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KIRLOSKAR PNEUMATIC CO. LTD.

Hadapsar Industrial Estate, Pune - 411 013, INDIA. Tel.: +91(20) 2687 0133, 2687 0341.

Fax: +91(20) 2687 0297. E-mail: [email protected]

Website: www.kirloskar.com








Website: www.kirloskar.comKIRLOSKAR PNEUMATIC CO. LTD.KIRLOSKAR PNEUMATIC CO. LTD.KIRLOSKAR PNEUMATIC CO. LTD.

Enriching lives every moment,reaping rewards around the worldEnriching lives every moment,reaping rewards around the world

Annual Report2005-06Annual Report2005-06Annual Report2005-06

l Substantial growth in High Pressure Air

Compressor business for Air Separation

application.

l Manufactured and supplied environment

friendly compressor for Indian Railways EMUs.

l ACR maintained dominant leadership

position in Hydrocarbon based Refrigeration

systems.

l ACR - Process Gas System, in 3 years since

inception attained a market share of 27% for

CNG compressor package in India.

l Breakthrough in High HP 5000KW + Marine

Gear boxes for Naval application.

l ‘Category I’ supplier of Traction Gears and

Pinions for Indian Railways.

As one of India’ s leading engineer ing

conglomerates, Kirloskar has been enriching the

lives of millions through world-class engineering

solutions. And now, we are making forays in global

markets as well. Pillared on the values of true

understanding, true effort and true commitment in

every endeavour, small or big, our global foothold

is getting stronger with every passing moment. So,

while we continue to excel in India, our exports will

also be contributing significantly to our economic

growth in the years to come. And with your

continued support and faith, we’re sure to make a

bigger difference.

From India to the world, we are going places.

15 to 55 KWIndustrial Electric Screw Compressor

1000 KW Natural Gas Compressor Package

1400 KW Marine Gear Box

Contents Page No.

Board of Directors

Notice

Directors’ Report

Report on Corporate Governance

Management Discussions & Analysis

Auditors’ Report

Balance Sheet

Profit & Loss Account

Cash Flow Statement

Schedule Nos. 1 to 20 forming part of Accounts

Statement on Significant Accounting Policies

Balance Sheet Abstract and Company’s

General Business Profile

Statement pursuant to Section 212

Subsidiary - Khosla Indair Ltd.

Attendance Slip / Proxy Form

Information for shareholders

Annual General Meeting

Day & Date : Friday, July 21, 2006

Time : 4.00 p.m.

Venue : Mahratta Chamber of Commerce,Industries and Agriculture, Pune.

th stDates of Book Closure : 18 July, 2006 to 21 July, 2006(both days inclusive)


BOARD OF DIRECTORS Mr. Sanjay C. Kirloskar Chairman

Mr. Rahul C. Kirloskar

Mr. Vikram S. Kirloskar

Mr. A. C. Mukherji

Mr. J. Y. Tekawade

Mr. P. S. Jawadekar

Mr. G. Krishna Rao

Dr. M. K. Datar IDBI Nominee

Mr. H. R. Mustikar Managing Director

COMPANY SECRETARY Mr. Kedar P. Phadke

STATUTORY AUDITORS M/s. Dalal & Shah

Chartered Accountants, Mumbai

BANKERS Bank of India Union Bank of India

Bank of Maharashtra The United Western Bank Ltd.

ICICI Bank Ltd. State Bank of India

REGISTRAR & INTIME SPECTRUM REGISTRY LTD.

TRANSFER AGENTS Pune Office : Mumbai Office :

'Bhagirathi' 120/3/11, C-13, Pannalal Silk Mills

Shivajinagar, Off. Ghole Road, Compound, LBS Marg,

Opp. Hotel Surya Bhandup (West),

Pune 411 004 Mumbai 400 078

REGISTERED OFFICE Hadapsar Industrial Estate,

Pune 411 013

LOCATION OF FACTORIES Pune and Saswad

Annual Report2005-06

1


3

NOTICE OF 31st ANNUAL GENERAL MEETING

NOTICE is hereby given that the 31st Annual General Meeting of the Members of Kirloskar Pneumatic CompanyLimited will be held on Friday the 21st day of July, 2006 at 4.00 p.m. at Mahratta Chamber of Commerce ,Industries &

Agriculture, Tilak Road, Pune 411 002 to transact the following business :

ORDINARY BUSINESS :

1. To receive, consider and adopt the Balance Sheet as at 31st March, 2006 and the Profit and Loss Account for theyear ended 31st March, 2006 and the Auditors’ and Directors’ Report thereon.

2. To appoint a Director in place of Mr. Sanjay C. Kirloskar, who retires by rotation and being eligible, offers himself

for re-appointment.

3. To appoint a Director in place of Mr. A. C. Mukherji, who retires by rotation and being eligible, offers himself for re-

appointment.

4. To appoint Auditors to hold office from the conclusion of the ensuing Annual General Meeting till the conclusionof the next Annual General Meeting and to authorise the Board of Directors to fix their remuneration.

SPECIAL BUSINESS :

5. To consider and, if thought fit, to pass, with or without modification, the following Resolution, as an ORDINARYRESOLUTION :

“RESOLVED THAT Mr G Krishna Rao a Director who was appointed as an Additional Director in the meeting ofthe Board of Directors of the Company held on 27th January, 2006 and who holds office as such upto the date of

31st Annual General Meeting and in respect of whom notice under Section 257 of the Companies Act, 1956 hasbeen received from a member signifying his intention to propose Mr G Krishna Rao as a candidate for the officeof Director of the Company be and is hereby appointed as a Director of the Company liable to retire by rotation.”

6. To consider and, if thought fit, to pass, with or without modification, the following Resolution, as SPECIALRESOLUTION:

“RESOLVED THAT pursuant to the provisions of Section 198, 309, 310, 349, 350 and other applicable provisions,

if any of the Companies Act, 1956 (“the Act”) and subject to the approval of the Central Government, the Companymay pay to a Director, who is neither in the whole time employment of the Company nor a Managing Director,further remuneration by way of commission (to be divided amongst them in such manner as the Board of Directors

may from time to time determine and in default of such determination equally) upto a period of 5 years commencingfrom the financial year 2006-07 , provided that the remuneration so paid to such a Director, or when there is morethan one such Director to all of them together, shall not exceed 1% of the net profits of the Company, computed

in the manner laid down in Sections 349 and 350 of the Act”.

Notes :

1. A MEMBER ENTITLED TO ATTEND AND VOTE AT THE MEETING IS ENTITLED TO APPOINT A PROXY TO

ATTEND AND VOTE INSTEAD OF HIMSELF AND THE PROXY SO APPOINTED NEED NOT BE A MEMBEROF THE COMPANY.

2. The Proxy Form duly executed and properly stamped should reach the Company’s Registered Office at least 48hours before the time of the Meeting.

3. The Register of Members and the Share Transfer Books of the Company will remain closed from Tuesday, the

18th day of July, 2006 to Friday, the 21st day of July, 2006 (both days inclusive).

4. Members holding shares in physical form are requested to notify change of address, if any, to Intime SpectrumRegistry Limited (ISRL) , Mumbai and those who hold shares in dematerialized form are requested to notify their

change in address to their Depository Participants.

4

5. Pursuant to the Scheme of Amalgamation ,the members of erstwhile Kirloskar Pneumatic Co.Ltd were allotted1(One) equity share of Rs.10/- each, fully paid up of K G Khosla Compressors Ltd for every 4(four) equity sharesof Rs.10/- each, fully paid up held by them on the record date fixed by the Company i.e. 20/8/2002. Company has

already forwarded the new share certificates in the month of October, 2002 to the shareholders of erstwhileKirloskar Pneumatic Co. Ltd. without exchanging old share certificates held by them. You are therefore requestedto please submit the new share certificates for transfer / demat purpose and do not submit the old share certificates

issued by erstwhile Kirloskar Pneumatic Co.Ltd. prior to 25-9-2002, as they are already been treated as cancelled.

6. Company has not issued any new share certificates to the shareholders of K G Khosla Compressors Ltd andforwarded only stickers regarding change in the name of the Company i.e. from K G Khosla Compressors Ltd to

Kirloskar Pneumatic Co.Ltd. The above certificates are not cancelled, so please do not send the above certificatesto the Company for exchange purpose.

7. Queries on Accounts of the Company, if any, may please be sent to the Company Secretary at the Registered

Office of the Company seven days in advance of the Meeting so that the answers may be made available at theMeeting.

8. Members are requested to bring their personal copy of the Annual Report to the Meeting.

9. Re-appointment of Directors at the Annual General Meeting : Mr. Sanjay C. Kirloskar and Mr. A. C. Mukherji retireby rotation and being eligible, offer themselves for re-appointment. Pursuant to Clause 49(IV)(G)(i) of the Listing

Agreement relating to the Code of Corporate Governance, the particulars of the aforesaid Directors are givenbelow :

Profile of Directors retiring by rotation :

a. Mr. Sanjay C Kirloskar graduate with Mechanical Engineering from Illinois Institute of Technology, Chicago,U.S.A. He gained valuable experience through practical training in a number of Kirloskar Group Companies.He held the positions of Vice President Operations and Executive Vice President of Kirloskar Brothers Limited.

Mr. Sanjay C. Kirloskar is presently the Chairman and Managing Director of Kirloskar Brothers Limited. Heis also a member of Mahratta Chamber of Commerce, Industries and Agriculture and the Executive Committeeof FICCI.

The Directorship / Committee membership in other companies of Mr.Sanjay C. Kirloskar is as follows:

Name of the Company Board position held Committee Membership

Kirloskar Brothers Ltd Chairman & Managing Director Investors Grievance Committee

Kirloskar Oil Engines Ltd Vice Chairman Audit Committee.Kirloskar Ferrous Industries Ltd Director Investors Grievance Committee

Kirloskar Copeland Ltd. Chairman —

Kirloskar Ebara Pumps Ltd Chairman —

Kirloskar Silk Industries Ltd Chairman —

Mr. Sanjay C. Kirloskar holds 12,783 equity shares in the Company.

b. Mr. A. C. Mukherji has a long and varied experience in Finance, Insurance and other Corporate subjects,having held important position as Chairman and Managing Director of The New India Assurance Company

Limited. The Company would be able to draw upon his long and varied experience.


5

The Directorship/Committee membership in other companies of Mr A. C. Mukherji is as follows:

Name of the Company Board position held Committee Membership

Titan Industries Ltd Director Audit Committee

Birla VXL Limited Director Audit Committee &Investors Grievance

Committee

Asiatic Oxygen Limited Director Investors Grievance Committee

U.T.Limited Director Audit Committee &Shareholders Grievance

Committee

NPR Finance Limited Director Audit Committee

Aekta Limited Director Audit Committee

VXL Technologies Ltd. Director Audit Committee

Sahara India Life Insurance Co.Ltd. Director —

Mr. A. C. Mukherji do not hold any shares in the Company.

Registered Office : By Order of the Board of DirectorsHadapsar Industrial Estate,Pune 411 013 Kedar P. Phadke

Date : May 15, 2006 Company Secretary

6

ANNEXURE TO THE NOTICEEXPLANATORY STATEMENT PURSUANT TO SECTION 173(2) OF THE COMPANIES ACT, 1956

Item no. 5

Mr. G. Krishna Rao was appointed as an Additional Director and holds office upto the date of ensuing Annual General

Meeting as per the provisions of Section 260 of the Companies Act, 1956 and Article 88 of the Articles of Associationof the Company.The Company has received a notice in writing from a Member under Section 257 of the Companies Act, 1956, proposing

his candidature for the office of Director.Mr. G Krishna Rao is B.Com, ACA, and I.C.I.I. Mr Rao was in senior level position in General Insurance Corporation ofIndia for last several years. He has a vast experience in Finance and Insurance matters.

The Board of Directors, recommend the resolution as set out at Item No.5 of the Notice for your approval.None of the Directors of the Company except Mr G. Krishna Rao is interested in this resolution.

Item no. 6

In view of increasing business operations of the Company and as a token of recognition of the onerous responsibilities

shouldered by its Directors, it is proposed to pay additional remuneration by way of commission to the Directors whoare neither in the whole time employment of the Company nor the Managing Director of the Company (non executiveDirectors). At present, only sitting fee for attending a Board / Committee Meeting is being paid to all such Directors of

the Company. The remuneration committee and the Board of Directors, at their respective meetings held on May 15,2006 accorded their approval for payment of additional remuneration by way of commission to Non Executive Directorsof the Company in pursuance to the provisions of Section 198, 309, 310, 349, 350 and other applicable provisions, if

any, of the Companies Act, 1956, and subject to the necessary approvals of the Central Government and of themembers of the Company.

All the Directors of the Company, except Mr H. R. Mustikar, Managing Director of the Company may be deemed to beinterested/concerned in this resolution to the extent of additional remuneration by way of commission payable tothem.

Registered Office : By Order of the Board of DirectorsHadapsar Industrial Estate,

Pune 411 013 Kedar P. PhadkeDate : May 15, 2006 Company Secretary


7

DIRECTORS’ REPORT TO THE MEMBERS

The Directors have pleasure in presenting their Report and the audited Statement of Accounts for the year endedMarch 31, 2006.

FINANCIAL RESULTS

The Financial results for the year ended March 31, 2006 are summarised below:(Figures in Rs.)

2005-06 2004-05

Gross Profit 148,978,487 38,161,977

Less : Depreciation 24,937,368 22,580,512

Provision for Taxation 8,200,000 303,000

Fringe Benefit Tax 7,420,580

Profit after tax 108,420,539 15,278,465

Balance of Profit from previous year 22,669,051 8,564,005

Add / (Less)

Tax adjustments for earlier years 54,947 (770,884)

Expenses in respect of Previous Year (579,071) (402,535)

Surplus carried to Balance Sheet 130,565,466 22,669,051

OPERATIONS

The Company achieved a turnover of Rs. 3037 Millions (previous year Rs. 2641 Millions), registering a growth of 15%over last year.

The Air Conditioning and Refrigeration Division’s turnover was Rs. 1130 millions as compared to Rs. 1031 millionsduring last year and have registered a growth of 11% over the previous year inspite of fierce competition. Your Companyhas established itself as a leader in design, manufacture and supply of Air Conditioning and Refrigeration Compressors.

Growth in the Process Gas Division has been very encouraging and systems designed and supplied by us have beenworking to the entire satisfaction of our customers. Our business grew upto Rs. 410 millions as against Rs. 260 millionsin the previous year.

The Transmission Division’s turnover was Rs. 434 millions as compared to Rs.259 millions during last year and haveregistered a growth of about 67% over the previous year and we expect to keep up this momentum in 2006-2007.

During the year shifting of manufacturing facilities of Faridabad plant to Pune was completed. This resulted into improvedproductivity and order booking and sale of reciprocating compressors increased compared to previous year. Companyis now in the process of introducing new range of rotary compressors.

Rigorous efforts initiated in the previous year continue in this year also to recover the past dues and / or to ascertain thereasons for non-recovery. To reflect the fair position of receivables and to strengthen the discipline in financial reporting,after making assessment and careful review of these past dues, irrecoverable debts have been written off during theyear under appropriate heads. Rigorous efforts also resulted in realizing Rs. 7.32 millions from the bad debts written offin earlier years. Despite this the Company’s operations during the year resulted in profit of Rs.108.42 millions againsta profit of Rs. 15.27 millions during previous year.

8

DIVIDEND

Your Company is on a growth path and has embarked upon modernization of its plant by acquiring new multi-utilitymachines. To finance this activity, your Directors feel it necessary to conserve funds earned during the year andhence do not recommend any dividend for the year.

FIXED DEPOSIT

The Company has only unclaimed Deposits of Rs. 66,000/-. The reminders have been sent to the respective Depositors.

PROSPECTS

With the revival of the Indian economy and better business conditions, the Company is poised for good growth in boththe segments during the current year. On 1st April 2006 your Company has the order board of Rs. 1780 millions.

The growth prospects for standard products continue to be encouraging.

DIRECTORS

Mr. Sanjay C. Kirloskar and Mr. A. C. Mukherji retire by rotation at the ensuing Annual General Meeting and beingeligible offer themselves for re-appointment.

