Hi Tutor, need your help in the following question:

1) Using all the following information, discuss the adavantage and costs of raising equity capital in each of the 3 financial markets. Which market do you recommend? Explain your recommendation. (40 Marks)

W13226 ESSAR ENERGY: INDIAN GAAP, U.S. GAAP OR IFRS? (A) Professor David Sharp, Professor Sudershan Kuntluru, Dr. Paritosh Basu and Mr. Sanjay Chauhan wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright 2013, Richard Ivey School of Business Foundation Version: 2013-06-10 INTRODUCTION On April 16, 2007, the top leadership team of Essar Group (Essar) was meeting on the 21st floor of Essar House overlooking the Mahalaxmi racecourse in Mumbai to consider some long-term financial issues. The family-founded company had grown rapidly over the previous 10 years, to the point where some subsidiaries would need to raise large amounts of capital in the next three years, possibly beyond the resources of the Indian capital markets. The group's chief financial officer (CFO) had to explain the challenges to the team, and recommend solutions. Prospective investors would need up-to-date financial information about the company in a form that they would understand and trust, since Indian GAAP (generally accepted accounting principles) was not a universally accepted accounting framework and reporting language. If Essar were to use the U.S. financial markets, it could prepare consolidated financial statements under U.S. GAAP. Alternatively, since the Securities and Exchange Commission (SEC) permitted non-U.S.-listed companies to use International Financial Reporting Standards (IFRS), the globally accepted standards promulgated by the International Accounting Standards Board (IASB), it could choose IFRS. However, at that time, Essar would also be required to prepare a reconciliation of its IFRS statements to U.S. GAAP, although there had been discussions among standard-setters and regulators that this reconciliation might not be required in the future. If Essar raised capital in London, it would be required to use IFRS. Another consideration was that India was moving toward IFRS adoption and discussions were taking place on whether and how to converge Indian GAAP with IFRS. Though no definite time line had been set, perhaps Essar should just wait until India adopted IFRS. THE ESSAR GROUP The Essar Group was founded in 1969 by two entrepreneurial brothers, Shashi and Ravi Ruia, who began operations with the construction of an outer breakwater in Chennai port. Essar moved quickly to capitalize on emerging business opportunities, becoming India's first private company to buy a tanker in 1976. The group also invested in a diverse shipping fleet and oil rigs when the Indian government opened up the shipping and drilling businesses to private players in the 1980s. Then, in the 1990s, Essar began its iron-making business by setting up India's first gas-based sponge iron plant in Hazira, Gujarat. By 2007, This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 2 9B13B014 Essar Group had become a diversified multinational conglomerate with highly qualified professionals in leadership roles, operations in multiple countries, about 20,000 employees and revenues of around US$4.5 billion1 for the financial year 2007/08. The group would eventually expand its operations to 25 countries with 75,000 employees. It was the leading player in steel, energy (oil, gas and power), infrastructure (ports, projects and concessions) and services (shipping, telecom, realty and business process outsourcing). A brief description of its activity in each sector is presented in Exhibit 1. The companies in the group were held by an entity known as Essar Global Limited. The group's vision was \"to be a respected global entrepreneur, through the power of positive action.\"2 It was considered one of the major uniting, driving and motivating forces for all of Essar Group's entities. To achieve the vision, management believed that the first step was to report financial statements in one language that was understandable to all stakeholders and prospective investors around the world. Secondly, the group's holding company had planned both vertical and horizontal expansions in early 2007 to achieve a higher growth trajectory in terms of both operations and wealth creation. It planned both organic growth and acquisitions. For that, Essar would have to tap international equity and debt markets, which would require it to adopt a single global reporting standard. This would also help the group to control its operations across its diversified business entities. Over time, the group had positioned itself for growth in highpotential markets, including India, North America, United Kingdom, Middle East, Singapore, Indonesia, Philippines, Africa and Mauritius. In most of the locations, there were major manufacturing and service business operations, and some had regional offices. Subsequently the group expanded its operations in many other countries, including China, Australia and Argentina. ESSAR ENERGY OIL, GAS AND POWER Essar Oil and Gas, one of the largest business segments in the group, had a global refining capacity