company adopted Indian Accounting Standards ('Ind AS') from 01 April 2016 and accordingly these financial results have been prepared in accordance with the recognition and measurement principles laid down in the Ind AS 34. "Interim Financial Reporting" prescribed under section 133 of the Companies Act, 2013 read with the relevant rules issued there under and other accounting principles generally accepted in India.



4. The Company is in the business of manufacturing Transformers and execution of projects related to power transmission and as such there are no separate reportable operating segments as defined by Ind AS 108- "Operating Segments. For management purposes the Company has only one reportable segment as follows: Transmission and Distribution Segment within Power Sector.



5. Initiation of Corporate Insolvency Resolution Process (CIRP):

Jet Roadlines (India) Pvt Ltd., in its capacity as the operational creditor of EMCO Limited (‘EMCOL’ or 'Corporate Debtor'), filed an application under Section 9 of the Insolvency and Bankruptcy Code (‘IBC’), 2016 read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 before the Hon'ble Adjudicating Authority, i.e. National Company Law Tribunal, at Mumbai ('Hon'ble NCLT Mumbai') for initiation of Corporate Insolvency Resolution Process ('CIRP') for the Corporate Debtor under the provisions of the Insolvency and Bankruptcy Code 2016. The said Application of Jet Roadlines has since been admitted by the Hon’ble NCLT Mumbai vide its order dated 22 July 2019 (“Order”) and the CIRP has commenced from the date of the order.

The Hon'ble NCLT Mumbai vide its order dated 22 July 2019 ('CIRP Commencement Order') inter alia appointed, Mr. Kedarram Ramratan Laddha having registration number IBBI/IPA- 001/TPP00586/2017-18/11115 as the Interim Resolution Professional ("IRP") of the Corporate Debtor to conduct the CIRP and to exercise all powers and subject and carry out all duties as envisaged under the provisions of the IBC.

Further, NCLT vide order dated 02 January 2020, excluded the period of time between 22 July 2019 to 15 August 2019 and pronounced new date of commencement of CIRP of the Company as 16 August 2019 (“ICD”)

The Committee of Creditors constituted by the IRP, at its first meeting convened on 16 September 2019, resolved with requisite majority to replace the IRP with Mr. Sundaresh Bhat, Insolvency Professional having IBBI registration no. IBBI/IPA-001 /IP-N00077/2017-18/10162 as the Resolution Professional of EMCOL. In accordance with Section 22(b) of IBC, an application for confirmation of Mr. Sundaresh Bhat as the RP of EMCOL was filed with the Hon'ble NCLT Mumbai. The Hon'ble NCLT Mumbai vide its order dated 14 October 2019 (written order made available on 11 November 2019) ('RP Confirmation Order'), confirmed the appointment of Mr. Sundaresh Bhat as the Resolution Professional of EMCOL.

However, in view of resolution plans not being received, the COC has resolved on 19th October,2020 to liquidate the company. Consequently, an application for the liquidation of the company has been filed with the NCLT on 21 October 2020 and the matter is sub judice.



6. Going Concern:

All the manufacturing activities of all the plants of the Company have been discontinued due to Non availability of funds. Also, since there has been no improvement in the position of the funds it casts material uncertainty about the functionality of all the plants soon.

The Company has accumulated losses of INR 2,21,746.04 Lakhs and the Company has registered net loss of INR 19,359.04 Lakhs during the period ended 31 December 2020 and of INR 1,59,290.62 Lakhs for the previous year ended 31 March 2020 (including provision for finance cost and depreciation).

The Resolution Professional and the COC have attempted to find an acceptable resolution plan to continue the company as a going concern. However, in view of no resolution plans being received, the COC have resolved on 19th October 2020 to liquidate the company. Consequently, an application for the liquidation of the company has been filed with the NCLT on 21 October 2020 and the matter is sub judice.

The Company also has accumulated losses resulting in substantial erosion of its net worth and has incurred net cash losses in the current period ended and in preceding financial years. The current liabilities of the Company exceeded its current assets as at the balance sheet date and with suspension of operations at all the Plants since March 2019, while no resolution plans have been received for any kind of revival under Corporate Insolvency Resolution Process, the company is non-operational and is not a going concern.