The Board of Directors at their meeting held on January 27, 2006 have appointed Mr. G. Krishna Rao as AdditionalDirector of the Company. Pursuant to Section 260 of the Companies Act 1956, he ceases to be a Director at theensuing Annual General Meeting. Company has received a notice in writing proposing his candidature for the office ofa Director. The necessary resolution for his appointment is being placed before you.

JOINT VENTURE COMPANY

The performance of Joint Venture Company Kirloskar McQuay Pvt. Ltd. continues to be satisfactory.

CORPORATE GOVERNANCE

The Company confirms to the norms of Corporate Governance as envisaged in the Listing Agreement with the BombayStock Exchange Ltd. A separate report on Corporate Governance, Management Discussion and Analysis, along withStatutory Auditors’ Certificate on the Compliance is attached and forms part of the Annual Report.

STATUTORY DISCLOSURES

1. Conservation of Energy, Technology Absorption and Foreign ExchangeThe information required under Section 217 (1) (e) of the Companies Act, 1956, read with the Companies(Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, pertaining to Energy Conservation,Technology Absorption, Foreign Exchange Earnings and Outgo, is given in the Annexure to this Report andforms part of this Report.

2. Subsidiary CompanyPursuant to Section 212 of the Companies Act, 1956, the details in respect of Khosla Indair Limited, a whollyowned Subsidiary Company, are annexed to and form part of the Annual Report.

3. Particulars of EmployeesInformation pursuant to Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars ofEmployees) Rules, 1975, as amended, is not given since the Company does not have any employee drawingremuneration in excess of the limits prescribed by the section.


9

4. The Cash Flow statement for the year 2005-2006 is attached to the Balance Sheet.

5. Directors’ Responsibility Statement

The Directors confirm that :

i. In preparation of Annual Accounts, the applicable accounting standards have been followed.

ii. The Directors have selected such accounting policies and applied them consistently in order to show trueand fair view of the state of affairs.

iii. The Directors have taken proper care in maintaining accounting records as per the provisions of theCompanies Act, 1956, for safeguarding Company’s Fixed Assets and detecting fraud and other irregularities.

iv. The Annual Accounts are prepared on the principle of going concern.

AUDITORS

The Auditors of the Company, M/s. Dalal & Shah, Chartered Accountants, retire at the conclusion of ensuing AnnualGeneral Meeting and are eligible for re-appointment. The requisite certificate pursuant to Section 224(1-B) of theCompanies Act, 1956 has been received.

PERSONNEL

The Company continues to have cordial relations with all the employees.

ACKNOWLEDGEMENT

The Directors take this opportunity to express their gratitude for the valued and timely support from our Bankers andFinancial Institutions and wish to place on record their appreciation for the continued trust and confidence in theCompany by its large number of members, employees, customers and suppliers.

For and on behalf of the Board of Directors

SANJAY C. KIRLOSKARPune, May 15, 2006 CHAIRMAN

10

ANNEXURE TO THE DIRECTORS’ REPORTInformation as required under Section 217(1)(e) of the Companies Act, 1956.

A. Conservation of Energy

a) Energy Conservation measures taken :! Installed 25 nos. Natural Wind Ventilators in the Newly built HT Shop on the roof.! Overhead Compressed Air Grid lines completed in the ACD Machine Shop to avoid air leakage.! Introduced transparent sheets for Holroyd , Sub-assembly Product Assembly area .! Use of Solar water heating system for canteen.! Close monitoring of loads of distribution transformers are switching on distribution transformers according to

load conditions to avoid no load losses. (Specially on Holidays).! Automatic Power Factor Correction Panel is installed for maintaining the Foundry Power Factor to unity .! Introduced energy efficient burners and continuous sand mixer instead of traditional sand mixing process .! 350 KW Soft Starter is installed at BOP Assembly for Testing of the products.

b) Additional Investments and Proposals, if any, being implemented for reduction of consumption ofenergy.

Proposals.! Siemens make VCB with Demand Controller is planned for controlling Maximum Demand of Power in

the Power House.! Further 2nd phase Over head Air line Grind is planned to ACD Assembly area, TRM m/c shop, New HT

shop & Hoffler Room.! New office of ACR Project will be renovated with Energy Saver CFL Lamps.! Trying out of different Energy Saving Products of lighting load.! Further Automatic Power Factor Panels ( 03 nos. ) planned in main plant.! Planned to replace 30 to 35 years old OCB Power Distribution Panel with latest ACB Panel PLC

based for Energy Conservation.

Investment :Estimated additional investment for above proposals is Rs. 1.5 Million.

c) Impact of the measures at (a) & (b) for reduction of energy consumption and consequent impact onthe cost of production of goods.Estimated saving from activities mentioned in (b) above is Rs. 0.5 Million per year.

d) Total Energy consumption and energy consumptions per unit of production as per prescribedForm-A.Not given, as the Company is not covered under the list of specified industries.

B. Technology Absorption :

Research and Development (R & D) :

1. Specific areas in which R & D is carried out by the Company :

! Design and Development of Electrical Screw packages.! Design of Special Compressors for naval application.! Development of standard Screw Compressor package with variable speed application for energy saving.! Development of Vehicle Engine Driven Air-Conditioning Systems for Buses.! Development of Rail Coach Air-Conditioning Unit.! Indegenisation of CNG compressor package accessories.! Proving of Technology for gearbox for LST(M) vessel.! Design of Planetary gearbox (750 kw) for Windmill application .! Design of Windmill gearbox (250 kw) for Indian Market .! Preliminary engineering for Gearboxes for Off Shore Patrol Vessel, Corvette, Air Defence Ship etc.


11

2. Benefits derived as a result of above R & D :

! Increasing our market share in Industrial Sector.! Further various R & D efforts in application engineering resulted into timely and smooth execution of

special projects.! Receipt of firm orders from Government Sector.! Business Growth in Transport Air-Conditioning Sector.! Business growth in Naval gearbox market.! Business growth in Windmill market.

3. Future plan of Action :

! Design and development at efficient rotor profiles for screw compressors.! Development of range of energy saving compressors through variable speeds.! Design & Development of KCX6 Refrigeration Compressor.! Design & Development of Semi Harmetic Screw Compressors.! Development of containerized Flake Ice Plant.! Diversification into Vapoure Absorption Chiller.! Manufacture of CNG Compressors.! Design of AP1618 Process gas compression systems.! Development of Planetary Gearbox.! Design of Mill Gearboxes.! Design and Development of Off shore Patrol Vessel Gearbox.

4. Expenditure on R & D ( Rs. in Million )

a) Capital —b) Recurring 10.22c) Total 10.22d) Total R & D Expenditure as a

Percentage of total turnover 0.40%

5. Technology Absorption, Adaptation & Innovation :

1. Efforts in brief, made towards Technology Absorption, Adaptation & Innovation:

! Imported technology absorbed and adopted to innovate and extend present range of products.! Building of expertise for design and development of special purpose compressors.

2. Benefits derived as a result of the above efforts :

! Increase in Market share through addition of new range of products.! Products with latest technology available to customer.! Minimise breakdown of equipments, resulting into Customer satisfaction.

3. Information regarding Imported Technology during last 5 years

Technology Imported and fully absorbed Year of ImportSpecial Screw Compressor 2001Water Well Drilling High Pressure Compressors 2002Industrial Air Supply Compressor 2003Indigenous Development of Centrifugal Compressor phase 1 2004

C. Foreign Exchange Earnings and Outgo :

Foreign exchange outgo Rs. 389.79 Mn.

Foreign exchange earned Rs. 126.74 Mn.


SANJAY C. KIRLOSKARPune, May 15, 2006 Chairman

12

REPORT ON CORPORATE GOVERNANCE

1. Company’s Philosophy on Corporate Governance

The Company as a part of Kirloskar Group, is committed to maintain high standards of Corporate Governance. To

us, Corporate Governance means conduct of business with transparency, accountability and business prosperity

with the ultimate objective of realising long term shareholder value, whilst taking into account the interest of all

other stakeholders as well.

2. Board of Directors :

The Board of Directors of the Company comprises of Executive, Non-Executive and Independent Directors. The

Chairman is a Non-Executive Director. In all, there are 9 Directors including 4 Non Executive & Independent

Directors, 4 Non-Executive Directors and 1 Executive Director. As on March 31, 2006, the composition of the

Board of Directors of the Company meets the stipulated requirements of clause 49 of the Listing Agreement of the

Stock Exchange.

!!!!! Number of Meetings :

Four Board Meetings were held on April 28, 2005, July 21, 2005, October 24, 2005 and January 27, 2006. The

Annual General Meeting of the Company was held on July 21, 2005.

Name of the Director

& Position

Status No. of Board

MeetingsWhether

attended

the Last

AGM

Directorships in other companies as

disclosed

Held

during the

year

Attended

during the

year

Public PrivateCommittee

Membership*

Committee

Chairmanship

Mr. Sanjay C. Kirloskar Non 4 4 Yes 6 2 3 —Chairman Executive

Mr. Rahul C. Kirloskar Non 4 4 Yes 4 4 — —Director Executive

Mr. Vikram S. Kirloskar Non 4 3 Yes 3 4 1 —Director Executive

Mr. A. C. Mukherji Non 4 3 No 8 — 9 4Director Executive

& Indepen-dent

Mr. J. Y. Tekawade Non 4 4 Yes — — — —Director Executive

& Indepen-dent

Mr. P. S. Jawadekar Non 4 4 Yes 2 1 1 —Director Executive &

Independent

# Mr. G. Krishna Rao Non 4 4 Yes — — — —Director Executive

Dr. M. K. Datar Non 4 4 Yes 1 — — —[Nominee] Industrial ExecutiveDevelopment & Indepen-Bank of India dent

Mr. H. R. Mustikar Executive 4 4 Yes 1 1 — —Managing Director

* Only two Committees i.e. the Audit Committee and Investors Grievance Committee are considered for this purpose.# General Insurance Corporation of India withdrew the nomination of Mr. G. Krishna Rao on December 16, 2005. On January 27,

2006 he was appointed as an additional director.

Directors with materially significant related party transactions, pecuniary or business relationship with theCompany.


13

There have been no materially significant related party transactions, pecuniary transactions or relationships between

the Company and its Directors that may have potential conflict with the interests of the Company at large.

3. Audit Committee :

The role and terms of reference of the Audit Committee covers the areas mentioned under Clause 49 of the

Listing Agreement and Section 292A of the Companies Act, 1956 besides other terms as may be referred by the

Board of Directors. These include oversight of Company’s financial reporting process and disclosure of its financial

information to ensure that the financial statement is correct, sufficient and credible, reviewing annual and quarterly

financial statements with management before submission to the Board, reviewing the adequacy of internal control

systems and performance of external and internal auditors with management. It may be clarified that the role of

the Audit Committee includes matters specified under the revised Clause 49 of the Listing Agreement.

The Audit Committee consists of Mr. G. Krishna Rao, Mr. Rahul C. Kirloskar, Mr. A. C. Mukherji and Mr. J. Y.

Tekawade. Mr. A. C. Mukherji, Independent Director is the Chairman of the Audit Committee. The Audit Committee

met five times during the year i.e. on April 28, 2005, July 21, 2005, October 24, 2005, January 27, 2006 and

March 17, 2006.

Chairman, Managing Director, Vice President & Finance Controller and the partners of M/s. Dalal and Shah, the

Statutory Auditors, are permanent invitees to the Audit Committee. We have also appointed an external agency

as Internal Auditors for each Division. The Internal Auditors submit their report to the Audit Committee. Company

Secretary acts as Secretary to the Audit Committee.

Attendance record of Audit Committee members

Name of the Director No. of Meetings

Held Attended

Mr. A. C. Mukherji 5 4

Mr. Rahul C. Kirloskar 5 5

Mr. G. Krishna Rao 5 5

Mr. J. Y. Tekawade 5 5

4. Remuneration Committee :

The functioning and terms of reference of the Committee are as prescribed under the Listing Agreement with the

Bombay Stock Exchange Ltd. It determines the Company’s policy on all elements of remuneration packages of

all the Directors including salary, benefits, bonus, stock options, pension rights and compensation payment etc.

and also to determine the remuneration of the Non-Executive Directors of the Company.

The Remuneration Committee comprises of 3 Directors consisting of Mr. P. S. Jawadekar, Chairman, Mr. G.

Krishna Rao and Mr. J. Y. Tekawade. Company Secretary acts as Secretary to the Committee.

Attendance record of Remuneration Committee members

Name of the Director No. of Meetings

Held Attended

Mr. P. S. Jawadekar 1 1

Mr. G. Krishna Rao 1 1

Mr. J. Y. Tekawade 1 1

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The Details of remuneration paid to the Directors during the year, is as under :

A. Non Executive and Independent Directors

Name of Director Sitting Fees Commission Salary & Total

(Rs.) on Net profit Perquisites (Rs.)

(Rs.) (Rs.)

Mr. Sanjay C. Kirloskar 46,000 — — 46,000

Mr. Rahul C. Kirloskar 90,000 — — 90,000

Mr. Vikram S. Kirloskar 12,000 — — 12,000

Mr. A. C. Mukherji 29,000 — — 29,000

Mr. J. Y. Tekawade 41,000 — — 41,000

Mr. P. S. Jawadekar 19,000 — — 19,000

Mr. G. Krishna Rao* 51,000 — — 51,000

Dr. M. K. Datar ** 17,000 — — 17,000

* Appointed as Additional Director w.e.f. January 27, 2006 & out of Rs. 51,000/-, Rs. 31,000/- was paid to General

Insurance Corporation of India

** Paid to Industrial Development Bank of India

B. Remuneration paid to Mr. H. R. Mustikar, Managing Director for the financial year 2005-06

Particulars Rs. .

Salary 2,292,581

House Rent Allowance 432,000

Contribution to :

Provident Fund 275,110

Superannuation Fund 343,887

Other perquisites 197,643

TOTAL 3,541,221

Note :

1. Company has not introduced any Stock Option Scheme.

5. Investors Grievance Committee

The Investors Grievance Committee specifically looks into redressing of shareholders and investors’ complaints

such as transfer of shares, non-receipt of shares, matters relating to transfer and registration of shares, issue of

duplicate share certificates, split and consolidation requests, non-receipt of dividend and to ensure expeditious

share transfer process. The Committee functions under the chairmanship of Mr. G. Krishna Rao, a Non-Executive

Director and Mr. Rahul C. Kirloskar, Director as its members. The members of this committee met twice this year

i.e. on July 21, 2005 and January 27, 2006.

All the queries of the investors are dealt with by the Compliance Officer i.e. Mr. Kedar P. Phadke, Company

Secretary, who in turn informs the Investors Grievance Committee periodically. The Company has considered all

the valid requests for Transfer of Shares.


15

The Company has received 5 complaints during the year. The complaints were regarding non receipt of New

Share Certificates and non receipt of Old Share Certificates sent for Demat. The Company has resolved all the

Complaints and reported the same to the Investors Grievance Committee.

6. General Body Meetings :

!!!!! Annual General Meeting :

The details of the last three Annual General Meetings are as follows :

Date Time Venue

July 21, 2005 11.00 am Kirloskar Pneumatic Company Limited

July 24, 2004 11.00 am Hadapsar Industrial Estate

July 26, 2003 10.00 am Pune 411 013.

! Special Resolutions passed in last 3 Annual General Meetings :

The shareholders of the Company have passed the following (3) three special resolutions at the following Annual

General Meetings.

July 26, 2003

No Special resolution passed.

July 24, 2004

1. Delisting of Securities from the Delhi Stock Exchange Association Limited and Pune Stock Exchange Limited

2. Re-appointment of Mr. H. R. Mustikar, Managing Director of the Company and to fix the remuneration.

July 21, 2005

1. Increase in sitting fees of Directors from Rs. 2000/- to Rs. 5000/-

!!!!! No Resolution was passed through Postal Ballot last year.

7. Disclosures :

During the year 2005-2006, the Company had no materially significant related party transaction, that has potential

conflict of interest with the interest of Company at large.

There has not been any non-compliance, penalties or strictures imposed on the Company by the Stock Exchange,

SEBI or any other Statutory Authority on any matter including matters related to Capital Markets, during last three

years.

Company has not adopted any non-mandatory requirements of this clause except that it has formed the

Remuneration Committee.