of over 750,000 bpsd (barrels per stream day) with refineries in India, the United Kingdom and Kenya. It was an oil and gas company of international scale with a strong presence across the hydrocarbon value chain from exploration and production to refining and oil retail. It had a diverse portfolio of 15 blocks3 and fields in the various fields of oil and gas exploration and production in India, Indonesia, Nigeria and Vietnam. It had a portfolio of onshore and offshore oil and gas blocks in India, and it owned the largest acreage of coal bed methane blocks in the country. There were over 1,149 Essar-branded oil retail outlets in various parts of India. Its target was to reach 1,600 outlets in the near future. Essar Power was one of India's largest private sector electrical power producers, with 1,600 megawatts (MW) of installed capacity, enough to supply 15 million average consumers in India with further expansion plans to scale up generation to 3,900 MW per year in the short term. It was one of the first private sector players in India to be granted a transmission and trading license. It had plans to build new power plants that would expand its capacity to around seven times its present generating capacity. Exhibits 2 and 3 show the Essar Oil and Essar Power financial statements prepared under Indian GAAP. The combined growth plans of the oil, gas and power segments would need about $2.5 billion of additional equity financing no later than early 2010. The Essar Group planned to consolidate the oil and gas business with the electricity business to form a company called Essar Energy, and then to raise that capital through an initial public offering (IPO). 1 All currencies are in US$ unless otherwise stated. www.essar.com/section_level1.aspx?cont_id=vyEUtlZ3m98=, accessed October 22, 2012. 3 Blocks are areas of land or sea where a company has been granted the right to explore and extract energy sources, such as oil, coal and gas. 2 This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 3 9B13B014 RAISING EQUITY CAPITAL Essar saw three possibilities for raising the capital they needed. The first was the local Mumbai stock market, where various subsidiaries of the group were already listed. The Mumbai market had experienced almost explosive growth since economic regulation had been relaxed in 1991. Essar was a household name with an excellent reputation. In India, during 2005 and 2006, 50 and 73 companies respectively had offered IPOs on the national stock exchange, of which more than half subsequently traded above their listing price.4 In 2006, Indian companies raised $4.5 billion in IPOs and a further $9.6 billion in secondary offerings, compared to $2 billion in IPOs and $8.6 billion in secondary offerings the previous year.5 However, the Indian stock market had been very volatile, and management was concerned that the supply of equity capital at a reasonable cost would not be sufficient to meet their needs. Exhibit 4 provides information on the volatility and volume of issues on the Mumbai Stock Exchange. A failed issue would have adverse consequences for the company's reputation. The second possibility was Europe, specifically the London Stock Exchange (LSE). In 2005, $31 billion of capital had been raised on the LSE through IPOs and a further $21 billion in secondary offerings; almost double these figures ($56 billion in IPOs and $39 billion in secondary offerings) was raised in 2006.6 Exhibit 5 provides information about the LSE, which was no stranger to Indian listings. The first was the electricity company, CESC, in 1979. By 2005, the LSE had 18 Indian companies listed with a total market capitalization of $2.94 billion (127.7 billion, 1.53billion). In addition, there were nine Indian companies with depository receipts traded on the Exchange. During 2004, two Indian companies, ACC Ltd. and Amtek Motors, successfully raised funds in excess of $100 million when they issued depository receipts on the Exchange.7 The LSE had fewer oil and gas listings than the New York Stock Exchange (NYSE), so it was possible that there would be more interest in the planned Essar Energy IPO. Management also felt that its cost of capital in London would be much lower than in Mumbai. They had estimated that P/E ratios in London were 20 per cent to 25 per cent higher for energy stocks than in Mumbai. There was still a risk, though; the planned size of the Essar IPO would immediately catapult it into the top 100 companies and, therefore, into the illustrious, and very carefully scrutinized, group of firms comprising the FT100 index. In its wake, this would raise global awareness of the brand image of the group and its leadership team; however, it also meant that the listing entity and its subsidiaries would be under critical research and review by the analyst community. A third possibility was the New York Stock Exchange (NYSE), the largest in the world. In 2005, investors had raised $187 billion of equity capital in New York, of which $56 billion was from IPOs; in 2006, the corresponding figures were $130 billion and $54 billion respectively.8 Indian companies had performed well on the NYSE, and for most Indian conglomerates, this was the preferred location for their 4 Piyu Sen, \"FY 2006 Was a Better Year For IPOs,\" moneycontrol.com, www.moneycontrol.comews/market-edge/fy-2006wasbetter-year-for-ipos_280018.html, accessed October 22, 2012. 