All the above events cast significant uncertainty on the ability of the company to continue as a going concern in the foreseeable future and hence the unaudited financial results of the company are prepared on a non - going concern basis.



7. In view of uncertain nature of projects, complex situations, performance issues, deterioration in client relationship, delays in contracts execution, probability of liquidated damages likely to devolve, unsettled or unaccepted claims, BG invocations, arbitrations, pending legal disputes, non-availability of balance confirmation from customers and vendors, penalties levied by various governmental authorities, outcome of the CIRP. etc., there is a high probability of substantial write down in the amount’s receivables and other current assets. The management, will assess the situation at the close year end and will give impact of any further impairment, as may be required.



8. Basis of preparation

The results of the company have been prepared in accordance with Indian Accounting Standards (Ind AS) notified under the Companies (Indian Accounting Standards) Rules, 2015 as amended by the Companies (Indian Accounting Standards) (Amendment) Rules, 2016 and the relevant provisions of the Companies Act, 2013 ("the Act").

The results are not prepared on going concern assumption as the liquidation application is filed per decision of COC meeting dated 19th October 2020.



9. As the financial results of the company are prepared on the non-going concern assumption, all the leases existing as on 1 April 2019 are treated as short term leases by the company. Accordingly, the company has availed exemption as per para 5 of Ind AS 116 'Leases'. Rent if any, paid on this short-term lease is accounted as an expense on straight line basis in the statement of profit and loss. As the company is not a going concern, the advance rentals shown above under the heading 'Leasehold land' is currently transferred and shown as asset held for sale. The leasehold land can be assigned to third party with the prior approval of Lessor.



10. The above Statement of Standalone unaudited results for the Quarter and period ended 31 December 2020 ("the Statement") has been reviewed by the Insolvency Resolution Professional Mr. Sundaresh Bhat (IBBI Registration no. IBBI/IPA-001/IPP00077/2017-18/10162) based on data provided by the Accounts Department and supervised by Mr. Ganesh Tawari (CFO) of EMCO Limited. It is pertinent to note that the Resolution Professional made all practicable and reasonable efforts from time to time to facilitate information/data from the officials of the Company in relation to the preparation of the statements of the company and also the information required by the auditors for the purpose of carrying out the audit of the results of the company. It is to be noted that any data pertaining to the financial statements up to the half year ended 30 September 2019 provided to the auditors for the purpose of audit, pertain to the year prior to the appointment of the Resolution Professional and therefore, while facilitating the collection and dissemination of the said information, the Resolution Professional has relied upon and assumed the accuracy/veracity of the data/information provided by the officials of the company, suspended directors, and the records of the company made available to the Resolution Professional, which the Resolution Professional has assumed are in conformity with the applicable law and present a true and fair view of the position of the company as of the dates and for the year indicated therein. The RP has not personally verified the information provided by the officials of the company and has placed confidence in the data/information provided to him of the previous years. Accordingly, the Resolution Professional shall be absolved from the accuracy, veracity and sufficiency or completeness of such information. Readers and users of these statements/statements are advised to do their due diligence before arriving at any conclusions. The Resolution Professional has signed the results to facilitate the CIRP Process and facilitate the statutory requirements without any liability of the same.



11. In respect of Company’s Bank balances & Borrowings from banks and financial institutions balance confirmation as of 31 December 2020 has been received from all the banks except for few fixed deposits, dormant and inactive accounts.



12. As a part of CIRP, creditors of the company were called upon to submit their claims to the RP in terms of the applicable provisions of Insolvency and Bankruptcy Code, 2016. Trade payables and employees and workers payable are not reinstated on the basis of the Operational Claims and Worker and employee claims received under Corporate Insolvency Resolution Process due to certain practical difficulties. However, Financials claims have been reinstated in the books to the extent they are fund based as on 16th August 2020. The final amount accepted under Insolvency and Bankruptcy Code, 2016 is available on the company's website



13. Consolidation

The Company has not prepared and presented Consolidated Ind AS Statement for the quarter and period ended 31 December 2020 as required under Section 129 sub-section 3 of the Companies Act, 2013 due to non-availability of financial information of subsidiaries.



14. Due to preparation of financial results on a non- going concern basis all the assets and liabilities are classified as current except, amount receivable from statutory authorities.