8. Risk Management :

The Company has laid down procedure to inform Board members about the risk assessment and minimization

procedures. These procedures are periodically reviewed to ensure that executive management controls risks

through means of a properly defined framework

9. Certificate from Managing Director and Chief Financial Officer :

Certificate from Mr. H. R. Mustikar, Managing Director and Mr. Suhas S. Kolhatkar, Vice President & Finance

Controller in terms of Clause 49(v) of the Listing Agreement with Bombay Stock Exchange Limited, for the financial

}

16

year ended 31st March 2006 was placed before the Board of Directors of the Company in its meeting held on May

15, 2006.

10. Means of Communication :

The quarterly, half yearly, nine monthly and yearly financial results were published in the leading news papers of

Maharashtra i.e. Times of India, Economic Times (English) and Maharashtra Times(Marathi). The Company also

updates its results and shareholding pattern quarterly on the SEBI EDIFAR Website.

The Company had organized an Analyst Meet in January 2006 wherein Mutual Fund Companies, Share Brokers,

Portfolio Managers and some top shareholders participated.

The Management Discussions and Analysis is a part of this Annual Report.

11. General Shareholder’s Information

! Annual General Meeting

Date : July 21, 2006

Time : 4.00 p.m.

Venue Mahratta Chamber of

Commerce, Industries & Agriculture

Tilak Road, Pune 411 002

! Financial Calendar :

Financial year 1st April to 31st March

a. First Quarter Results Last week of July

b. Second Quarter Results Last week of October

c. Third Quarter Results Last week of January

d. Results for year ending March 2007 May 2007

! Date of Book Closure : July 18, 2006 to July 21, 2006

(both days inclusive)

! Dividend Payment Date : The Company has not declared any dividend for the

financial year 2005 -06

! The Stock Exchange : Mumbai

! Stock Code : Mumbai – 505283 Kirloskar PN

! Depositories : National Securities Depository Ltd.

Central Depository Services (I) Ltd.

!!!!! ISIN Number : INE811A01012


17

!!!!! Market Price Data :

Market Price Data as per Bombay Stock Exchange Ltd., i.e. High-Low during each month for this financial

year

Year High Low Close

April 2005 156.95 113.05 127.35

May 2005 169.80 114.65 151.50

June 2005 168.60 131.00 132.40

July 2005 205.00 130.05 180.60

August 2005 199.50 170.25 189.75

September 2005 193.50 146.35 154.45

October 2005 166.00 127.50 130.00

November 2005 206.70 130.00 199.65

December 2005 269.90 194.70 230.70

January 2006 291.65 229.20 276.25

February 2006 336.40 270.00 336.40

March 2006 425.00 335.25 394.25

!!!!! Stock Performance in comparison to BSE Sensex :

!!!!! Registrar & Transfer Agent :

M/s. Intime Spectrum Registry Limited are the Registrar & Transfer Agents for shares in physical form as

well as electronic mode.

! Share Transfer System :

Share Transfers are registered and returned within a period of 15 days from the date of receipt, provided the

documents are correct and valid in all respects.

0

6000

8000

10000

12000

APR.2005

MAY2005

JUN.2005

JUL.2005

AUG.2005

SEPT.2005

OCT.2005

NOV.2005

DEC.2005

JAN.2006

FEB.2006

MAR.2006

6154.446715.11

7193.857635.42 7805.43

8634.487892.32

8788.819397.93

9919.89 10370.24

11279.96

394.25

336.40

276.25230.70

199.65

130.00154.45

189.75180.60

132.40151.50

127.35 100

200

300

400

0

BSE

SEN

SEX

SHAR

E PRIC

E

0

6000

8000

10000

12000

0

6000

8000

10000

12000

6000

8000

10000

12000

APR.2005

MAY2005

JUN.2005

JUL.2005

AUG.2005

SEPT.2005

OCT.2005

NOV.2005

DEC.2005

JAN.2006

FEB.2006

MAR.2006

APR.2005

MAY2005

JUN.2005

JUL.2005

AUG.2005

SEPT.2005

OCT.2005

NOV.2005

DEC.2005

JAN.2006

FEB.2006

MAR.2006

6154.446715.11

7193.857635.42 7805.43

8634.487892.32

8788.819397.93

9919.89 10370.24

11279.96

6154.446715.11

7193.857635.42 7805.43

8634.487892.32

8788.819397.93

9919.89 10370.24

11279.96

394.25

336.40

276.25230.70

199.65

130.00154.45

189.75180.60

132.40151.50

127.35

394.25

336.40

276.25230.70

199.65

130.00154.45

189.75180.60

132.40151.50

127.35 100

200

300

400

0

100

200

300

400

100

200

300

400

0

18

!!!!! Shareholding Pattern as on March 31, 2006

Category No. of Shares of Percentage of

Rs. 10/- each shareholding

A. Promoter’s 70,48,352 54.88

B. Banks, Financial Institutions, Insurance

Companies(Central/State Govt. Institutions) 9,32,037 7.25

C. Other Corporate Bodies 10,81,731 8.42

D. General Public 36,78,233 28.64

E. NRIs 1,03,985 0.81

Grand Total 1,28,44,338 100.00

Pursuant to Regulation 3(1)(e)(i) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations,

1997, as amended the ‘Group’ consists of; Better Value Holdings Private Limited, Kirloskar Brothers Limited,Kirloskar Oil Engines Limited, Kirloskar Ferrous Industries Limited, Pooja Credits Private Limited, KirloskarSystems Limited, Asara Sales & Investments Private Limited, PIH Finvest Company Limited, Navsai Investments

Private Limited, Prakar Investments Private Limited, Alpak Investments Private Limited, Achyut & Neeta Holdings& Finance Private Limited, Harihareshwar Investments & Finance Private Limited, Cees Investments PrivateLimited, Kirloskar Kisan Equipments Limited, Kirloskar Briggs & Stratton Power Equipment Limited, Kirloskar

Silk Industries Limited, Kirloskar Proprietary Limited, Kirloskar Copeland Limited, G. G. Dandekar MachineWorks Limited, Smt. Suman Kirloskar, Smt. Mrinalini Kirloskar, Smt. Neeta A. Kulkarni, Mr. Atul C. Kirloskar,Mrs. Arti Kirloskar, Miss. Gauri Kirloskar, Miss. Aditi Kirloskar, Mr. Sanjay C. Kirloskar, Mrs. Pratima Kirloskar,

Mr. Alok Kirloskar, Miss. Rama Kirloskar, Mr. Rahul C. Kirloskar, Mrs. Alpana Kirloskar, Miss. Alika Kirloskar,Master Aman Kirloskar, Mr. Gautam A. Kulkarni, Mrs. Jyotsna Kulkarni, Mr. Nihal Kulkarni, Mrs. Shruti NihalKulkarni, Mr. Ambar Kulkarni, Mr. Vikram S. Kirloskar, Mrs. Geetanjali Kirloskar, Miss. Manasi Kirloskar, Mrs.

Roopa J. Gupta.

!!!!! Distribution of Shareholding as on March 31, 2006

Holding No. of Percentage No. of % To

Members Shares Capital

of Rs. 10/-

each

UPTO 500 22710 96.33 1106583 8.61

501 1000 432 1.83 368470 2.87

1001 2000 175 0.74 283364 2.20

2001 3000 81 0.34 211479 1.65

3001 4000 39 0.17 140074 1.09

4001 5000 29 0.12 137427 1.07

5001 10000 44 0.19 342687 2.67

10001 AND ABOVE 66 0.28 10254254 79.84

TOTAL 23576 100.00 12844338 100.00


19

!!!!! Dematerialisation of Shares :

The Company has entered into an agreement with National Securities Depository Limited (NSDL) and Central

Depository Services (I) Limited (CDSL). The name of the Company appears in the compulsory Trading Listw.e.f. June 2000. As on date, more than 91.98% of Share Capital is in Electronic Form.

!!!!! Outstanding GDRs/ADRs/Warrants or any convertible instruments, conversion date and likely impacton equity

Company has no GDR/ADR / Warrants or any convertible instruments.

!!!!! Insider Trading :

The code of internal procedure of conduct and code of corporate disclosure practices as suggested under

the SEBI (prohibition of Insider Trading) Regulations, 1992 as amended by the Notification of 20th February2002 has been approved by the Board on June 28, 2002 and is made effective immediately.

!!!!! Code of Conduct :

Securities & Exchange Board of India (SEBI) vide their circular dated October 29, 2004 revised the provisionsof Clause 49 of the Listing Agreement, wherein the effective date was April 1, 2005. SEBI has extended the

effective date upto December 31, 2005 vide its Circular dated March 29, 2005. The Board of Directors of theCompany had approved the Code of Conduct for the Members of the Board of Directors and SeniorManagement of the Company in their Meeting held on January 27, 2005 effective from April 1, 2005.

!!!!! Plant Locations :

PUNE SASWAD

Hadapsar Industrial Estate, Tal.: Purandar

Pune 411 013 Dist. Pune

! Address for Correspondence :

a. In respect of shares :

R & T Agent :

Intime Spectrum Registry Limited Intime Spectrum Registry Limited

C-13, Pannalal Silk Mills Compound, ‘Bhagirathi’ 1202/3/11, Shivajinagar,

LBS Marg, Bhandup (West), Off. Ghole Road, Opp. Hotel Surya

Mumbai 400 078 Pune 411 004

Phone No. : 022-25963838 Phone No.: 020-256203395

Fax No. 022-25946969 Email : [email protected]

Email : [email protected]

b. In respect of any other matter

Registered Office of the Company

Secretarial Department

Kirloskar Pneumatic Co. Ltd.

Hadapsar Industrial Estate,

Pune 411 013

Phone No. 020- 26870133 / 341

Fax No. 020 – 26870297 / 634

Email : [email protected]

20

COMPLIANCE CERTIFICATE

To,

The Board of Directors

Kirloskar Pneumatic Co. Ltd.

Hadapsar Industrial Estate,

Pune 411 013

Re. : REPORT ON CORPORATE GOVERNANCE

We have examined the records concerning the Company’s compliance of conditions of Corporate Governance as

stipulated in Clause 49 of the Listing Agreement entered into, by the Company, with the Stock Exchange of India, for

the financial year ended 31st March 2006.

The objective of our examination is to give our opinion on whether the Company has complied with the conditions of

Corporate Governance as stipulated in the provisions of Clause 49 of the Listing Agreement entered into by the

Company with the Bombay Stock Exchange Limited.

Our examination was limited to procedures and implementation thereof, adopted by the Company for ensuring the

compliance of the conditions of the Corporate Governance. It is neither an audit nor an expression of an opinion on the

financial statements of the Company.

We have conducted our examination on the basis of the relevant records and documents maintained by the Company

and furnished to us for examination and the information and explanations given to us by the Company.

Based on such examination, in our opinion, the Company has complied with the conditions of the Corporate Governance,

as stipulated in Clause 49 of the Listing Agreement of the Bombay Stock Exchange Limited.

We further state that, such compliance is neither an assurance as to the future viability of the Company, nor to the

efficiency or effectiveness with which the management has conducted the affairs of the Company.

For and on behalf of Dalal & Shah

Chartered Accountants

Shishir Dalal

Mumbai, May 15, 2006 Partner


21

MANAGEMENT DISCUSSIONS AND ANALYSIS

Industry Structure and Development

With an improving macro economic environment in 2005-06 and its strong position in its major business lines, theCompany has been able to achieve healthy growth across various operations and marketing parameters. Thisperformance reflects the strength of the Company, into two major business segments i.e. 1) Air Compressor Division(ACD) & Air Conditioning & Refrigeration Division (ACR) 2) Transmission Division (TRM).

During the current year, the Company expects to achieve good growth in sales; considering the present order boardand demand for new products, especially developed for defence sector.

Business Segments (segment-wise / product-wise performance)

The Company has two major business segments viz. Compression Systems and Transmission Products.

i. Compression Systems segment consists of Air Compressor Division (ACD) and Air Conditioning & RefrigerationDivision (ACR)

The ACD manufactures various types of compressors such as small Air Compressors, Railway Brake Compressors,Reciprocating Vertical & Balanced Opposed Piston Air Compressors, High Pressure Air Compressors,Reciprocating Gas Compressors, Electrical & Diesel Screw Air Compressors, Packaging of Dry ScrewCompressors and Centrifugal Compressors. The Company has manufacturing facilities for the above at Hadapsar,(Pune).

The ACR Division with a plant at Saswad, (Pune), manufactures Refrigeration and Air Conditioning Compressorsand undertakes design and packaging of conventional and high-tech refrigeration systems for various industries.

The Process Gas Division, packages Gas Compression systems for CNG Stations, Refineries and PetrochemicalIndustry, in Saswad.

ii. The Transmission Division manufactures Rail Traction Gears, Wind-Mill Gear Boxes, Marine Gearboxes for Navaland commercial ships and gearboxes for industrial applications. This manufacturing facility is located at Hadapsar,(Pune).

Performance

During the year, turnover of Compression Systems Segment, which comprises of ACD & ACR Divisions, was Rs. 2635millions, compared to Rs. 2404 millions during the last year.

The turnover of TRM Segment was Rs. 434 millions, compared to Rs. 259 millions during the last year.

Outlook

Company expects to receive good orders in ACD for High Pressure Air Compressors, Centrifugal Compressors andScrew Air Compressors. Further it is expected that orders from Public Sector would continue to be encouraging.

In ACR Division, for Refrigeration Compressors, the Company has increased its market share in the Indian market andhave taken up aggressive steps for export of these compressors by stationing an engineer in Vietnam.

The TRM Division is expected to report good growth due to good order board from Railways and Windmill customers.

Opportunities, Threats and Concerns

Air Compressor Division

There is a good opportunity for growth as Industrial and Infrastructural activities show good growth, where aircompressors are used, which will help us to increase the market share.

There is tough competition in each market sector from multinational and local companies. The Company proposes todevelop state of art, highly reliable products and improve upon after sales service to get higher market share.

Air Conditioning & Refrigeration Division

Our dominance in Hydrocarbon based Refrigeration System continues.

We are now a recognized player in supply of CNG Compression packages and also for Upstream Gas compressionbusiness.

22

We have received and executed a very prestigious order for Shell, Hazira.

A new competitor is emerging in CNG Compression business with the possibility of local manufacturer of this compressor.

Transmission Division

A) RAIL TRACTION SECTOR

Increase in demand for Railway Rolling Stock and technology upgradation have resulted in substantial rise inbusiness potential. Global market for Traction Gearing is also open and that has open new business avenue.

B) INDUSTRIAL SECTOR

Our leadership in Windmill Gear Box market has been proven and because of Govt. thrust on Non ConventionalEnergy, the Company has a good business opportunities in this sector in coming years.

Developments of new markets and upgradation of technology has been undertaken to sustain the growth rate.

With opening up of markets, lowering of Custom duties, international acquisitions, competitions from overseashas intensified. This has affected margins. Different cost reduction projects and new vendor development activitieshave been taken up to counter the same.

Internal Control Systems and their adequacy

Company has adequate internal control systems to ensure maintenance of proper accounting records, their accuracyand Accounting Standards, safeguarding of Company’s assets and assessing its risk for insurance coverage.

Company has appointed Internal Auditors for review of Internal Control Systems. The detailed reports of InternalAuditors are presented to the Audit Committee. The compliances of observations of Internal Auditors are monitored bythe management.

Safety, Health and Environment :

The Company is giving due importance to safety, health and environment related issues. The employees are educatedand trained to improve their awareness and skills.

The Company has been supporting and providing assistance to the society by arranging various health camps i.e. freeeye check-up, Heart Disease Prevention Programme, Screening for Hypertension (High Blood Pressure), Diabeteisand Heart Disease.

Besides effluent treatment of waste products, lot of attention has been given to improve greenery all around the plants,through massive tree plantation programmes.

Human Resources and Industrial Relations

To meet the Company’s long term vision and various emerging challenges, the Company has put together a numberof initiatives, e.g. significant strides have been made in organizational renewal programme, with focus on enhancingorganizational efficiencies, employee competencies and commitment, keeping in mind the flexibility required to meetchanging market requirements and to use manpower gainfully and enhance their productivity.