5 \"Investment Flows - New Capital Raised by Shares,\" World Federation of Exchanges, www.worldexchanges.org/statistics/annual/2006/investment-flows-new-capital-raised-shares, accessed November 10, 2012. 6 Investment Flows - New capital Raised by Shares,\" World Federation of Exchanges, www.worldexchanges.org/statistics/annual/2006/investment-flows-new-capital-raised-shares, accessed November 10, 2012. 7 \"London Stock Exchange Markets Opened by Indian Finance Minister,\" London Stock Exchange, Press Release, www.londonstockexchange.com/about-the-exchange/media-relations/pressreleases/2005/indianfinanceopensthemarkets.htm, accessed October 17, 2012. 8 Investment Flows - New capital Raised by Shares,\" World Federation of Exchanges, www.worldexchanges.org/statistics/annual/2006/investment-flows-new-capital-raised-shares, accessed November 10, 2012. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 4 9B13B014 first international capital issue. Infosys had led the way in 1999, followed by a dozen more, including such luminaries as ICICI Bank, Dr. Reddy's, Infosys Technologies, Tata Motors, and Wipro. In addition, in 2007, Indian ADRs9 on the NYSE were trading at an average of 5.1 per cent above the price of the underlying stocks on the Mumbai exchange.10 If Essar Energy listed on the NYSE, it would be following in sound footsteps. However, Essar management had some concerns about New York. There were already many oil and gas companies listed on the NYSE, so the addition of Essar Energy would not add much diversification. Management wondered whether there would be an appetite among investors for more oil and gas stocks. The listing requirements in New York were very stringent. On the one hand, meeting the requirements would be expensive; on the other hand, meeting them also demonstrated to the markets that Essar could be counted among the best global businesses. In addition to historical financial information, prospective equity investors would look into various other aspects of the company and the business for which the capital was raised. Prospective investors would be concerned about various risk factors related to the group, each of its businesses, the industry's overall prospects and the regulatory environment in India. They would be keen to understand whether the company could meet the timelines for principal events and its detailed plans for doing so. However, probably the most important information for prospective investors was the company's forecasted future cash flows. Investors would need to ensure that they could evaluate performance in the future. For this, they would need financial statements prepared using familiar accounting standards. If Essar chose to raise capital outside of India, then it would have to prepare financial statements under either U.S. GAAP or IFRS. Regardless of the choice of locale in which it raised capital, Essar would need to continue using Indian GAAP for its accounting records and statements to meet the local Indian regulatory requirements. U.S. GAAP or IFRS disclosure would be an additional requirement, not an alternative. If the IPO were in the United States, Essar could prepare statements under U.S. GAAP. Alternatively, the company could provide Indian GAAP statements, but it would then be required to prepare a reconciliation of those statements with U.S. GAAP. One concern with this approach was that U.S. investors would not be familiar with Indian GAAP, which might affect their willingness to invest. The company could, however, also prepare statements under IFRS, and reconcile those to U.S. GAAP. This reconciliation was required of all foreign companies whose shares were listed on the NYSE. While this appeared to be a very complicated approach, it might turn out to be simpler. The SEC had proposed a \"roadmap\" by which U.S. GAAP would gradually converge toward IFRS. One of the proposed steps in that roadmap was the SEC's acceptance of statements from non-U.S. companies prepared under IFRS, without the need for this reconciliation. This proposal's implementation date was expected to be announced later that year. When the proposal was implemented, Essar would then simply be able to file IFRS statements without reconciliation. If the IPO was in London, Essar would be required to prepare IFRS statements. If the capital was raised in Mumbai, no change in its reporting would be required. Despite this, there was general agreement among Essar's senior management that, as an increasingly global company, Essar should report using accounting standards that were accepted globally. This meant either IFRS or U.S. GAAP. Since Essar Energy would 9 An ADR is an American Depositary Receipt. Most non-U.S. companies used this indirect vehicle to trade their shares on the NYSE, rather than the shares themselves. 10 \"Indian ADRs on NYSE Euronext Trade at 10% Premium,\" Business Standard, February 16, 2010, www.businessstandard.com/indiaews/indian-adrsnyse-euronext-trade-at-10-premium/85894/on, accessed October 17, 2012. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 5 9B13B014 be such a large part of the group, it would make sense that whatever accounting standard Essar Energy used, the same reporting standard would be adopted throughout the whole Essar Group. U.S. GAAP U.S. GAAP was considered \"rules-based,\" meaning that the standards prescribed exactly what the preparer should do in just about every situation (in contrast to a principle-based approach that emphasized how to decide what to do). The Financial Accounting Standards Board (FASB) and the regulator, the SEC, frequently issued detailed accounting rules. Though it minimized confusion and the need to apply professional judgment, these exhaustive rules resulted in a high level of detail and complexity. For many years, the FASB and IASB had collaborated closely on standard-setting, so that any new standards that were promulgated were essentially identical under IFRS and U.S. GAAP. U.S. GAAP was very different from Indian accounting standards. The Institute of Chartered Accountants of India (ICAI) had for several years developed accounting standards that were closer to the more principles-based IFRS with a larger emphasis on substance over form. U.S. GAAP stipulated more stringent accounting treatment than Indian GAAP, as well as higher disclosure norms, e.g., for related party disclosures (Indian AS18), segment reporting (Indian AS17) and cash flow statements (Indian AS3). There were also several economic transactions for which no standards were issued by the ICAI. Some of the more important differences between Indian GAAP and U.S. GAAP were: Under US GAAP, the current portion of long term debt was classified as a current liability, whereas under Indian GAAP there was no such requirement. As a result, neither interest accrued on long term debt nor the current portion of long term debt was a current liability under Indian GAAP. Equity issue costs: Under U.S. GAAP, capital issue expenses were required to be written off when incurred against proceeds of the capital issue, whereas under Indian GAAP, capital issue expenses could be amortized or written off against reserves. PPE valuation: Under Indian GAAP, an enterprise was permitted to revalue its assets to reflect an increase in cost of replacement, which would also be reflected in a higher depreciation expense, and the unrealized gain credited directly to a revaluation reserve (Guidance note 57). However, some companies credited the gain through the profit and loss account, in order to increase profitability. Managers had used this accounting treatment to mislead investors on many occasions. U.S. GAAP did not allow revaluation of property, plant and equipment (PP&E), or investments, except under specified circumstances. Financial instruments: U.S. GAAP provided detailed rules for valuation of financial instruments, including derivatives, whereas Indian GAAP provided no comprehensive guidance on derivatives. These differences could result in large differences in the results of Indian companies when computed under U.S. GAAP; profits computed under U.S. GAAP were generally lower. IFRS Whether the IPO was to take place in London or New York, Essar could prepare statements under IFRS. But IFRS was still new in the United States, and there was concern that U.S. investors might feel less This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 6 9B13B014 comfortable with IFRS than U.S. GAAP statements, especially from an Indian company that would still be using Indian GAAP for its own use. International Financial Reporting Standards were promulgated by the IASB, an international standardssetting body based in London. Since its earliest appearance as International Accounting Standards (IAS) in 1973, IFRS, in its current form, had become widely adopted around the world, most significantly in 2005, when the EU adopted IFRS for all public companies. There were still some regional differences, when particular jurisdictions would \"carve out\" sections of IFRS that they were unhappy with. For example, the EU had required that some sections relating to fair-valuation of assets in IAS 39 be removed, in response to political pressure applied by the banking industry. This particular carve-out had a significant impact on the financial statements and capital adequacy measures for some troubled banks. The IASB was committed to developing, in the public interest, a single set of high-quality, global accounting standards that required transparent and comparable information in financial statements. By 2007, over 100 countries around the world had adopted IFRS, were planning to adopt IFRS or were revising their own accounting standards in a manner that converged toward IFRS. IFRS were described as \"principles-based\" standards, i.e., they provided guidelines for reporting based on fundamental concepts, rather than explicit rules. IFRS thus required an implementation team to exercise significant professional judgment and analysis to reach the underlying basis of its accounting choices and to focus on substance over form, except in certain areas where IFRS was prescriptive. The structure of these