15. During the period ended 31 December 2020, MAT credit entitlement of INR NIL (previous year ended 31 March 2020 INR 501.08 Lakhs) was written off as it was not probable that taxable profit will be available during the specified year against which the credit can be utilized.



16. During the period ended 31 December 2020, Deferred tax assets amounting to INR NIL (previous year ended 31 March 2020 INR 34,232.78 Lakhs) was written off in the absence of reasonable certainty that future taxable profits will be available against which this asset can be used.



17. During the period ended 31 December 2020, Basis its assessment of unbilled revenue and Lack of certainty on collectability of the amount, unbilled revenue to the extent of INR NIL (previous year ended 31 March 2020 INR 5,419.85 Lakhs) Lakhs was written off by the management.



19. During the period ended 31 December 2020, basis the management estimates of contract liabilities (Billing in excess of Revenues), the amount of INR NIL (previous year ended 31 March 2020 INR 89.16 Lakhs) was not payable and hence the liabilities was written-back and credited to the statement of profit and loss. Provision for contract liabilities was created in the earlier years for certain ongoing sub-station projects.



20. Expected credit loss (ECL) for trade receivables:

The management has assessed all its trade receivables on quantitative parameters like age of the receivables, past default trends, etc. and on the qualitative parameters like the financial health of the customer, sectoral performance, etc.



Trade receivable are outstanding and standing at INR 3,682.07 Lakhs during the period ended 31 December 2020. The management is in the process of assessing the recoverability of these advances and necessary impact of such assessment will be provided for at the year end.



During the year ended 31 March 2020, based on this analysis management has created a provision of INR 32,718.80 Lakhs towards ECL on trade receivables.





21. Employee Stock Option Plan (ESOP)

The Company had granted stock options under the following employee stock option scheme:

30,00,000 Equity Shares are reserved for allotment of equity shares under Employee Stock Option Scheme 2011. During the year Nil Equity Shares have been issued and allotted to the eligible employees against exercise of Options under ESOS 2011.



30,00,000 Equity Shares are reserved for allotment of equity shares under Employee Stock Option Scheme 2015. During the year NIL Equity Shares have been issued and allotted to the eligible employees against exercise of Options under ESOS 2015.



Each option when exercised would be converted into one fully paid-up equity share of ` 2 each of the Company. The options granted under ESOP 2011 and options granted under the ESOP 2015 scheme carry no rights to dividends and no voting rights till the date of exercise.



The COC have resolved on 19th October,2020 to liquidate the company. Consequently, an application for the liquidation of the company has been filed with the NCLT and the matter is sub judice. Also, the existing employees to whom the ESOP option was allotted have given up their right vide letter dated 31st March 2020. Considering the above scenario, the management has decided to forfeit the ESOP options and reverse the ESOP outstanding as on the 31 March 2020 and the liability for the same has been transferred to General reserve in the statement of equity.



22. Employee Provisions:

Employee/workmen dues recorded in the books of accounts are based on the company policy and after considering their attendance and leave records.



Employee cost for other than CIRP employees i. e. employee cost not considered as CIRP cost, is not provided in the books of accounts for the quarter and period ended 31 December 2020 due to Covid 19 related ongoing lock down.



Only COC approved salaries of CIRP critical employees form part of CIRP Cost. During the CIRP period, all dues pertaining to employees whose salary is treated as CIRP cost like employee’s share of Provident Fund, Employees State Insurance Scheme, Profession Tax and TDS has been deducted and paid as applicable.



All claims for outstanding salaries and wages pertaining to employees/workmen whose salary/wages is not treated as CIRP cost will be dealt with in accordance with the provision of Insolvency and Bankruptcy Code, 2016.



23. Inventory

Stock of Raw Materials & Components, Work-in-progress and Store, Spares and Packing Material amounting to INR 672.23 Lakhs as on 31 December 2020 is stated at realisable value as assessed by the management as on 31 March 2020. The management believes that there is no significant change in the realisable value of the inventory as on 31 December 2020 and hence no impact of any further diminution in the value of inventory is required. The management will assess the carrying value of inventory as at the year-end 31 March 2021 and will provide impact of such assessment, if any, at the year end.



Since the company has filed liquidation application post approval from COC in the meeting dated 19th October 2020, the going concern assumption cease to exist. Accordingly, inventories were valued net realisable value based on the Management estimate during the year ended 31 March 2020.