Upgrading skills and competencies across all levels and functions especially to meet the technological challenges willgather momentum. The Company plans to build on people and processes.

The Company’s Future Leaders Programme seeks to identify, leverage and appropriately deploy talent within theCompany keeping in view the long-term objective of the Company.

The Company is also focusing beyond the workplace with programmes such as training to its employees and engagingand recognizing employees in social activities.

The relations with the employees at all levels continue to be cordial. As on March 31, 2006, the total strength was 823employees.


23

REPORT OF THE AUDITORS TO THE MEMBERS


We have audited the attached Balance Sheet of KIRLOSKAR PNEUMATIC CO. LTD., as at 31st March, 2006 and alsothe annexed Profit and Loss Account and the Cash Flow Statement of the Company for the year ended on that date.

These financial statements are the responsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our Audit.

(1) We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards

require that we plan and perform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatements. An Audit includes examining, on a test basis, evidence supporting the amountsand disclosures in financial statements. An audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion;

(2) As required by the Companies (Auditor’s Report) Order, 2003 (CARO, 2003), issued by the Central Government

of India in terms of Section 227(4A) of the Companies Act, 1956, we annex hereto a Statement on the mattersspecified in paragraphs 4 of the said Order;

(3) Further to our comments in Annexure referred to in paragraph 2 above, we report that:

(a) We have obtained all the information and explanations, which to the best of our knowledge and belief werenecessary for the purposes of our audit;

(b) In our opinion, proper books of account as required by law have been kept by the Company so far as appearsfrom our examination of the Books of the Company;

(c) The Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with by the report are in

agreement with the Books of Account of the Company;

(d) In our opinion, the Balance Sheet, Profit and Loss Account and the Cash Flow Statement dealt with by thisreport comply with the Accounting Standards referred to in Section 211 (3C) of the Companies Act,1956, to

the extent applicable;

(e) On the basis of the written representations received from the Directors as on 31st March, 2006, and taken on

record by the Board of Directors, we report that none of the Directors is disqualified as on 31st March, 2006from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the CompaniesAct, 1956;

(f) In our opinion and to the best of our information and according to the explanations given to us, the saidFinancial Statements, read together with the notes thereon, give the information required by the CompaniesAct,1956, in the manner so required and present a true and fair view in conformity with the accounting principles

generally accepted in India:

(i) In the case of the Balance Sheet, of the state of the affairs of the Company as at 31st March, 2006,

(ii) In the case of the Profit and Loss Account, of the Profit for the year ended on that date, and

(iii) In the case of the Cash Flow statement, the cash flows of the company for the year ended on that

date.For and on behalf of

DALAL & SHAHChartered Accountants

Shishir DalalPartner

Mumbai, May 15, 2006 Membership No: 37310

24

ANNEXURE TO THE AUDITORS’ REPORT

Statement referred to in Paragraph 2 of the Auditors’ Report of even date to the Members of KIRLOSKARPNEUMATIC CO. LTD., on the Financial Statements for the year ended 31st March, 2006.

On the basis of the records produced to us for our verification / perusal, such checks as we considered appropriate,and in terms of information and explanations given to us on our enquiries, we state that:

i) (a) The Company has maintained proper records showing full particulars including quantitative details andsituation of fixed assets.

(b) As explained to us, considering the nature of the Fixed Assets, the same have been physically verified bythe management at reasonable intervals during the year as per the verification schedule adopted by theCompany. According to the information and explanations given to us and the records produced to us forour verification, discrepancies noticed on such physical verification were not, in our opinion, materialhowever the same have been properly dealt with in the Books of Account.

(c) As per the information and explanation given to us on our enquiries the disposal of assets during the yearwere not substantial so as to have an impact on the operations of the company, or affect its goingconcern;

ii) (a) The inventories have been physically verified by the management at reasonable intervals during the year andpartially at the close of the year except inventory lying with third parties, which have been confirmed by themat the close of the year;

(b) The procedures of physical verification of inventories followed by the management as explained to us are, inour opinion, reasonable and adequate in relation to the size of the Company and the nature of its business;

(c) According to the inventory records produced to us for our verification, we are of the opinion that the Companyis maintaining proper records of its inventory. Further, the discrepancies noticed on physical verification ofinventories, if any, referred to above, as compared to book records, though not material, have been properlydealt with in the books of account;

iii) (a) As per the information and explanation given to us and the records produced to us for our verification, thecompany has not granted loans, secured or unsecured, to companies, firms and other parties covered in theregister maintained under section 301 of the Companies Act, 1956;

(b) As per the information and explanation given to us and the records produced to us for our verification, theCompany has not taken any loans, secured or unsecured, from Company’s firms and other parties covered inthe register maintained under section 301 of the Companies Act, 1956;

iv) In our opinion and according to the information and explanations given to us, there are adequate internal controlprocedures commensurate with the size of the Company and the nature of its business with regard to the purchaseof inventory and fixed assets and also for sale of goods and services. As per the information given to us, no majorweaknesses in internal controls, have been identified by the management or the internal auditors of the Company.During the course of our audit, nothing has come to our notice that may suggest a major weakness in the internalcontrol systems of the Company;

v) (a) On the basis of the audit procedures applied by us, and according to the information and explanations givento us on our enquiries on this behalf and the records produced to us for our verification, the transactionsrequired to be entered into the register in pursuance of section 301 of the Companies Act, 1956 have been soentered;

(b) The transactions so entered during the year, have been in our opinion as per the information and explanationsgiven to us, made at prices, which are reasonable having regard to the prevailing market prices available withthe Company for such transactions or prices at which transaction for similar goods have been made withother parties at the relevant times.

vi) In our opinion and according to the information and explanations given to us, the Company has complied with thedirectives issued by the Reserve Bank of India and the provisions of Section 58A of the Companies Act, 1956,other relevant provisions of the said act including the Companies (Acceptance of Deposits) Rules, 1975, where


25

applicable with regard to the deposits accepted by it from the public. Since the Company has not defaulted inrepayments of deposits, compliance of Section 58AA or obtaining any order from the Company Law or NationalCompany Law Tribunal or Reserve Bank of India or any other court or tribunal, does not arise;

vii) The Company has made a representation to the Central Government stating that provisions under Section 209(1)(d)of the Companies Act, 1956, are not applicable to the Company as the products manufactured by the Company arenot covered under the said section and the rules made thereunder viz. Cost Accounting Records (EngineeringIndustries) Rules, 1984. Consequently, the cost records have not been made and maintained;

viii) (a) According to the records of the Company, the Company has been generally regular in depositing undisputedstatutory dues including Provident Fund, Investor Education and Protection Fund, Employees State Insurance,Income Tax, Sales Tax, Service Tax, Wealth Tax, Customs Duty, Excise duty, Cess and other Statutory dueswith the appropriate authorities;

(b) On the basis of our examination of the documents and records of the Company and the information andexplanations given to us upon our enquiries in this regards, disputed amounts payable in respect of SalesTax, Income Tax, Wealth Tax, Service Tax, Customs Duty and Excise Duty / Cess not deposited with theappropriate authorities are as follows :

Statutes Forum Before Whom Pending

Commissioner District Tribunal High Supreme TotalAppeals Court Court Court

1 Sales Tax — — 2,056,724 475,000 — 2,531,7242 Income Tax — — 6,985,655 712,245 — 7,697,9003 Custom Duty 1,499,365 — — — — 1,499,3654 Excise 4,671,342 — 279,565 — — 4,850,9075 Land Revenue — 613,874 — — — 613,874

ix The Company has not defaulted in repayment of dues to any financial institutions or banks during the year;

x The Company has, in our opinion, maintained proper records and contracts with respect to its Investments wheretimely entries of transactions have been made. All Investments held by the Company at the close of the year areheld in its own name;

xi The terms and conditions at which guarantees have been given by the company for loans taken from financialinstitutions and/or banks by others, are, in our opinion, not prejudicial to the interest of the company;

xii As per the information and explanations given to us, term loans obtained by the company, in our opinion, havebeen applied for the purpose for which they were obtained;

xiii According to the information and explanations given to us and on an overall examination of the balance sheet of thecompany, we are of the opinion that no funds raised on short-term basis have been used for long-term investment;

xiv As per the information and explanation given to us on our enquiries on this behalf there were no frauds on or by theCompany noticed or reported by the Company during the year;

In view of the nature of activities carried on by the Company clause no (xiii) of CARO, 2003 is applicable to thecompany. Further in view of the absence of conditions prerequisite to the reporting requirement of clauses (iii) b, c,d, f, g, (x), (xii), (xviii), (xix) and (xx) the said clauses are, at present, not applicable.

For and on behalf ofDALAL & SHAH

Chartered Accountants

Shishir DalalPartner

Membership No: 37310Mumbai, May 15, 2006

26

BALANCE SHEET AS AT 31ST MARCH, 2006

As at As at31ST 31ST

MARCH 2006 MARCH 2005Schedule Rs. Rs. Rs.

I. SOURCES OF FUNDS :

1 Shareholders’ Funds :

(a) Capital 1 128,443,380 128,443,380(b) Reserves & Surplus 2 335,195,910 230,239,120

463,639,290 358,682,5002 Loan Funds :

(a) Secured loans 3 380,016,497 514,380,917(b) Unsecured loans 4 20,376,994 27,727,313

400,393,491 542,108,230

Total 864,032,781 900,790,730

II. APPLICATION OF FUNDS :1 Fixed Assets :

(a) Gross Block 777,226,949 718,557,289(b) Less: Depreciation 533,470,985 524,722,052

(c) Net Block 5 243,755,964 193,835,237(d) Capital work in progress,

expenditure to date 6,384,589 4,723,646

250,140,553 198,558,8832 Technical Know-how 6 23,968,386 27,037,2983 Investments 7 36,106,881 42,967,8824 Current Assets Loans and Advances :

(a) Inventories 8 366,814,500 418,963,322(b) Sundry Debtors 9 904,486,832 897,711,768(c) Cash & Bank Balances 10 74,504,328 5,590,022(d) Loans and Advances 11 120,658,554 139,006,705

1,466,464,214 1,461,271,817Less: Current Liabilities and provisions :(a) Liabilities 12 918,023,088 860,236,799(b) Provisions 13 15,620,580 303,000

933,643,668 860,539,799

Net Current Assets 532,820,546 600,732,018

5 Miscellaneous Expenditure(to the extent not written off or adjusted) :Deferred Revenue Expenditure in respect of :Voluntary Retirement Scheme 20,996,415 31,494,649

Total 864,032,781 900,790,730

Notes forming part of the Financial Statements 20

As per our attached report of even date. For and on behalf of The Board of Directors#For & on behalf ofDALAL & SHAH H.R.Mustikar Sanjay C. KirloskarChartered Accountants Managing Director Chairman

Shishir Dalal Kedar P Phadke Suhas S. KolhatkarPartner Company Secretary Vice President & Finance Controller

Mumbai, 15th May, 2006 Pune, 15th May, 2006


27




PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2006

Current Year Previous YearSchedule Rs. Rs. Rs.

INCOME :

Sales ( Gross ) 14 3,388,467,314 2,961,136,761Less: Excise Duty 351,950,760 319,714,308

Net Sales 3,036,516,554 2,641,422,453

Other Income 15 73,658,177 62,145,722

3,110,174,731 2,703,568,175EXPENDITURE :

Materials Consumed &Manufacturing Expenses 16 2,082,476,062 1,850,549,289Employees’ Emoluments 17 359,801,604 368,132,944Sundry Expenses 18 471,876,111 394,617,265Interest & Other FinanceCharges, net 19 48,842,467 52,106,700Depreciation 24,937,368 22,580,512

2,987,933,612 2,687,986,710

Profit before Taxation 122,241,119 15,581,465

Taxation :Current Tax ( Including Wealth Tax Rs.200,000/- Previous Year Rs.151,000) 8,200,000 303,000 Fringe Benefit Tax 7,420,580 — Deferred Tax ( See Note 12 ) — —

Profit after Taxation 106,620,539 15,278,465

As per last Account 22,669,051 8,564,005

Add / (Less) Tax Adjustments in respect ofearlier years ( Net ) 54,947 (770,884)

129,344,537 23,071,586Expenses in respect of previous years (579,071) (402,535)

Balance carried to Balance Sheet 128,765,466 22,669,051

Earning per Share :Net Profit after Tax ( After prior period adjustments ) 106,096,415 14,105,046

Weighted average number of Shares 12,844,338 12,844,338

Basic and Diluted Earning Per Share (Rs.) of the face value of Rs.10/- 8.26 1.10

Notes forming part of the Financial Statements 20

28

CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH, 2006

PARTICULARS 2005-2006 2004-2005

Rs. Rs. Rs.

I) OPERATING ACTIVITIES

(A) Profit before taxation 122,241,119 15,581,465

(B) ADJUSTMENTS :

Add :

(i) Provision for Diminution in value of Investment - 3,863,750

(ii) Depreciation 24,937,368 22,580,512

(iii) Amount written off against Tech. Knowhow 3,068,912 3,068,912

(iv) Bad Debts 29,262,931 31,562,851

(v) Loss on Assets sold 1,778,371 813,320

(vi) Interest on Secured /Unsecured Loans 48,842,467 52,106,700

(vii) Tax Adjustments in respect of earlier years 54,947 (770,884)

107,944,996 113,225,161

230,186,115 128,806,626

Less :

Investment Income included above :

(i) Dividend 7,947,158 7,893,761

(ii) Income from Units 265,864 264,214

8,213,022 8,157,975

(iii) Surplus on Sale of Assets 3,024,314 1,504,909

(iv) Profit on sale on investment 12,547,264 8,871,000

(v) Provision no longer required 11,771,371 4,941,049

(vi) Expenses in respect of previous year 579,071 402,535

(vii) Income Tax & Wealth Tax paid 12,869,526 2,514,998

49,004,568 26,392,466

CASH FROM OPERATIONS 181,181,547 102,414,160

(C) (Increase) / Decrease in Current Assets

(i) Inventories 52,148,822 10,760,747

(ii) Sundry Debtors (36,037,995) (45,174,776)

(iii) Other Current Assets, Loans & Advances 30,914,677 59,150,136

47,025,504 24,736,107

(D) Increase/(Decrease) in Current Liabilities

( i ) Liabilities 80,055,894 51,256,827

127,081,398 75,992,934

NET CASH FROM OPERATIONS 308,262,945 178,407,094


29

CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH, 2006

PARTICULARS 2005-2006 2004-2005

Rs. Rs. Rs.

(II) INVESTMENT ACTIVITIES

(i) Sale of Investments 19,408,266 21,503,750

(ii) Provision for Diminution in value of Investment — (3,863,750)

(iii) Capital Expenditure (79,623,305) (39,898,938)

(iv) Sale proceeds of Assets 3,210,585 3,035,102

(57,004,454) (19,223,836)

(v) Investment Income :

Dividend 7,947,158 7,893,761

Income from Units 265,864 264,214

8,213,022 8,157,975

NET CASH FROM INVESTING ACTIVITIES (48,791,432) (11,065,861)

(III) FINANCING ACTIVITIES

(i ) Increase / (Decrease) in Secured Loans (49,308,160) (80,180,564)

(ii ) Cash Credit (85,056,261) 12,984,557

(iii) Interest on Secured /Unsecured Loans (48,842,467) (52,106,700)

(iv) Increase / (Decrease) in Unsecured Loans (275,500) (43,802,500)

(v) Sales Tax Deferred Liability (7,074,819) (6,805,334)

NET CASH FROM FINANCING ACTIVITY (190,557,207) (169,910,541)

NET CHANGE IN CASH + CASH EQUIVALENTS ( I + II + III ) 68,914,306 (2,569,308)

Cash & Cash Equivalents as at 1-4-2005 (Opening Balance) 5,590,022 8,159,330

Cash & Cash Equivalents as at 31-3-2006 (Closing Balance) 74,504,328 5,590,022




30

As at As at

31st March, 2006 31st March, 2005

Rs. Rs.