standards gave a clear insight as to why the standard was introduced, what its objectives were, its scope, accounting guidelines, the basis for its conclusions with the dissenting opinion of the board members, and illustrative examples. Thus, IFRS established conceptual principles that could be applied universally and hence improve comparability. IFRS emphasized the economic substance of a transaction. The rapid increase in the global integration of economic zones and financial markets had underscored the need for harmonized accounting standards that would facilitate the trade of goods and capital. The IASB and the FASB had therefore publicly committed to work toward the convergence of both standards, which were expected to be completed as early as 2015. INDIAN GAAP Preparing additional statements under a second accounting standard would be a very expensive and timeconsuming task. A third possibility was to continue to use Indian GAAP and defer the IPO until India was close to adopting IFRS. The Institute of Chartered Accountants of India (ICAI) had been established within two years of independence, but had its roots in the Society of Auditors founded in Madras (Chennai) in 1927, and the Indian Accountancy Board, created to advise the governor-general and maintain the qualification standards and conduct of auditors in 1932.11 The present ICAI was incorporated under an Act of the Indian Parliament in 1949. The ICAI had created a task force to prepare a concept paper on convergence with IFRS, with the objective of laying down a road map for achieving convergence with IFRS and making Indian standards IFRS-compliant.12 This paper, published on October 15, 2006, had proposed 11 The Institute of Chartered Accountants of India, \"History,\" www.icai.orgew_post.html?post_id=197&c_id=196, accessed November 13, 2012. 12 The Institute of Chartered Accountants of India, \"Concept paper on convergence with IFRSs in India,.www.icai.org/resource_file/12436announ1186.pdf, accessed November 9, 2012. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 7 9B13B014 new Indian accounting standards known as IndAS, which would be converged with IFRS. Immediately after publication, however, both the regulator and companies started pushing for \"carve-outs,\" i.e., exceptions that would make IndAS different from IFRS as promulgated by the IASB. The concept paper had proposed that IFRS should be adopted for public entities starting on April 1, 2011. However, given the amount of pressure for carve-outs, it was doubtful that this date would be met, and even if it was, there was uncertainty as to how closely IndAS would resemble the \"official\" IFRS. Even though Indian GAAP was closer to IFRS than U.S. GAAP, there were still many differences. The overriding principle to be followed for accounting and disclosure under IFRS was substance over form. Exhibit 6 provides examples of some important differences. COMPARISON OF U.S. GAAP AND IFRS WITH INDIAN GAAP Changing from Indian GAAP to either U.S. GAAP or IFRS would likely have a significant impact on performance indicators. The most affected ratios would be the current ratio, fixed assets to long-term debt, debt to equity, return on net worth and the debt service coverage ratio. The current ratio was likely to be adversely affected by the change in the classification to current from non-current liabilities. The fixed assets to loan ratio could move in either a favorable or an adverse direction depending on the fair valuation of PP&E, the reassessment of its economic life and its residual value. The debt to equity ratio would most likely increase due to the reclassification of convertible preference shares as debt. Return on net worth most likely would improve. The debt-service coverage ratio could change, and was a concern for Indian banks, which had yet to set a policy with respect to IFRS adoption. ESSAR'S IMPLEMENTATION CHALLENGES If the top management team at Essar decided to change, it would not only be implementing the adoption of another standard, as European companies had done two years previously (and in which the \"big four\" global accounting firms had considerable expertise), but also undertaking the unique, more complex task, of adding a second standard while retaining their existing Indian GAAP. In 2007, knowledge of IFRS and U.S. GAAP was very limited within the company. One challenge was to obtain the expertise necessary to implement this dual reporting system. Outside consultants, even the big four, would not have experienced a transition of this complexity, so they would be very expensive. An alternative would be to build the expertise internally; a consultant could be hired to train an internal team, who would then be able to train the rest of the group. But it was not clear that they had sufficient depth of expertise within the company even for this. There would also be the risk of errors and possibly opposition from managers who were either less enthusiastic about the change, or who would see their measured performance decrease under the new standard. A new IT architecture would be needed to prepare the dual set of books. The complexity of adoption and preparation of the first set of financial statements with comparative numbers for the previous year would be especially daunting. The company was planning the consolidation of the financial statements of the oil and gas and electric power companies, and IFRS required that many fixed assets would have to be \"componentized,\" i.e., broken down into smaller identifiable assets, with separate evaluation of the technical and actual feasible working life of each component asset. While U.S. GAAP required assets to be recorded at cost, IFRS allowed the fair value to be used. To get their converted financial statements audited, local auditors would need to gain experience with the process of conversion. Communicating this to them would be a challenge. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 8 9B13B014 EXHIBIT 1: ESSAR BUSINESS GROUPS Essar Oil and Gas had a global portfolio of oil and gas blocks, with about 35,000 sq. km available for exploration in India, Indonesia, Nigeria and Vietnam. It operated refineries with combined capacity over 750,000 barrels per day in India, the United Kingdom and Kenya, and over 1,100 Essar-branded retail outlets in various parts of India. Essar Power was one of India's largest private sector electrical power producers, with 1,600 megawatts (MW) of installed capacity. Essar Steel was a fully integrated global producer of flat carbon steel with a production capacity of 14 MTPA (million tons per annum) in India, North America, Europe, Middle East and South East Asia. Products of this business group found wide acceptance in highly discerning consumer sectors such as automotive, white goods, construction, engineering, hydrocarbon and shipbuilding. Essar Steel was a highly versatile producer whose facilities included five meter wide plate making, hot rolling, cold rolling, galvanizing and colour coating, and pipes. It had a full service distribution business consisting of steel processing, distribution centers and retail outlets under the brand, Essar Hypermart. Essar Shipping operated sea transportation, logistics and oilfield services businesses. The sea transportation business provided crude oil and dry bulk transportation services to leading Indian and global oil majors, core sector industries and commodity traders. It had a diversified fleet of 27 vessels, including VLCCs (Very Large Crude Carriers), capsizes, supramaxes, mini-bulk carriers and tugs, with 24 more on order. The logistics business provided end-to-end inter-modal logistics services from ships to ports, lighterage services and intraplant logistics and dispatch of finished products to the final customer. It managed a fleet of 5,000 trucks for inland transportation of steel and petroleum products. The Oilfields Services business provided contract drilling and related services to oil and gas companies worldwide, operating both offshore and onshore. It owned a fleet of 13 rigs, which included one semi-submersible rig and 12 onshore rigs. Essar Ports was one of India's largest port operators with a cargo handling capacity of 88 MMTPA that was being expanded to 158 MMTPA by 2013. Essar Ports had two operational ports, at Hazira and Vadinar. The Hazira port was an all-weather, deep-draft port with 30 million tonnes of dry bulk cargo handling capacity. The company was constructing two terminals at Paradip on the north-east coast 200km south of Kolkata, and planned to set up a dry bulk terminal at Salaya on the north-west coast in Gujarat, some 500km north of Mumbai. Essar Projects was a leading EPC (Engineering, Procurement and Construction) contractor with a global presence. In India, it operated through its wholly-owned subsidiary, Essar Projects (India) Ltd. The company was supported by a specialized team of about 1,100 engineers with expertise in diverse sectors. The company had a strong procurement function, with a vendor base of around 15,000 suppliers. Its construction capability was underpinned by its ability to mobilize and manage a large number of labourers across multiple sites, along with access to one of the largest construction equipment fleets in India. Essar Projects carried out its business activities through eight Specialized Business Units (SBUs), e.g., Hydrocarbons, Steel, Power, Ports and Jetties, Pipelines and Terminals, Offshore and Subsea, Civil and Buildings, and Heavy Engineering Services. Essar Telecom operated a mobile services network in Kenya under the brand name \"Yu,\" which had over a million subscribers. Essar had a significant presence in telecom retail, with over 1,000 \"The Mobile Store\" outlets spread across several Indian cities. Essar was also present in consumer durables and IT appliance retail with several \"The Electronic Store\" outlets across India. Aegis was a global provider of business services offering the complete spectrum of business process outsourcing, technology solutions, shared services, and consulting and analytics. With almost 30 years of experience and more than 55,000 employees across 50 centers in 12 countries, Aegis worked with over 150 global clients to manage, enable, enhance and extend the customer experience. Equinox Realty was a wholly owned business unit of the Essar