During the year 31 March 2020, following adjustments were made in the value Inventories:



Physical verification of stock of Raw Materials & Components, Work-in-progress and Store, Spares and Packing Material was conducted by the management during the year ended 31 March 2020 and shortage amounting to INR 6,333.61 Lakhs is written off in the books of accounts during the year ended 31 March 2020.



Stock of Raw Materials & Components, Work-in-progress and Store, Spares and Packing Material as per books of accounts, as on 31 March 2020 was INR 3,463.73 Lakhs. Inventories have been valued at net realisable value based on the Management estimate. Diminution in the value of stock on account of valuation at net realisable value is Rs.2,791.51 Lakhs.



Details of diminution in the value of inventory is as detailed below:



a) Decrease in value of closing stock of Raw Materials & Components: INR 1,579.25 Lakhs

b) Decrease in value of closing stock of Work-in-progress: INR 1,206.41 Lakhs

c) Decrease in value of closing stock of Store, Spares and Packing Material: INR 5.84 Lakhs



The management had not conducted physical verification of stock for few locations. The value of stock present at these locations as per the books of accounts is INR 253.52 Lakhs. Out of this stock amounting to INR 117.11 Lakhs is valued at net realisable value, resulting in diminution in value by INR 117.11. Stock amounting to INR 136.41 Lakhs is carried in the books at book value as the same pertains to ongoing project.



The management has not carried out any physical verification of inventory for the period ended 31 December 2020 and the same will be done at the year-end 31 March 2021.



24. Statutory Dues

The company has provided interest on outstanding Provident Fund, Employee State Insurance Scheme, Labour Welfare Fund & Profession Tax only to the extent of notices received from respective authorities.



Interest on TDS defaults was provided only for post CIRP period and not for dues outstanding prior to that date.



The company has not fully paid Statutory dues pertaining to provident fund, ESIC & other material statutory dues relating to employees and workmen who have not been paid their salary and wages.



The company has not calculated and provided for contribution to provident fund based on the supreme court ruling to include all fixed components to derive the amount of contribution to the fund. The company has not conducted an impact study on account of the retrospective application of the said ruling. Impact of these non-compliance and their respective interest and penalties are not quantified and provided for in the books of accounts. All the outstanding statutory dues prior to the CIRP date will be dealt with in accordance with the provision of the IBC, 2016



25. Sale of Solar power plant in the previous year ended 31 March 2020



For the purpose of setting up the Solar Power plant, Company obtained ECB facility of USD 6.50 million from Axis Bank in 2011. The terms and conditions were reviewed/modified/renewed from

time to time. Axis Bank had created charge on assets of Project (Power Plant), whose yearly revenue was in the range of INR 6-8 Crs, to secure due repayment of outstanding dues. Charge was created on all movable fixed assets installed and lying at the power plant and immovable property (Land).



Company committed default in payment of amount and as a result Company was classified as Non- Performing Asset (NPA) in the books of Bank from April 2018.



Owing to continuous defaults, bank initiated legal action for recovery of its dues against Company and issued demand notice dated 15 January 2019 under SARFAESI Act calling upon the borrower to repay outstanding amount of INR 1,462.45 Lakhs as on 31st December 2018 within a year of 60 days.



Company could not repay the amount within 60 days of notice and hence Bank proceeded with the provisions of the act and put the secured assets for sale through E-Auction Notice dated 28 March 2019 at Reserve price of INR 1,710.00 Lakhs. It was based on the valuation report submitted by BKC Advisors Pvt Ltd. dated 22nd March 2019 which gave the Fair Value of the entire plant at INR 1,962.17 Lakhs, Realisable value at INR 1710.14 Lakhs. and Distress Value at 1,534.11 Lakhs. E-Auction date of assets was kept at 30 April 2019.



E-Auction was conducted on the said date and assets were successfully sold at price of INR 1,715.00 Lakhs as against the book value of INR 3,424.10 Lakhs (Net of Creditors).



Since all assets and liabilities has been transferred in relation to Solar Power Plant, the sale is treated as Slump Sale as per provisions of Income Tax Act, 1961.