SCHEDULE 1 : SHARE CAPITAL :

AUTHORISED :

15,000,000 Equity Shares of Rs.10/- each 150,000,000 150,000,000

150,000,000 150,000,000

ISSUED AND SUBSCRIBED :

12,844,338 Equity Shares of Rs. 10/- each 128,443,380 128,443,380

128,443,380 128,443,380

PAID UP :

12,844,338 Equity Shares of

Rs.10/- each fully paid 128,443,380 128,443,380

Total 128,443,380 128,443,380

Notes :

i. 1,495,100 Equity Shares of Rs 10/- each were allotted as fully paid up Bonus Shares by capitalization of General

Reserve.

ii. 592,000 Equity Shares of Rs. 10/- each were allotted as fully paid up as per Delhi High Court Amalgamation order

without payment being received in cash.

iii. 2,590,138 Equity Shares of Rs. 10/- each were allotted to Equity Shareholders of Erstwhile Kirloskar Pneumatic

Co. Ltd. on Amalgamation as per scheme approved by the High Court of judicature at Bombay.

SCHEDULE 2 : RESERVES AND SURPLUS

Capital Reserve :

As per last Account 27,965 27,965

Revaluation Reserve:


Less: Adjustment on assets sold during the year 1,139,625 50,043

26,550,433 27,690,058

Securities Premium (Share Premium) Account:


General Reserve


Surplus as per annexed Profit & Loss Account 128,765,466 22,669,051

Total 335,195,910 230,239,120

SCHEDULES

Schedule Nos. 1-20 annexed to and forming part of the Balance Sheet as at and the Profit and Loss Account for the

year ended 31st March 2006.


31

As at As at

31st March, 2006 31st March, 2005

Rs. Rs.

SCHEDULE 3 : SECURED LOANS :

Loan under Asset Credit Scheme from the

Industrial Development Bank of India 25,952,708 33,072,708

(For Security See note (a) below )

Corporate Loan from the Industrial Development Bank of India 29,020,000 36,140,000

(For security see note (b) below)

Other Loans

i) From ICICI Bank Ltd. 6,950,546 1,798,066

ii) From Ford Credit Kotak Mahindra Ltd. 58,579 279,218

(Secured against hypothecation of specific Vehicles purchased.)

Rupee Term Loan from ICICI Bank Ltd. 210,000,000 250,000,000

(For Security See note (c) below )

Working Capital Loans from Consortium Banks

Cash Credit 108,034,664 193,090,925

(For Security See Note (d) below)

Total 380,016,497 514,380,917

Note :

(a) Loan under Asset Credit Scheme from IDBI, is secured by way of a First Charge on immovable properties of the

Company situate at Hadapsar Industrial Estate, Pune and Saswad both present and future and by way of

hypothecation of all the movables save & except book-debts, including movable machinery, machinery spares,

tools and accessories, present and future, subject to prior charges created and/or to be created (i) in favour of

Bankers, of the Company’s stock of raw materials, semi-finished goods, consumables, stores and such other

movables as may be agreed to by IDBI for securing borrowings for working capital requirements in the ordinary

course of business and (ii) on specific items hypothecated to IDBI under its Equipment Finance Scheme and Asset

Credit Scheme; mortgage of land and Building to cover immovable properties of the Company situated at Hadapsar

Industrial Estate, Pune and Saswad both present and future.

(b) Corporate Loan from IDBI, is secured by way of a First Charge on immovable properties of the Company situate at

Hadapsar Industrial Estate, Pune and Saswad both present and future and by way of hypothecation of all the

movables save except book-debts, including movable machinery, machinery spares, tools and accessories, present

and future, subject to prior charges created and/or to be created in favour of Bankers, of the Company’s stock of

raw materials, semi-finished goods, consumables, stores and such other movables as may be agreed to by IDBI

for securing borrowings for working capital requirements in the ordinary course of business.

(c) Rupee Term Loan from ICICI Bank Ltd., is secured by a) Second charge by way of executing legal Mortgage of

immovable properties situate at i) Hadapsar Industrial Estate, Pune both present and future ii) Saswad within the

limits of Saswad Municipal Corporation both present & future iii) All movable assets of the Company present and

future b) Corporate Guarantee by M/s. Kirloskar Oil Engines Ltd.

(d) Cash Credit facilities including fund and non fund based facilities are secured by (i) First Charge by way of

Hypothecation of Current Assets of the Company namely stock of Raw Materials, Stock in Process, Semi-Finished

and Finished Goods, Stores and Spares not relating to Plant and Machinery (Consumable Stores and Spares),

Bills Receivables and Book Debts and all other movables both present and future in the factories premises and

Godowns situated at Hadapsar, Saswad and Faridabad. (ii) Second Charge by way of Mortgage of Immovable

Properties situate at Hadapsar Industrial Estate, Pune and Saswad within the limits of Saswad Municipal Corporation

in favour of Consortium Banks.

32

As at As at

31 st March, 2006 31 st March, 2005

Rs. Rs.

SCHEDULE 4 : UNSECURED LOANS :

Sales Tax Interest Free Loan from The State Industrial

and Investment Corporation of Maharashtra Ltd. 20,310,994 27,385,813

Fixed Deposits 66,000 341,500

Total 20,376,994 27,727,313

SCHEDULE 5 : FIXED ASSETS

Particulars Land BuildingsWater Tanks & Plant & Electrical Furniture Vehicles Leased Asset Total As At

Pipe Lines Machinery Installations & Fixture Plant & 31.03.2006 31.03.2005

( including Machinery Total

Equipments )

RS. RS. RS. RS. RS. RS. RS. RS. RS. RS.

GROSS BLOCK AT COST :

As at 01.04.2005 6,105,533 90,933,213 1,942,215 476,135,674 12,988,204 35,485,911 18,238,577 49,037,904 690,867,231 690,190,806

Increase due to Revaluation

on 30.06.84 2,944,933 12,914,151 — 11,830,974 — — — — 27,690,058 27,740,101

Additions — 10,593,090 — 57,583,984 58,240 2,342,047 7,385,001 — 77,962,362 37,939,476

Deduction in revaluation during the year — — — 1,139,625 — — — — 1,139,625 50,043

Deductions and adjustments — — — 17,697,963 — 1,099,953 (644,839) — 18,153,077 37,263,051

Apportioned Cost As

at 31.03.2006 9,050,466 114,440,454 1,942,215 526,713,044 13,046,444 36,728,005 26,268,417 49,037,904 777,226,949718,557,289

DEPRECIATION :

Up to 31.03.2005 — 42,651,658 1,942,215 388,060,378 11,623,648 23,022,923 8,383,326 49,037,904 524,722,052537,061,078

For the year — 3,114,498 — 18,301,268 227,901 1,629,673 1,664,028 — 24,937,368 22,580,512

Deductions and Adjustments — — — 15,758,121 — 865,150 (434,836) — 16,188,435 34,919,538

Total Depreciation up to 31.03.2006 — 45,766,156 1,942,215 390,603,525 11,851,549 23,787,446 10,482,190 49,037,904 533,470,985 524,722,052

NET BLOCK

As at 31.03.2006 9,050,466 68,674,298 — 136,109,519 1,194,895 12,940,559 15,786,227 — 243,755,964 193,835,237

As at 31.03.2005 9,050,466 61,195,706 — 99,906,270 1,364,556 12,462,988 9,855,251 — 193,835,237

Buildings include premises on Ownership basis in Co-operative Societies Rs.844,900/- ( Previous year Rs.844,900/-)

SCHEDULE 6 :TECHNICAL KNOWHOW :


Less : Written off during the year 3,068,912 3,068,912

3,683,745 6,752,657

Others 20,284,641 20,284,641

(See note 13)

Total 23,968,386 27,037,298


33

As at As at

31st March, 31st March,

2006 2005

Rs. Rs. Rs.

SCHEDULE 7 : INVESTMENTS AT COST :

LONG TERM INVESTMENTS :

Government and Trust SecuritiesQuoted :Unit Trust of India :

38165 6.75 % Tax Free US 64 Bonds ofRs.100/- each under Unit Scheme 1964 3,816,500 3,816,5006819.248 units of Rs.10/- each under UTI -Unit Scheme 2002 ( Growth ) 68,192 68,192

3,884,692 3,884,6923300 Master Shares of Rs.10/- each 8,244 8,244

3,892,936 3,892,936Unquoted :

(6 Year National Savings Certificates of theFace Value of Rs.7,500/-) (deposited with theGovernment Department as Security) matured,Amount received during the year — 7,500Indira Vikas Patra of the Face Value Rs.100/-(deposited with the Government Department as Security) 100 100

100 7,600

3,893,036 3,900,536Fully paid Equity Shares :Trade, Unquoted :

1 Share of Rs.100/- each in Kirloskar Proprietory Ltd. 100 100 In subsidiary Company:

Unquoted :495,000 Equity Shares of Rs.10/- each in Khosla Indair Limited 4,950,000 4,950,000Less: Provision for diminution in value (4,949,500) (4,949,500)

500 500

Other, Quoted :100,000 Shares of Rs.10/- each inThe Mysore Kirloskar Ltd. 2,400,000 2,400,000Less: Provision for diminution in value (2,399,999) (2,399,999)

1 150,000 Shares of Rs.10/- each in Kirloskar Ghatge Patil Auto Ltd. 500,000 500,000 Less: Provision for diminution in value (499,999) (499,999)

1 19398 Shares of Rs.10/- each inHousing Development Finance Corporation Ltd 117,475 117,475375,000 Shares of Rs.10/- each inKirloskar Investment and Finance Ltd. 5,000,000 5,000,000Less: Provision for diminution in value (3,863,750) (3,863,750)

1,136,250 1,136,250Carried Over 1,253,727 1,253,727

34

As at As at

31st March, 31st March,

2006 2005

Rs Rs Rs.

SCHEDULE 7 : INVESTMENTS AT COST : (Contd.)

Brought Over 1,253,727 1,253,72710,005 Shares of Rs.10/- each inICICI Bank Ltd. 201,101 201,101(128,205) Shares of Rs.10/- each inKirloskar Electric Company Ltd. — 6,853,5012,000,000 Shares of Rs.10/- each inKirloskar Ferrous Industries Ltd. 20,000,000 20,000,000500 Equity Shares of Rs.10/- each inHDFC Bank Ltd. 5,000 5,0001,400 Equity shares of Rs. 10/- each inPunjab National Bank 43,400 43,400

21,503,228 28,356,729Unquoted :

1,272 Shares of K. Sh. 1,000/- each inKirloskar Kenya Ltd. 833,984 833,98456,250 Shares of Singapore $ 1 each inKirsons Trading Pte. Ltd. - a Foreign Body Corporate 1,120,932 1,120,9321 share of Rs.100/- fully paid in The NasikMerchants’ Co-operative Bank Ltd. 100 100500 Shares of Rs.10/- each in The Sangli Bank Ltd. 5,000 5,000750,000 Equity Shares of Rs.10/- each fully paid inKirloskar McQuay Ltd. 7,500,000 7,500,00062,500 Shares of Rs.20/- each fully paid inThe Cosmos Co-operative Bank Ltd. 1,250,000 1,250,000

10,710,016 10,710,016In Debentures and Bonds :Unquoted :$ 25,000 12.5% Secured Redeemable Partly

Convertible Debentures of Rs.100/- each ofThe Mysore Kirloskar Ltd. Balance non-convertible portion of Rs.44/- per Debenture -matured on 01.06.1998 awaiting realisation 1,100,000 1,100,000Less: Provision for diminution in value (1,099,999) (1,099,999)

1 1

Total 36,106,881 42,967,882

Book Value as at Market Value as at

31st March, 31st March, 31st March, 31st March,2006 2005 2006 2005 Rs. Rs. Rs. Rs.

Quoted 25,396,164 32,249,665 115,526,635 74,071,512Unquoted 10,710,717 10,718,217

Total 36,106,881 42,967,882

$ Included in market value at face value / paid up value, whichever is lower, as the quotations are not available.

Note :Investments made by the Company being of long term nature, diminution in the value of Quoted investments aregenerally not considered to be a permanent nature. However, provision for such diminution as considered necessaryby the Management has been made in the Financial statements.


35

As at As at


Rs. Rs. Rs.

SCHEDULE 8 : INVENTORIES

General Stores & Spares-

Stores, Spares, Jigs & Fixtures, etc., at cost, (except Jigs and

Patterns which are at cost, less amounts written-off) 21,882,907 24,689,650

Stock-in-Trade :

Raw Materials, at cost 157,379,392 228,384,898

Work-in-progress :

Work-in-Progress expenditure to date at cost( including factory made

components Rs 95,158,758/-, Previous year Rs 83,584,586/-) 151,052,831 132,747,247

Finished Goods, at cost 32,008,784 31,502,121

As per Inventories Certified by the Managing Director 362,323,914 417,323,916

Goods in Transit — 716,475

Goods in Bonded Warehouse, cost to date 4,490,586 922,931

Total 366,814,500 418,963,322

SCHEDULE 9 : SUNDRY DEBTORS, UNSECURED :

Sundry Debtors, Good :

(a) Outstanding over six months 110,695,952 150,924,205

(b) Other 793,790,880 746,787,563

904,486,832 897,711,768

Total 904,486,832 897,711,768

SCHEDULE 10 : CASH AND BANK BALANCES

Cash on hand 671,931 753,417

Post office Saving Bank Account

(Pass Book Pledged with Excise Authorities) 85,210 85,210

Bank Balances :

With Scheduled Bank :

In Current Account 1,783,799 4,322,039

Remittance in Transit 31,628,491 —

In Margin Money Deposit 40,000,000 —

In Fixed Deposits 334,897 429,356

73,747,187 4,751,395

Total 74,504,328 5,590,022

36

As at As at


Rs. Rs. Rs.

SCHEDULE 11 : LOANS AND ADVANCES :UNSECURED , GOOD :(Unless otherwise stated )Advances recoverable in cash or in kind orfor value to be receivedGood 67,017,444 85,476,219Doubtful 5,800,392 5,800,392Less : Provision 5,800,392 5,800,392

67,017,444 85,476,219Dues from Subsidiary 1,184,089 1,149,807(Maximum balance during the year Rs.1,184,089/-Previous year Rs.1,149,807/-)Dues from other companies promotedby the Company 2,460,076 2,108,229Expenditure on Projects, pending implementation — 16,260,763Sundry Deposits 14,145,139 20,114,685Balances with Central Excise 18,602,581 9,214,303Income Tax paid in advance 9,828,645 4,682,699Fringe Benefit Tax paid in Advance 7,420,580 —

Total 120,658,554 139,006,705

SCHEDULE 12 : LIABILITIES :Acceptances 83,327,673 —Sundry Creditors :(i) Due to Small Scale Industrial Undertakings

(See Note 11) 73,804,744 141,369,651(ii) Other Creditors 389,835,375 379,696,224

463,640,119 521,065,875Other Liabilities 239,773,061 209,695,583Advances Received 130,709,603 128,740,549Interest accrued but not due on loans 572,632 734,792

Total 918,023,088 860,236,799

SCHEDULE 13 : PROVISIONS :Provision for TaxationIncome Tax 8,000,000 152,000Wealth Tax 200,000 151,000Fringe Benefit Tax 7,420,580 —

Total 15,620,580 303,000

Current Year Previous YearRs. Rs.

SCHEDULE 14 : SALES :

Sales 3,312,114,739 2,907,942,153Works Contract 38,651,119 27,491,323Erection, Job work, Operation & MaintenanceCharges 37,701,456 25,703,285

Total 3,388,467,314 2,961,136,761


37

Current Year Previous Year

Rs. Rs. Rs.