Group. It had grown rapidly since its commencement, and had a portfolio of approximately 16 million square feet, including those under various stages of development. It was present in five Indian states. Source: Company records This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 9 9B13B014 EXHIBIT 2: ESSAR OIL LTD FINANCIAL STATEMENTS (INDIAN GAAP) Year ending Balance Sheets (Crores)13 March 31 March 31 2007 2006 Sources of funds: Share capital Reserves total Total shareholders' funds Secured loans Unsecured loans Total debt Total liabilities Application of funds: Gross block Less : accumulated depreciation Net block Lease adjustment Capital Work in Progress Investments Current assets, loans & advances: Inventories Sundry debtors Cash and Bank Loans and Advances Total current assets Less current liabilities & provisions: Current liabilities Provisions Total current liabilities Net current assets Deferred tax assets Deferred tax liability Net deferred tax Total assets Contingent liabilities March 31 2005 1,345.52 1,649.61 2,995.13 7,739.08 832.36 8,571.44 1,100.18 1,420.55 2,520.73 5,602.96 464.62 6,067.58 955.9 1,448.92 2,404.82 4,833.06 281.65 5,114.71 11,566.57 8,588.31 7,519.53 303.86 99.97 203.89 -7.62 10,633.63 109.37 279.12 87.14 191.98 -7.62 8,304.07 89.65 233.52 80.95 152.57 -7.68 7,311.98 73.05 3,417.97 176.84 642.97 432.49 4,670.27 36.49 81.12 519.93 336.01 973.55 134.61 102.06 699.31 303.82 1,239.80 3,970.48 40.39 4,010.87 659.4 0.17 32.27 -32.1 11,566.57 628.34 897.96 32.28 930.24 43.31 0 33.08 -33.08 8,588.31 998.55 671.17 546.78 1,217.95 21.85 0 32.24 -32.24 7,519.53 957.66 Source: www.capitaline.com, accessed November 9, 2012. 13 A crore is 10 million. $1 was worth about 44 in 2005 and 45 in 2006. Therefore, 1 crore rupees was worth about US$227,000 in 2005 and US$222,000 in 2006. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 10 9B13B014 EXHIBIT 2 (CONTINUED) Year ending 31 March Income: Sales turnover Other income Stock adjustments Income Statements (Crores) 2007 2006 12 months 12 months 473.98 636.63 10.39 62.59 96.85 -97.79 2005 15 months 1,045.12 101.46 118.78 Total income 581.22 601.43 1,265.36 Expenditures: Raw materials Power & fuel cost Employee cost Other manufacturing expenses Selling and Administration Expenses Miscellaneous expenses 562.93 0.14 9.43 0.16 45.29 2.66 569.67 0.58 15.96 0.41 79.04 2.02 1,079.72 0.06 13.52 23.79 44.15 66.53 Total expenditures 620.61 667.68 1,227.77 Operating profit -39.39 -66.25 37.59 10.65 21.14 17.01 -50.04 -87.39 20.58 4.51 4.66 6.22 -54.55 -92.05 14.36 Tax Fringe benefit tax Deferred tax 13.34 0.59 -0.99 0 0.79 0.84 -0.98 0 5.48 Reported net profit -67.49 -93.68 9.86 0 -12.52 -0.01 -67.49 -81.16 9.87 Interest Profit before depreciation and tax Depreciation Profit before tax Extraordinary items Adjusted net profit Source: www.capitaline.com, accessed November 9, 2012. Cash flow Summary (Crores) Year ending 31 March 2007 Cash and cash equivalents at beginning of the year 34.95 Net cash from operating activities (93.72) Net cash used in investing activities (2,495.99) Net cash used in financing activities 2,672.01 Net inc/(dec) in cash and cash equivalent 82.30 Cash and cash equivalents at end of the year 117.25 2006 707.28 (118.27) (2,097.78) 1,543.72 (672.33) 34.95 2005 405.97 31.24 (3,405.40) 3,675.47 301.31 707.28 Source: www.capitaline.com, accessed November 9, 2012. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 11 9B13B014 EXHIBIT 3: ESSAR POWER LTD FINANCIAL STATEMENTS (INDIAN GAAP) Balance Sheets (Crores) As at 31 March Sources of funds: Share capital Reserves total Total shareholders' funds Secured loans Unsecured loans 2007 2006 598.5 518.22 598.5 490.12 1,116.72 1,088.62 1,282.46 85 1,370.64 5.55 Total debt 1,367.46 1,376.19 Total liabilities 2,484.18 2,464.81 Application of funds: Gross block Less: accumulated depreciation Net block Capital work in progress Investments 2,277.14 1,103.14 1,174.00 55.38 777.24 2,235.33 984.89 1,250.44 49.63 489.8 Current assets, loans & advances: Inventories Sundry debtors Cash and bank Loans and advances Total current assets 64.07 420.79 101.94 133.00 719.80 52.78 321.46 298.88 81.96 755.08 Less: current liabilities and provisions: Current liabilities Provisions Total current liabilities Net current assets Misc. Expenses not written off Deferred tax assets Net deferred tax 252.52 1.19 253.71 466.09 0.07 11.4 11.4 90.12 1.7 91.82 663.26 0.21 11.47 11.47 2,484.18 2,464.81 378.46 264.83 Total assets Contingent liabilities Source: www.capitaline.com, accessed November 9, 2012. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 12 9B13B014 EXHIBIT 3 (CONTINUED) Income Statements (Crores) Year ending 31 March 2007 2006 Income : Operating income Net operating income Other income 749.99 749.99 35.85 699.25 699.25 19.71 Total income 785.84 718.96 Expenditure : Electricity & fuel expenses Operating expenses Employee cost Selling & administration expenses Miscellaneous expenses 373.19 39.25 17.79 26.88 2.2 313.71 23.53 11.65 27.8 2.14 Total expenditure 459.31 378.83 Operating profit 326.53 340.13 178.62 171.16 147.91 168.97 118.31 118.55 28.60 50.42 Tax Fringe benefit tax Deferred tax -0.1 0.57 0.16 0.02 0.68 -1.38 Reported net profit 28.97 51.1 -0.03 -0.23 28.94 51.87 Cash Flow Summary (Crores) Year ending 31 March 2007 Cash and cash equivalents at beginning of the year 293.29 Net cash from operating activities 228.75 Net cash used in investing activities (301.06) Net cash used in financing activities (188.27) Net inc/(dec) in cash and cash equivalent (260.58) Cash and cash equivalents at end of the year 32.71 2006 50.62 348.09 (49.11) (56.31) 242.67 293.29 Interest Profit before depreciation and tax Depreciation Profit before tax Extraordinary items Adjusted net profit Source: www.capitaline.com, accessed November 9, 2012. Source: www.capitaline.com, accessed November 9, 2012. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 13 9B13B014 EXHIBIT 4: MUMBAI STOCK MARKET DATA Number of listed companies 2004 2005 2006 4,730 4,763 4,796 Domestic market capitalization ($ millions) 386,321 553,074 818,879 Value of shares traded ($ millions) 118,248 158,982 214,488 Average daily turnover ($ millions) 466 633 858 Average value of trades ($ thousands) 0.5 0.6 0.7 2,918 1,319 5,601 392 7,179 1,320 New capital raised from initial public offerings ($ millions) New capital raised from secondary public offerings ($ millions) Source: www.wikinvest.com/wiki/Bombay_Stock_Exchange, accessed November 6, 2012. Source: www.tradingeconomics.com/india/stock-market, accessed November 7, 2012. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 14 9B13B014 EXHIBIT 5: LONDON STOCK EXCHANGE DATA 2004 2005 2006 2,837 3,091 3,256 Domestic market capitalization ($ million) 2,865,243 3,058,182 3,794,310 Value of shares traded ($ million) 5,169,024 5,677,721 7,571,699 Average daily turnover ($ million) 20,351 22,531 30,046 96.5 85.7 79.9 New capital raised from initial public offerings ($ million) 13,831 31,169 55,807 New capital raised from secondary public offerings ($million) 18,649 20,669 38,561 Number of listed companies Average value of trades ($ thousand) Source: www.wikinvest.com/wiki/London Stock Exchange, accessed November 7, 2012. FTSE 100 Index 8,000.00 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 FTSE 100 Index 2,000.00 1,000.00 Jan07 Jun06 Nov05 Apr05 Sep04 Feb04 Jul03 Dec02 Oct01 May02 Mar01 Aug00 Jan00 0.00 Source: http://ca.moneycentral.msn.com/investor/charts/historicdata.aspx?symbol=%24GB%3aUKX, accessed November 7, 2012. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016. Page 15 9B13B014 EXHIBIT 6: EXAMPLES OF IFRS-INDIAN GAAP DIFFERENCES Example 1: Car manufacturers sell cars with two to three years' warranty. Under Indian GAAP, a manufacturer would recognize the entire invoice value as revenue in the first year, and would make provision for warranty depending upon the estimated replacement cost. But under IFRS the estimated value of future expenses to meet warranty conditions were deducted from revenue. Thus, the revenue of the car maker would be lower under IFRS than Indian GAAP. Example 2: An entity engaged in the shipping business in India could buy ships from abroad, finance the purchase with overseas borrowing denominated in dollars, collect proceeds of invoices against transport services from overseas customers, pays its crew and buy diesel fuel abroad. All these transactions take place in foreign currencies, typically the dollar or euro. But because the entity is in India, financial statements must be prepared and reported in Indian Rupees. Under IFRS, from a substance over form point of view, the entire financial state of affairs of the organization is predominantly influenced by the U.S. dollar. In such a situation, even though the entity's legal jurisdiction is in India, IFRS required that the functional currency and reporting currency be the dollar or euro. Example 3: If a power plant was owned by entity A, and entity B entered into a long-term take-or-pay agreement such that B would use the power generated by the plant for a long period almost on a captive basis, and A's revenue from other customers was insignificant, subject to a few other conditions being satisfied, IFRS would treat the owner of the power plant as not being in the business of generating power, but in the business of leasing assets. Thus, the power plant would be reported on B's balance sheet even though A was the legal owner. A's asset would be \"Future Receivables.\" Example 4: Indian GAAP focused on stand-alone financial statements and did not require the disclosure of consolidated statements (nor did the Indian Companies Act). Consolidation was only required by the regulator (SEBI) if the group itself was listed. IFRS required the consolidation of controlled subsidiaries wherever there were relationships through actual and/or potential shareholding, including call or put options, control over economic and operating decisions, and special purpose entities. The objective of IFRS was to present to all stakeholders the financial state of affairs of all such holding and subsidiary companies in a group as a combined economic entity, rather than individual standalone entities. This document is authorized for use only in Financial Statement Analysis - 25 July 2016 by Dr Ding Ding, SIM University from July 2016 to September 2016