As per Ind AS 105, ‘Non-current assets held for sale and discontinued operations’



A discontinued operation is a component of an entity that can be distinguished operationally and financially for financial reporting purposes from the rest of the entity and:

• Represents a separate major line of business or geographical area of operation

• Is part of a single coordinated plan to dispose of a separate major line of business or major geographical area of operation

• Is a subsidiary acquired exclusively with a view for resale



Though the plant is a component which can be distinguished separately for operation and financial purposes, the Solar Power Plant cannot be classified as major line of business because it is not a substantial component of the Profit and Loss statement of the Company. This can be further substantiated as the turnover from the Solar Power Plant for the year March 31, 2019 is INR 684.01 Lakhs which is less than 10% of the total turnover (INR 21,300.76 Lakhs) of the Company.



Since Solar Power Plant is not considered as discontinuing operation, disclosures pertaining to Ind AS 105 are not required.



The loss on sale of the Asset INR 1709.10 Lakhs has been shown as an exceptional item on the face of Profit and Loss statement for the previous year ended 31 March 2020 and quarter ended 30 June 2019.



26. Gratuity and Leave Encashment

The company makes provision for defined benefits plans like gratuity and compensated absences. These provisions are done by the company annually on actual basis as the financial results are not prepared on a going concern basis as the company has filed a liquidation application and the same will be payable as per the provisions of Insolvency and Bankruptcy Code, 2016.



No provision for these benefits is made for the period ended 31 December 2020.



27. Interest

On account of loans being reclassified as Non-Performing Assets (NPA) by all lenders, interest has been provided for in the books of accounts:

Pre CIRP date interest is calculated on the basis of actual claim received from the financial creditors and included in the respective facility.

Post CIRP date interest is calculated at the rates charged by banks on actual basis and where interest is not charged by the bank, the same is provided at the rates used by the banks prior to CIRP date including penal interest as applicable for each facility availed by the company.

28. Bank Guarantees



During the period ended 31 December 2020, there are no adjustments on account of advance and performance bank guarantee.



During the year ended 31 March 2020, Advance Bank Guarantee invoked during the year ended was INR 6,346.50 Lakhs. Out of this, INR 311.16 Lakhs is charged to Statement of Profit and Loss, amount of INR 4,618.62 Lakhs has been adjusted against the advances and balance amount of INR 1,260.39 Lakhs is retained as receivable based on management assessment of these amounts.



Performance Bank Guarantee invoked during the year ended 31 March 2020 was INR 8,143.23 Lakhs. Out of this INR 4,979.76 Lakhs is charged to statement of profit and loss, INR 3,004.83 Lakhs is retained as receivable based on management assessment of these amounts and balance amount of INR 158.64 Lakhs is recovered from the customer.



29. Write off of Trade Receivable pertaining to Bank Guarantee:

Basis the assessment of management and lack of certainty on collectability of this amount, trade receivables pertaining to Bank guarantee invoked of INR NIL (previous year ended 31 March 2020 INR 499.93 Lakhs) have been written off during the period.

32. As the company has filed liquidation application with the honourable NCLT and the financial results are prepared on a non-going concern basis, entire amount of unclaimed dividend is to be transferred to Investor Education and Protection Fund (IEPF). IEPF return has not been filed for the current year.



33. Non-Compliance of applicable laws and regulations:

As a consequence of the matters described above and various other matters discussed in these results, the company is not in compliance with various laws and regulations even before the CIRP started, including certain requirement of the Companies Act, 2013, FEMA, Factories Act, 1948 etc. Management is in the process of evaluating the financial and other consequences arising from such non-compliance and of making a comprehensive assessment of other non-compliances, to determine the impact/consequences, including financial and operational impact, of such non compliances on the company. Pending final determination and assessment thereof, no adjustments have been made to these results.



34. Company has foreign trade receivable of INR 1,728.29 Lakhs and foreign trade payables of INR 249.16 Lakhs outstanding for more than 180 days. This is in violation of the provision of Foreign Exchange Management Act (‘FEMA’). The compounding fees that may devolve on the company on account of this non-compliance is currently not quantifiable.



35. For the period ended 31 December 2020, the management has not identified MSME vendors pertaining to the CIRP period and accordingly no interest has been paid/ provided for any delay in payments made to MSME vendors during the quarter or on outstanding balances payable to MSME vendors as per the MSME Act.



36. Figures of the previous period have been regrouped and reclassified, wherever required.