SCHEDULE 15 : OTHER INCOME :

Dividend 7,947,158 7,893,761Income from units of Unit Trust of India 265,864 264,214Profit on sale of Investment 12,547,264 8,871,000Insurance Claim Received 3,850,904 14,602,744Miscellaneous Receipts 26,467,888 23,485,451Surplus on Sale of Assets 3,024,314 1,504,909Sundry Credit Balances appropriated 463,541 40,909Bad Debts / Liquidated Damages Recovered 7,319,873 541,685Provisions no longer required Written Back 11,771,371 4,941,049

Total 73,658,177 62,145,722

SCHEDULE 16 : MATERIALS CONSUMED ANDMANUFACTURING EXPENSES :

(a) Raw Materials (including components) consumed :Stocks at commencement 228,384,898 245,506,158Add : Purchases 1,686,389,448 1,564,624,665

1,914,774,346 1,810,130,823Less : Stocks at close 157,379,392 228,384,898

1,757,394,954 1,581,745,925(b) Manufacturing Expenses :

Stores and Spares Consumed (includingamounts written off against Jigs and Patterns) 111,639,027 89,523,467Manufacturing Expenses 118,017,169 101,327,046Power, Fuel and Water 54,451,173 49,354,150Building Repairs 18,847,759 14,561,916Machinery Repairs 34,977,044 18,622,555

337,932,172 273,389,134(c) Freight and Octroi 5,961,183 7,442,061(d) (Increase) / Decrease in Stocks :

Stocks at close :Work-in-Progress 151,052,831 132,747,247Finished Goods 32,008,784 31,502,121

183,061,615 164,249,368Less : Stocks at commencement :Work-in-Progress 132,747,247 126,156,648Finished Goods 31,502,121 26,064,889

164,249,368 152,221,537

(18,812,247) (12,027,831)

Total 2,082,476,062 1,850,549,289

SCHEDULE 17 : EMPLOYEES’ EMOLUMENTS :

Salaries, Wages, Bonus, etc. 263,302,711 265,576,424Incentive 21,216,536 11,102,878Proportionate Deferred Revenue Expenditure in respectof Voluntary Retirement Scheme ’98 written off 10,498,234 10,498,234Proportionate Deferred Revenue Expenditure in respect of Voluntary Retirement Scheme 2000 written off — 18,524,352Contribution to Provident and Other Funds, etc. 36,319,260 37,423,508Welfare Expenses 28,464,863 25,007,548

Total 359,801,604 368,132,944

38

Current Year Previous Year

Rs. Rs. Rs.

SCHEDULE 18 : SUNDRY EXPENSES :

Rent 4,362,494 4,786,832

Rates and Taxes 18,171,859 2,697,831

Insurance 4,167,396 2,798,873

Sundry Repairs 13,060,768 9,851,318

Commission and Discount 55,819,560 49,972,170

Royalty 1,111,800 2,252,240

Travelling Expenses 48,635,185 44,400,913

Excise Duty, net 30,440,768 27,256,498

Sales Tax 2,213,715 1,991,525

Postage, Telephones, Telex Expenses 11,855,456 12,772,382

Bank Charges 27,185,831 24,002,228

Freight Outward 27,890,703 23,534,600

Vehicle Expenses 11,294,149 9,094,105

Printing and Stationery 7,246,624 8,190,242

Legal and Professional Charges 29,200,346 21,762,215

Advertisement and Publicity Expenses 5,457,000 3,893,178

Miscellaneous Expenses 50,069,170 43,532,220

Auditors’ Remuneration 1,360,555 1,110,616

Directors’ Fees and Travelling Expenses 682,796 434,689

Managing Director’s Remuneration : Salary 4,524,581 2,334,355

Loss on Assets sold, discarded, demolished or scrapped 1,778,371 813,320

Technical Service charges 36,230,293 28,951,437

Expenditure on Projects Implemented now written off 16,260,763 —

Amount written off against technical know-how 3,068,912 3,068,912

Bad Debts and Sundry Debit Balances written off 29,262,931 31,562,851

Provision for Diminution in Value of Investment — 3,863,750

Liquidated Damages 30,524,085 29,687,965

Total 471,876,111 394,617,265

SCHEDULE 19 : INTEREST AND OTHER FINANCE CHARGES, NET :

Interest :

On Fixed Loans 38,026,582 45,293,653

Other 12,969,027 10,378,659

50,995,609 55,672,312

Less : Interest received :

Interest (Gross, Tax deducted Rs. 218,548/-,

Previous Year Rs.530,429/-) 2,153,142 3,565,612

Total 48,842,467 52,106,700


39

SCHEDULE 20 : NOTES FORMING PART OF THE FINANCIAL STATEMENTS : 2005-06 2004-05

Rs. Rs.1 Significant Accounting Policies followed by the

Company are as stated in the statement annexed tothe Schedule ( Annexure A )

2. A. Contingent Liabilities not provided for in respect of :

a) Sales Bills Discounted 751,241 —Secured ( See Note ( d ) in Schedule 3 )Since Realised 751,241 —

b) Claims against the Company not acknowledgedas Debts, estimated at 267,543,490 274,101,971

c) Income Tax Matters under Dispute 26,268,358 26,268,360

d) Disputed Central Excise Matters 5,671,136 4,253,210

e) Disputed Sales Tax Demands 475,000 75,101,336

f) Guarantees to Housing Development FinanceCorporation Limited for housing loans to employees 122,270 291,284

B. Claim for US $ 10 million has been filed against the Company in theInternational Court of Arbitration. The Arbitration proceedings have beenstayed by the Honourable High Court of Delhi. The Special Leave Petitionfiled by the plaintiff against the Order of High Court has been dismissedby the Honourable Supreme Court. Further the Honourable High Courtof Delhi has transferred the matter to District Courts, Tis Hazari, Delhion the grounds of pecuniary jurisdiction. Company has obtained anopinion from Senior Counsel stating that claim made by the plaintiff isnot tenable.

3 Estimated amount of Contracts remaining tobe executed on Capital Account and not provided for,net of Advances 11,144,228 11,693,428

4 Payments to Auditors :

a) As Auditors 810,000 810,000

b) In other capacity :

For Tax Audit 200,000 200,000

For Certificates 203,540 57,890

1,213,540 1,067,890

c) For Expenses 147,015 42,726

1,360,555 1,110,616

5 Guarantees given by Company’s Bankers for Contractsundertaken by the Company are secured by a First Chargeon Company’s Inventories (excluding Stores and Sparesrelating to Plant and Machinery) Outstanding Bills &Secound Charge on Fixed Assets. Amount outstanding as on31st March 2006. 381,049,194 291,220,687

40

SCHEDULE 20 : NOTES FORMING PART OF THE FINANCIAL STATEMENTS : (Contd.) 2005-06 2004-05

Rs. Rs.

6 C.I.F. Value of Imports, Expenditure and Earnings in ForeignCurrencies :

a) C.I.F. Value of Imports :

Raw Materials (including components and spares) 336,056,333 288,833,315

Capital Goods 37,758,400 24,353,094

b) Expenditure in Foreign Currencies :

i) Commission on Exports 4,025,786 2,396,993

ii) Royalty 1,093,618 2,120,300

iii) Interest 885,779 —

iv) Other matters 15,342,777 12,507,212

c) Earnings in Foreign Currencies :

i) F.O.B. Value of Exports 124,186,584 81,493,024

ii) Commission received 2,548,648 1,753,959

7 The Company has imported Capital Goods under the Export Promotion Capital Goods Scheme, of the Governmentof India, at concessional rates of Duty with an obligation to fulfill quantified exports, against which remaining futureobligations aggregates to Rs. 135.44 Million, to be fulfilled over a period of next seven years, while maintainingaverage exports of Rs. 80.66 Million per annum. Export obligation to be fulfilled by the Company under the saidscheme by 31st March, 2006 has been fulfilled.

8 Details of Raw Materials Consumption :

a) Raw Materials (including Components) consumed2005-06 2004-05

Unit Quantity Rs. Quantity Rs.

Steel Bars and Plates M.T. 242 14,783,006 208 13,106,550

Pipes Mtrs. 87,658 8,909,761 168,171 13,721,030

Castings Nos. 59,095 37,053,357 54,028 50,616,979

Forgings Nos. 18,206 169,125,061 22,659 120,591,743

Foundry Raw material Ton 2,183 31,814,361 2,214 36,548,358

Components Nos. 4,472,574 933,649,185 4,197,390 1,313,946,712

Others — 562,060,223 — 33,214,553

1,757,394,954 1,581,745,925

b) Imported and Indigenous Raw Materials Consumption (including Components) :

2005-2006 2004-2005

Rs. Percentage Rs. Percentage

Imported 385,275,047 21.92 392,182,871 24.79

Indigenous 1,372,119,907 78.08 1,189,563,054 75.21

1,757,394,954 100.00 1,581,745,925 100.00


41

SCHEDULE 20 : NOTES FORMING PART OF THE FINANCIAL STATEMENTS : (Contd.)

9 Details of Licensed and Installed Capacity, Production, Stocks and Turnover :

A) Licensed and Installed Capacity and Production

Class of Goods (a) Licensed Capacity Installed Capacity* Production

2005-06 2004-05 2005-06 2004-05 2005-06 2004-05

Nos. Nos. Nos Nos. Nos. Nos.

Air & Gas Compressors of alltypes and ranges including

Reciprocating, Centrifugal &Rotary, etc., excludingCompressors for

Air-conditioning & Refrigeration 5,646 5,646 4,072 4,072 973 (b) 2,584Rock Drills 1,800 1,800 — — — —Sump Pumps 240 240 — — — —

Pneumatic Tools 2,832 2,832 — — — —Rock Drill Rods 50,000 50,000 — — — —High Pressure Compressors 100 100 25 25 — —

Refrigeration Compressors 1,500 1,500 — — — —Hydraulic Press 600 600 600 600 — —Car Washers 2,400 2,400 2,400 2,400 — —

Rock Drills & Air Legs 3,600 3,600 3,600 3,600 — —Vacuum Pumps 2,400 2,400 2,400 2,400 — —Car Lifts 600 600 600 600 — —

Refrigeration Compressors, Condensors, etc. 1,200 1,200 1,146 1,164 1,146 1,164Refrigeration & Airconditioning

Units / Plants includingCompressors & Components 2,400 2,400 49 33 49 33Air Conditioning and

Refrigeration Equipment forTransport 600 600 — 10 — 10Power Transmission

Equipment (Torque Converters) 2,400 2,400 9 19 9 19Reverse Reduction Gears forMarine Gear Engines 900 900 32 33 32 33

Reverse Reduction Gear Unitsfor Industrial & Mobile Application 1,000 1,000 283 213 283 213Controllable Pitch Propellers &

Standard Propellers 200 200 — — — —Fluid Couplings 750 750 — — — —Tractors 10,000 10,000 — — — —

Engines 10,000 10,000 — — — —

a) Annual capacity on maximum utilisation basisb) Excludes production of small compressors which has been outsourced* Note : Installed Capacity

Most of the Plant & Machinery being common for different products manufactured by the Company and installedcapacity being dependent on Product Mix, which in turn is decided by the actual demand for various products fromtime to time and also on availing of sub-contracting facilities, it is not feasible for the Company to indicate the exactinstalled capacity. The Company has, however, indicated the installed capacity on the basis of year’s Product Mix— as certified by the Vice President of the respective divisions and being a technical matter, accepted by theAuditors as correct.

42


B) Stocks and Turnover :

Class of Goods Stocks at Commencement Stocks at Close Turnover (including Sundry (a)

Works Contracts)

2005-06 2004-05 2005-06 2004-05 2005-06 2004-05 2005-06 2004-05

Nos. Rs. Nos. Rs. Nos. Rs. Nos. Rs. Nos. Rs. Nos. Rs. Nos. Nos.

Air & Gas Compressors

of all types and ranges

including Reciprocating

Centrifugal & Rotary,

etc., excluding

Compressors for

Air-conditioning &

Refrigeration 34 24,384,283 31 22,291,183 59 27,519,704 34 24,384,283 947 (b) 929,351,996 2,577 996,321,587 1 4

High Pressure

Compressor upto

100 cfm & upto6000 psi — — — — — — — — — — — — — —

Rock Drills — — — — — — — — — — — — — —

Sump Pumps — — — — — — — — — — — — — —

Pneumatic Tools — — — — — — — — — — — — — —

Rock Drill Rods — — — — — — — — — — — — — —

Refrigeration

Compressors,

Condensors, etc. 40 5,538,786 22 2,483,062 36 3,148,150 40 5,538,786 1,150 295,810,792 1,145 287,679,697 — 1

Refrigeration &

Air-conditioning Units/

Plants including

Compressors &

Components 3 230,164 — — — — 3 230,164 52 7,125,174 30 4,533,517 — —

Air-conditioning and

Refrigeration Equipment

for Transport 2 70,086 — — 2 70,086 2 70,086 — — 7 2,499,346 — 1

Power Transmission

Equipment

(Torque Converters) — — 2 352,932 — — — — 9 9,171,600 21 16,344,686 — —

Reverse Reduction

Gears for Marine Gear

Engines — — 2 606,344 — — — — 32 15,012,250 35 14,226,510 — —

Reverse Reduction

Gears for Industrial &

Mobile Application — — — — — — — — 282 163,076,000 212 103,883,000 1 1

Others 1,278,802 331,368 1,270,844 1,278,802 1,616,968,742 1,215,934,110

Total 31,502,121 26,064,889 32,008,784 31,502,121 3,036,516,554 2,641,422,453

a) Includes units scrapped, dismantled, used as spares, capitalised, given as free replacements

b) Excludes production of small compressors which has been outsourced


43


10 Managerial Remuneration :a) Profit and Loss Account includes payments and provisions on account of Remuneration to the Managing

Director as under : 2005-06 2004-05

Rs Rs.

Salary 2,292,581 1,938,710House Rent Allowance 432,000 395,645Commission 1,800,000 # —Contribution to :Provident Fund 275,110 232,645Superannuation Fund 343,887 290,807Gratuity Fund 195,000 * —Other perquisites 197,643 380,828

Gross Remuneration 5,536,221 3,238,635

* As the employeewise breakup of contribution to gratiuty fund is not ascertainable, the same has beenincluded in the above figures, for the purpose of computation of Net Profit in terms of Sec 349 of theCompanies Act 1956,as per the rules of the company

# Subject to necessary Approval

b) Computation of net profit under section 349 of the Act

1 Net Profit as per Profit & Loss Acount 122,241,119 15,581,465

2 ADD

Directors Remuneration 4,524,581 2,334,355Loss on sale of Assets 1,778,371 813,320

128,544,071 18,729,140

3 LESSExpenditure in respect of previous year 579,071 402,535Profit on sale of Assets 3,024,314 1,504,909Profit on sale of Investments 12,547,264 8,871,000

16,150,649 10,778,444Net Profit U/s 349 112,393,422 7,950,696

Maximum permissible Remuneration payable toManaging Director 5,619,671 Remuneration

. for the year ispaid as

approvedby Central

GovtRestricted to 5,536,221

11 a) This disclosure is based on the information available with the Company regarding the status of Suppliers asdefined under the “Interest On Delayed Payments To Small Scale And Ancillary Industries Undertaking Act,1993”. Unpaid overdue amount due on 31st March, 2006 to Small Scale and / or Ancillary Industrial Suppliersis Rs. 5,030,751/- on account of Principal and Rs. 3,800,870/- on account of Interest.

44


11 (b) The names of the Small Scale Industrial Undertakings to whom the Company owes a sum which is outstandingfor more than 30 days :

ENVIRO EQUIPMENTS & ALLIED INDUSTRIESEUREKA HIGHTECHEXCELL ENGINEERING INDUSTRIESFAINGER LESER VALVES (P) LTDFALCON ENGG WORKSFERROTHERM HEAT TREATERFINE INDUSTRIESFLEETGUARD FILTERS PRIVATE LIMITEDFLOW CHEM INDUSTRIESFLUID CONTROLS PVT LTDFLUIDLINE VALVES CO P LTDFOURTECH ENGINEERING ENTERPRISESG S. R. V. ENGINEERING WORKSGALA PRECISION TECHNOLOGY LIMITEDGANESH CHEMICAL WORKSGANESH ENGG WORKSGANESH PATTERNGHAZIABAD ISPAT UDYOG PVT LTDGOA INSTRUMENTS INDUSTRIES PVT LTDGOLE INDUSTRIES PVT LTDGRIHALAXMI METAL INDUSTRIESGURU ENTERPRISESHANUMAN ENGG WORKSHARSH DEEP ENGINEERSHARSHAD ENGINEERING WORKSHEAT TRANSFER ENGINEERSHI TECH GAS CORPORATIONHI-TECH CORPORATIONHYDROLINES INDIAINDIAN GASKETS & SHIMSINDIAN PRECISION GEARSINDUSTRIAL GASKETS & SHIMSINDUSTRIAL INSTRUMENTS & CONTROLSINSTRUMENT CARERSJ J FILTERSJALDOOT MATERIAL HANDLING PVT LTDJAMIR FABRICATION & GENERAL WORKSJAYASHREE ELECTRON PVT LTDJAYESH ENTERPRISESJOSHI METAPRINTSK AIR SPECIALITY GASESK H K INDUSTRIESKAILASH VAHAN UDYOG LTDKANKOO PAINTS PVT LTDKANTILAL CHUNILAL & SONS APPLIANCESKAVERI ELECTRICAL INDUSTRIESKENNAMETAL INDIA LTDKHALSA ENGINEERING WORKSKOHINOOR BEARINGSKRAN RADAR PVT LTDKSHIRSAGAR METALSKUDALE INSTRUMENTS PVT LTDKULKARNI POWDER METALLURGICAL INDKUNAL ENGG WORKSL K PRECISION ENGGLECMEC ENGG PVT LTD

A K ENTERPRISESA P T ASSOCIATES & ENGINEERSACCURATE VALVES ‘N’ FITTINGACME FOUNDRY FLUX COAFCIL INDUSTRIES LIMITEDAJAY ENGRAVERSAJAY METACHEM PVT LTDAKSHAY EL-TECH ENGINEERSALLIANCE ENGG COALLWIN ENGINEERSALPHA COMPRESSOR VALVES PVT LTDALPHA INDUSTRYAMOL INDUSTRIESAMRITA & COAPT PNEUMATICS PVT LTDARUN ENGG WORKSARUN FOUNDRIES & FABRICATIONASIAN ENGINEERING SALES CORPASTRA ENGINEERING SERVICES,ATCO TOWER PVT LTDAUTO STEEL INDUSTRIESAUTOMATIC SEQUENCE CONTROLAVCON CONTROLS PVT LTDA-VEE ENGINEERSBAGA INDUSTRIESBALAJI RUBBER MFG CO PVT LTDBHAIRAVNATH ENGG WORKSBHAIRAVNATH INDUSTRIESBIYANI ALLOYS PVT LTDBRAZEWELL ENGINEERSCHEMTROLS SAMIL INDIA PVT LTDCHINTAMANI THERMO TUBECHIVAS ENTERPRISESCOMPAIR ACCESSORIESCOMPU TAX FORMS PVT LTDCONSOLIDATED HOISTS PVT LTDCONTINENTAL ENGINEERSCONTROL EFFECTS PUNE PVT LTDCOOPER METALS PVT LTDCOSMIC CONTROLCRESCENT SPRINGSCYCLO INSTRUMENTS PVT LTDDATTATRAYA ENGINEERING WORKSDAY-CH ENGINEERINGDEEPAK ENGG CODELAIR (INDIA) PVT LTDDELTA ENTERPRISESDEWAS HYDROQUIP PVT LTDDIP FLON ENGINEERING AND CODYNAMIC ENTERPRISESEAGLE ENGINEERSELECTROCHEMELECTRO-FLASH INDUSTRIESELECTRONICS SYSTEMS & DEVICESEMPIRE ENGG COENGINEERING ENTERPRISES


45

LEKHA CONTROL ENGINEERSLIBRAFLEXMACK POWER EQUIPMENTS PVT. LTDMADHU ENGINEERING WORKSMAHAJAN ENTERPRISESMAKSEL ENGINEERSMANASI SALES PVT LTDMANISH INDUSTRIAL CORPNMAVAL TECHNOLOGIESMELLCON ENGINEERS PVT LTDMERITECHMETAL IMPREGNATIONS (INDIA) PVT LTDMIC INSTRUMENTS PVT LTDMODERN ENGINEERING WORKSMORSON ENGINEERSMUKUND ELECTRICALSMUKUND ROADLINESN CRANKWELL P LTDNANA INDUSTRIES,NARHARI ENGINEERING WORKSNAV GASES & CHEMICALSNEHA ENTERPRISESNEW AGE ENGINEERSNEW AGE INDUSTRIESNIKI GEARS PVT. LTD.NIRGHOSH ENGINEERINGNOBLE PLASTIC INDUSTRIESOMEGA ENGINEERS AND CONSULTANTSPANKAJ ENGINEERINGPARAMOUNT PISTONSPARKER HANNIFIN INDIA PVT.LTD.PLASTIC PRODUCTS ENGG COPOONA COUPLINGS PVT LTDPOONA PROFILES PRIVATE LIMITEDPRADNYA ENTERPRISESPRAKASH INDUSTRIESPRARTHANA ENGINEERING PVT LTDPRECISION APPLIANCESPRECISION GEAR MANUFACTURING COMPANYPRESSURE VESSELS (INDIA)PRESTO INDUSTRIES.PUNE TECHTROL PVT LTDPUSHPA ENGINEERING WORKSQUALITY NDT SERVICESR.Y.INDUSTRIESRADIANT ENGINEERSRAJ RAJESHWARI FOUNDERSRAJU ENTERPRISESRASHMI HEATERS PVT.LTD.RAVIRAJ WINDERSRICOS K FABRICATORSS.M.ENGINEERINGS.M.TUPES.S.INDUSTRIES (PUNE)SADHANA ARTS,SAGAR ENGINEERSSAI PACKAGING INDUSTRIESSAIRAM ENGINEERING WORKSSAMEER ENGINEERS

SARA INDUSTRIESSARITA INDUSTRIESSATYAM ENGINEERING WORKSSAVETA ENGG CO PVT LTDSHANKAR ENTERPRISESSHARAYU ENGINEERINGSHIMAKSHA TOOL COSHIMOGA PISTON RINGS PVT. LTDSHIVAM ENGINEERING WORKSSHIVAYAN INDUSTRIESSHIVSHAKTI INDUSTRIESSHREE ENTERPRISES(HADAPSAR)SHREE SALES CORPORATIONSHREE SAMARTH ENTERPRISESSHRI DURGA INDUSTRIESSHRI ENTERPRISESSHRI KAIVALYA UNITED INDUSTRIESSHRIRAM ENGINEERING WORKSSIEMAG INDUSTRIESSKEY PRODUCTSSPIDER STEEL SPRING MFG.COSTANDARD RADIATORS PVT LTDSTERLING ENGG WORKS.STRAG DESIGNERS PVT LTDSUMMITS HYGRONICS PVT LTD.SUNTECH GEARS PVT LTDSUPER QUALITY SPRINGSSUPERIOR HYDROLIQUE PVT LTDSURAJ ENTERPRISES (PUNE)SURYA SPRINGS PVT LTDSUSHIL ENGINEERING WORKSSUVARN UDYOGSWAMI INDUSTRIESSWANSON ENGINEERING SERVICESTALAB ENGINEERING CO.TECHNO SERVE ENGINEERSTECNOMATIC (INDIA )PVT LTDTHERMO TRANSFER ENGINEERS.TRIMURTI ENTERPRISESULTRASEAL (INDIA) PVT LTDUNITECHUNITED HEAT TRANSFER PVT. LTD.UNITY GAUGE AND TOOL CO PVT LTDUTTAM ENGG WORKSV.N.ENGINEERINGVARUNSAK PLASTIC PAINTS &CHEMICALS P LT.VASANT ENGG.WORKS.VASU TECH LIMITEDVEDGANGA PATTERNSVIJAY FABRICATORS & TRADING COVINAY TRADERSVINAYAK INDUSTRIES (RAJKOT)VINOD ENTERPRISESVISHAL ENGG.WORKS.(PUNE)VISHVACHAYA STEELS PVT LTDVNS ENGINEERING & SERVICES CO.WINTECH ENGINEERSYASH ENGINEERING WORKSYASHODEEP ENGINEERSZIRCAR CERAMICS PVT. LTD.


46

12 Consequent to the issuance of Accounting Standard 22, “ Accounting for taxes on Income “ by the Institute ofChartered Accountants of India which is mandatory in nature, the Company has reviewed Deferred Taxes whichresult from the timing difference between the Book Profits and Tax Profits.

The Company, at present is covered by the provisions of Minimum Alternate Tax under the Income Tax Act,1961. The Company therefore considers it prudent that Net Deferred Tax Asset, if any, should be recognisedonly when the position regarding availment of carried forward losses under the Income Tax Act, 1961, becomesclearer and certain which the Company expects to happen in a couple of years.

13 In accordance with the Accounting Standard 26, “Intangible Assets” expenditure on Technical Know-how onprojects under implementation will be amortized on commencement of commercial production.

14 Consolidated Financial Statement as required by Accounting Standard 21:Khosla Indair Ltd., a Subsidiary of the Company operates under severe long term restrictions, which significantlyimpairs its ability to transfer funds to the Company. Consolidated Financial Statement as required by AccountingStandard 21 is therefore not prepared.

In view of above, the question of Financial Reporting of Interest in Joint Ventures ( AS - 27) in ConsolidatedFinancial Statements, does not arise.



47

15 Details of Segment Reporting

2005-06 2004-05

A. Information about COMPRESSION TRANSMISSION TOTAL COMPRESSION TRANSMISSION TOTALBusiness Segment - SYSTEMS EQUIPMENTS SYSTEMS EQUIPMENTSPrimary(See Note below) Rs. Rs. Rs. Rs. Rs. Rs.

1 Segment RevenueSales etc. 2,634,540,611 433,554,782 3,068,095,393 2,403,996,219 259,344,167 2,663,340,387Less: Inter SegmentRevenue — — — — — —

Net Revenue fromOperations 2,634,540,611 433,554,782 3,068,095,393 2,403,996,219 259,344,167 2,663,340,387

2 ResultSegment Result 260,425,223 38,852,532 299,277,755 162,014,670 2,878,904 164,893,575

Less: UnallocableCorporate Expenses(Net of Income) 128,718,293 98,378,829

Operating Profit 170,559,462 66,514,746Less: Interest (Net) 48,842,467 52,106,700

Profit / (Loss )before Tax 121,716,995 14,408,046

3 Other InformationSegmernt Assets 1,447,794,405 287,152,662 1,734,947,067 1,419,578,452 271,964,769 1,691,543,221

Add: Unallocablecommon assets 62,729,382 69,787,304

Total Assets 1,797,676,449 1,761,330,525

Segmernt Liabilities 793,814,615 125,861,012 919,675,627 744,947,251 100,123,031 845,070,282

Add: Unallocablecommon liabilities 13,968,041 15,469,517

Total Liabilities 933,643,668 860,539,799

4 Capital ExpenditureDuring the year 68,097,572 9,864,790 77,962,362 11,123,505 26,815,971 37,939,476

5 Depreciation 17,941,257 6,799,191 24,740,448 15,949,553 6,435,039 22,384,592

Add: UnallocableDepreciation 196,920 196,920

24,937,368 22,581,5126 Non Cash

Expenditure 10,186,716 3,380,430 13,567,146 28,711,067 3,380,430 32,091,497

B Secondary Segment -Geographical byCustomers1 Segment Revenue

In India 2,943,908,809 2,581,847,363Outside India 124,186,584 81,493,024

Total 3,068,095,393 2,663,340,387

C Other Disclosures

1 Segments have been identified in line with the Accounting Standard, AS-17 “Segment Reporting” (AS -17),taking in to account the organisation structure as well as the differing risks and returns.

2 Company has disclosed Business Segment as the primary segment.


48

C 3 Composition of Business Segment

Name of the Segment : Comprises of :

a) Compression Systems Air & Gas Compressors, Airconditioning &

Refrigeration Compressors and Systems etc.b) Transmission Equipments Power Tranmission Equipments

( Torque Convertor ) , Reverse ReductionGears for Marine Gear Engines,Industrial & Mobile application etc.

4 The Segment Revenue, Results , Assets and Liabilities include the respective amounts identifiable to eachof the segment and amounts allocated on reasonable basis

5 The Accounting Policies of the Segments are the same as those described in the Significant AccountingPolicy as referred in Note 1 of Schedule 19 to the Accounts.

16 . Disclosure of Transactions with Related Parties as required by the AS -18

A) Name of the related party and nature of relationship where control exists

Name of related party Nature of relationship

Khosla Indair Ltd. Subsidiary Company

B) Related Party Transactions

Nature of Transaction Year Subsidiary Joint Venture Key Relatives TotalCompany management of Key

Personnel ManagementPersonnel

Purchase of Goods 2005-06 1,232,080 1,232,0802004-05 422,225 422,225

Sale of Goods 2005-06 152,890 152,8902004-05 248,369 248,369

Services Rendered 2005-06 34,282 2,706,050 2,740,3322004-05 14,400 2,574,765 2,589,165

Services Received 2005-06 1,313,340 1,313,3402004-05 —

Dividend Received 2005-06 7,500,000 7,500,0002004-05 7,500,000 7,500,000

Interest paid 2005-06 —2004-05 400,132 400,132

Lease Rent Paid 2005-06 —2004-05 80,631 80,631

Interest Received 2005-06 —2004-05 21,478 21,478

Remuneration paid 2005-06 * 5,536,221 5,536,2212004-05 3,238,635 3,238,635

Advance against purchases 2005-06 6,278,203 6,278,2032004-05 —

Balance Outstanding 2005-06 1,184,589 16,238,279 17,422,868Debit (Credit ) 2004-05 1,150,307 9,185,624 10,335,931

* The amount of Gratuity is included as per the rules of the Company



49


Names of Related parties

1) Subsidiary Company Khosla Indair Ltd.

2) Joint Venture Kirloskar McQuay Pvt. Ltd.

3) Key Management Personnel Mr.H.R.Mustikar

4) Relatives of Key Management Personnel Mrs. Snehlata H. Mustikar WifeMr. Milind H. Mustikar SonMr. Mukul H. Mustikar SonMrs. Kanchan M Mustikar Son’s WifeMrs. Gauri M Mustikar Son’s WifeMaster Pranav M Mustikar Son’s SonMiss Madhura M Mustikar Son’s DaughterMiss Mrunal M Mustikar Son’s DaughterMr. Yeshwant P Kulkarni BrotherMrs. Premlata Y Kulkarni Brother’s WifeMr. Mohan R Mustikar BrotherMrs. Anjali M Mustikar Brother’s WifeMrs. Usha S. Kale SisterMr. Shyamkant P Kale Sister’s husband

Note : Related Party relationship is as identified by the Company based on the available information and relied up onby the Auditors.

17 Information required in terms of Part IV of Schedule VI to the Companies Act, 1956, as compiled by the Company,is attached.

18 The Company has entered into agreements in the nature of Lease / Leave and Licence agreement with differentLessors / Licensors for the purpose of establishment of office premises / residential accomodations and assets.These are generally in nature of operating Lease / Leave and Licence and disclosure required as per accountingstandard 19 with regard to the above is as under.

Payment under Lease / Leave and License for period :

1) Not later than 1 year Rs.2,546,245/—

2) Later than 1 year but not later than 5 years Rs. 872,638/—

a. There are no transaction in the nature of Sub Lease

b. Payments recognised in the profit and Loss Account for the year ended 31st March, 2006 Rs. 4,362,494/-

c. Period of Agreement is generally for Eleven Months and renewable at the option of Lessee.

19 Previous years figures have been regrouped wherever necessary.




50

ANNEXURE “A” REFERRED TO IN NOTE NO.1 IN SCHEDULE NO.20 TO THE FINANCIAL STATEMENTS FORTHE YEAR ENDED 31ST MARCH, 2006.

Statement of Significant Accounting Policies :

1 System of Accounting :

(i) The Company, except under significant and uncertain circumstances, follows the mercantile system ofaccounting and recognises income and expenditure on accrual basis.

(ii) The Financial Statements are based on historical costs. These costs are not adjusted to reflect the impactof the changing value in the current purchasing power of money.

(iii) Insurance Claims are recognised upon acceptance of claim by the Insurance Companies.

(iv) Estimates and assumptions used in the preparation of the Financial Statements are based uponManagement’s evaluation of the relevant facts and circumstances as of the date of the financial statements,which may differ from the actual results at a subsequent date.

2 Fixed Assets and Depreciation :

A. Fixed Assets :

a) Fixed Assets are carried at cost of acquisition or construction or at manufacturing cost in case of Companymanufactured assets, less accumulated depreciation (except Freehold Land).

b) Land & Building, Plant & Machinery at Faridabad Unit acquired before 30th June, 1984, are taken atrevalued cost and those acquired after 30th June, 1984, are valued at landed cost.

B. Depreciation on Assets (other than Freehold Land) :

(a) On Plant and Machinery given on Lease :

Depreciation on Plant and Machinery given on Lease is being provided at the rates worked on StraightLine Method over the primary period of Lease Agreement or at the rate specified in Schedule XIV to theCompanies Act, 1956, whichever is higher, on pro-rata basis.

Rate on Straight Line Method

Asset Over the primary As specified inPeriod of Lease Schedule XIV

Plant and Machinery 8 years 12.50% 10.34%Plant and Machinery 5 years 20.00% 10.34%

(b) Depreciation on Assets :

(i) Depreciation on Additions to the Fixed Assets upto 31st March, 1961, is being provided on “WrittenDown Value” Method in accordance with the Provisions of Section 205(2)(a) of the CompaniesAct, 1956, at the rates specified in Schedule No.XIV to the said Act.

(ii) Depreciation on Additions to Assets from 1st April, 1961 to 30th September, 1987, is being providedfor on Straight Line basis in accordance with the provisions of Section 205(2)(b) of the CompaniesAct, 1956, pursuant to Circular No.1/1/86/CLV No.15-(50)84 CL VI dated 21st May, 1986, issuedby the Department of Company Affairs, at the rates corresponding to the rates (inclusive of multipleshift allowance) applicable under the Income Tax Rules 1962 as in force at the time of acquisition/installation and on Additions on or after 1st October, 1987, on the same basis at the rates specifiedin Schedule No.XIV to the Companies Act, 1956.

(iii) Depreciation on assets of Faridabad unit has been charged on Straight Line Method as per ratesprescribed by Schedule XIV to the Companies Act, 1956. Depreciation on additions made after16th December, 1993, has been charged on Straight Line Method at the revised rates as prescribedin Schedule XIV to the Companies Act 1956 and substituted by Notification GSR No.756 (E) dated16th December, 1993, of the Department of Company Affairs, Government of India.

(iv) Depreciation on Additions to Fixed Assets is being provided on pro-rata basis from the month ofacquisition or installation of the said Asset, as required by Schedule XIV to Companies Act, 1956.

(v) Depreciation on Assets sold, discarded or demolished during the year is being provided at theirrespective rates upto the month in which such Assets are sold, discarded or demolished.

(vi) No Depreciation is being charged on Revaluation amount of the Fixed Assets.

PrimaryLeasePeriod


51

Statement on significant Accounting Policies (Contd.) :

3 Technical Know-how Fees :

Expenditure on acquiring Technical Know-how (intangible asset) is being amortised equally over a period of fiveyears after commencement of commercial production.

4 Investments :

Investments are valued at Cost of acquisition less estimated diminution in value determined to be of permanentnature.

5 Inventories :

Cost of inventories have been computed to include all costs of Purchase, Cost of Conversion and other costsincurred in bringing inventories to their present location and condition.

(i) The Stocks of Raw Materials and Components, Stores and Spares are valued at cost calculated on WeightedAverage basis.

(ii) The Stocks of Work-in-Progress (including factory-made components) and Finished Goods are valued onthe basis of Full Absorption Cost of attributable factory overheads or net realisable value, whichever islower.

(iii) Goods in Transit are stated at actual cost to the date of Balance Sheet.

(iv) Jigs & Fixtures, Patterns and Dies are valued at Full Absorption Cost of attributable factory overheads andwritten off equally, over an estimated effective life of three years.

(v) Unserviceable and Obsolete Raw Materials are valued at an estimated realisable value.

(vi) Imported Materials lying in Bonded Warehouse, are valued at cost to the date of Balance Sheet.

(vii) Excise / Customs Duty :

Excise Duty on Finished Goods and Customs Duty on imported materials are accounted on production ofFinished Goods / Receipt of materials in Customs Bonded Warehouse.

6 Foreign Currency Conversion :

(i) The Company revalorises Foreign Currency Loans, Current Liabilities and Current Assets at Contracted and/ or appropriate Exchange Rates, at the date of Balance Sheet. Gain or Loss arising out of decrease orincrease in Rupee Value of Foreign Currency Liability for acquiring Fixed Assets is being adjusted to theCost of Assets acquired and depreciated over the balance period of life of the said Asset.

(ii) Foreign Currency Liability for acquiring Technical Know-how is debited to the said account and amortisedover a period of five years.

(iii) Gain or Loss on account of decrease / increase in Rupee Value of other Foreign Currency Loans, CurrentLiabilities and Current Assets are charged to the Profit and Loss Account.

7 Sales :

(i) Export Sales are accounted for on the basis of dates of Bills of Lading.

(ii) Construction Contract Sales :

(a) In respect of Construction Contracts undertaken by the Company, the expenditure to the date of BalanceSheet on incomplete contracts wherein profit cannot be estimated reliably, is recognised as sales to theextent recoverable from the customer. This policy has been adopted to comply with the revised AS 7 -“Accounting for Construction Contracts” issued by “the Institute of Chartered Accountants of India.”

8 Privilege Leave Benefit :

Liability in respect of unavailed privilege leave is being valued at the salary rates prevailing as on the date ofBalance Sheet.

52

Statement on significant Accounting Policies (Contd.) :

9 Employees’ Retirement Benefits :

(i) Retirement benefit in the form of Provident Fund and Pension Schemes whether in pursuance of Law orotherwise, is accounted on accrual basis and charged to Profit and Loss Account of the year.

(ii) Gratuity :

Gratuity payments are under the policy with LIC of India through Gratuity Trust and are made according totheir demand. Premium paid is charged directly to Profit & Loss Account.

(iii) Superannuation :

Contribution made to Life Insurance Corporation of India for employees covered under SuperannuationScheme are accounted at the rate of 15% of such employees’ annual salaries.

(iv) Early Voluntary Retirement Scheme :

(a) Liability under Voluntary Retirement Scheme 1998, is being treated as “Deferred Revenue Expenditure”and is being amortised over a period of ten years.

(b) Liability under Voluntary Retirement Scheme 2000 of Faridabad unit, is being treated as “DeferredRevenue Expenditure” and is being amortised over a period of five years.


53

PART - IVBALANCE SHEET ABSTRACT & COMPANY’S GENERAL BUSINESS PROFILE

I. Registration Details

Registration No. 110307

State Code 11

Balance Sheet Date 31-03-2006

(Amount in Rs. Thousand)

II. Capital raised during the year

Public Issue —

Rights Issue —

Bonus Issue —

Private Placement —

Re-issue of Forfeited Shares —

III. Position of Mobilisation and Deployment of Funds

Total Liabilities 1797676

Total Assets 1797676

Source of Funds

Paid-up Capital 128443

Reserves and Surplus 335196

Secured Loans 380017

Unsecured Loans 20377

Total 864033

Application of Funds

Net Fixed Assets 250141

Investments 36107

Net Current Assets 532820

Misc. Expenditure (including Technical Know-how) 44965

Total 864033

IV. Performance of Company

Turnover 3110175

Total Expenditure 2987934

Profit / Loss before Tax 122241

Profit / Loss after Tax 106096

Earning Per Share in Rs. 8.26

Dividend rate % —

V. Generic Names of Principal Products / Services of the Company

i) Item Code No. 356501000

(ITC Code)

Product Description Air & Gas Compressor

ii) Item Code No. 375308000

(ITC Code)

Product Description Marine Gear Boxes

iii) Item Code No. 356106000

(ITC Code)

Product Description Industrial Air-conditioning

& Refrigeration Equipment

54

Statement pursuant to Section 212 of the Companies Act, 1956, relating to Subsidiary Companies

1 Name of the Subsidiary : Khosla Indair Ltd

2 Financial year of the Subsidiary ended on : 31st March, 2006

3 Holding Company’s interestEquity Share Capital : 100%

4 Profit or Loss for the current financialyear so far as concerns the Members ofthe Holding Company, not dealt with orprovided for in the Accounts of theHolding Company : Rs. ( 9,672 )

5 Net aggregate Profits or Lossesfor the previous financial years sincebecoming subsidiary so far as concernsthe Members of the Holding Company,not dealt with or provided for in theAccounts of the Holding Company : Rs. ( 7,635,187 )

6 Net aggregate amounts received asdividends for previous financial yearssince becoming subsidiary dealt with inthe accounts of the Holding Company inrelevant years. : NIL

For and on behalf of The Board of Directors

H. R. Mustikar Sanjay C. KirloskarManaging Director Chairman

Pune, 15th May, 2006


55

Khosla Indair Limited24TH ANNUAL REPORT

FOR

THE YEAR ENDED ON 31ST MARCH, 2006

BOARD OF DIRECTORS

Mr. H R Mustikar Chairman

Mr. Suhas S. Kolhatkar

Mr. Kedar P. Phadke

Regd. Office : HADAPSAR INDUSTRIAL ESTATE, PUNE 411 013

KHOSLA INDAIR LIMITED


57

DIRECTORS’ REPORT

To,The Members,Khosla Indair Ltd.

The Directors present their 24th Annual Report together with the audited Statement of Accounts of the Company forthe year ended March 31, 2006.

OPERATIONS:-

The turnover of the Company during the year under review is Rs. 24,662/- (previous year Rs. 9452/-).

The Company has made a loss of Rs. 9,672/- during the year. The accumulated loss has increased toRs. 7,644,859/- which has been carried over to the Balance Sheet.

DIVIDEND:-

In view of the accumulated losses, Directors do not recommend dividend for the year under review.

FIXED DEPOSIT:-

The Company has not accepted any Fixed Deposits.

DIRECTORS:-

In accordance with the requirements of the Companies Act, 1956 and the Articles of Association of the Company, Mr.Suhas S. Kolhatkar, retires by rotation and being eligible offers himself for reappointment.

AUDITORS :-

The members are requested to appoint Auditors from the conclusion of this meeting till the conclusion of the nextAnnual General Meeting.

AUDITORS’ REPORT :-

With reference to observations on note to the accounts referred to by the Auditors in their Report, the Directors wish tostate that the said notes are self-explanatory.

STATUTORY DISCLOSURES

1. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE:-

The information required under Section 217(1)(e) of the Companies Act, 1956, read with the Companies (Disclosureof Particulars in the Report of the Board of Directors) Rules, 1998, pertaining to Energy Conservation, TechnologyAbsorption, Foreign Exchange Earnings and Outgo is not applicable since there are no manufacturing operationsin the Company and do not form a part of this Report.

2. PARTICULARS OF EMPLOYEES

The Company had no employees of the category indicated under Section 217(2A) of the Companies Act, 1956read with the Companies (Particulars of Employees) Rules, 1975 as amended.

3. DIRECTORS RESPONSIBILITY STATEMENT

The Directors confirm that:

1. In preparation of Annual Accounts, the applicable accounting standards had been followed.

2. Our Directors had selected such accounting policies and applied them consistently in order to show true andfair view of the state of affairs.

3. Directors had taken proper care in maintaining accounting record as per the provisions of the CompaniesAct, 1956 and for safeguarding Company’s Fixed Assets and detecting fraud and other irregularities.

4. Annual Accounts are prepared on the principle of going concern.


H. R. MustikarPune, May 6, 2006 Chairman


58

AUDITORS’ REPORT TO THE MEMBERS

We have audited the attached Balance Sheet of KHOSLA INDAIR LIMITED as at 31st March, 2006 and also the Profitand Loss Account for the year ended on that date annexed thereto. These financial statements are the responsibility ofthe Company’s Management. Our responsibility is to express an opinion on these financial statements based on ouraudit.

We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit include examining on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation. We believe that our auditprovides a reasonable basis for our opinion.

As required by the Companies (Auditors’ Report) Order, 2003 (CARO), we report that, in our opinion, and to the best ofour knowledge and belief and as per information and explanations furnished to us and the books and records examinedby us in the normal course of audit.

1. Clause 4(i) of CARO is not applicable as the Company was having negligible value of fixed assets during the yearunder reporting.

2. Clause 4(ii) of CARO is not applicable as the Company was not holding any inventory during the year underreporting.

3. (i) The Company has not granted any loans to Companies, Firms or other Parties to be listed in the Registerrequired under Section 301 of the Companies Act, 1956.

(ii) The company has taken interest free unsecured loan from one party to be listed in the Register required underSection 301 of the Companies Act, 1956. Amount outstanding as on 31st March, 2006 is Rs. 11.84 lacs. Asthere are no stipulations as to repayment, there are no overdue amounts. The Company has shown this loanunder current liabilities.

4. Clause 4(iv) of CARO is not applicable as the Company has neither purchased any inventory and fixed assets norsold any goods. Sale of services is of very minor value during the year.

5. According to the information and explanation given to us and on the basis of such checks as we consideredappropriate the Company has not purchased / sold goods and materials and services from / to Companies andother parties in which directors are interested as to be listed in the register required under Section 301 of theCompanies Act, 1956 aggregating during the year to Rs. 5,00,000/- or more in respect of each party.

6. The Company has not accepted any fixed deposits from public within the meaning of Section 58A of the CompaniesAct, 1956 and Companies (Acceptance of Deposits) Rules 1975.

7. The Company is not having any formal Internal Audit System.

8. As per information & explanations given to us, the Central Government has not prescribed maintenance of costrecords under Section 209(1)(d) of the Companies Act, 1956, for any of the Company’s products.

9. (i) The Company is regular in depositing undisputed statutory dues with the appropriate authorities.

(ii) There are no disputed amounts payable in respect of Income Tax, Sales Tax, Excise Duty, Customs Duty,Wealth Tax, Service Tax and cess outstanding as at 31st March, 2006.

10. The accumulated losses of the Company as on 31/03/2006 are more than its net Worth. The Company has incurredCash losses during the financial year under report and also in the immediately preceding financial year.

11. There are no outstanding dues of financial institutions or banks or debenture holders.

12. The company has not granted any loans and advances on the basis of security by way of pledge of shares,debentures and other similar securities.

13. The Company is not a chit fund and therefore the provisions of any special statute are not applicable.

14. The Company is not dealing or trading in shares, securities, debentures and other investments.

15. As per information and explanations given to us, the Company has not given any guarantee for loans taken byothers from bank or financial institutions.

16. The Company has not taken any term loans.

17. The Funds raised on short term basis have not been used for long term investment during the year.

18. During the year the Company has not made any preferential allotment of shares.


59


19. The Company has no outstanding debentures.

20. The Company has not raised any money by public issue during the year.

21. As per information and explanation available with us, no fraud on or by the Company has been noticed or reportedduring the year.

Further to and in terms of the above, we further report that

a) We have obtained all the information and explanations, which to the best of our knowledge and belief were necessaryfor the purpose of our audit.

b) In our opinion, proper books of accounts as required by law have been kept by the company so far as appears fromour examination of such books.

c) The Balance Sheet and Profit and Loss Account referred to in this report are in agreement with the books ofaccount.

d) In our opinion, the Balance Sheet and Profit and Loss Account comply with the accounting standards referred to insub-section (3C) of section 211 of the Companies Act, 1956.

e) On the basis of written representations received from the Directors and taken on record by the Board of Directors,we report that none of the directors is disqualified as on 31st March, 2006 from being appointed as a director interms of clause (g) of sub section (1) of section 274 of the Companies Act, 1956.

f) In our opinion and to the best of our information and according to the explanations given to us, the said BalanceSheet and Profit & Loss Account read together with the Accounting Policies and notes to accounts give the informationrequired by the Companies Act, 1956 in the manner so required and subject to following notes of Schedule ‘H’;

1. Note No B (ii) regarding adoption of Going Concern Basis

2. Note No B (iii) treatment of unsecured loans of Rs. 11.84 lacs; give a true and fair view :

i) In the case of the Balance Sheet, of the state of affairs of the Company as at 31st March, 2006, and

ii) In the case of the Profit and Loss Account, of the Loss of the Company for the year ended on that date.

For RAGHU NATH RAI & Co. Chartered Accountants

( SAMIR JAIN )New Delhi, May 8, 2006 Partner

Membership No.: 77010

60

BALANCE SHEET AS AT 31ST MARCH, 2006

(Amount in Rs.)

Schedules As At As At

Annexed 31st March 2006 31st. March 2005

SOURCES OF FUNDS

Shareholders Funds

Share Capital A 4,950,000.00 4,950,000.00

Reserves & Surplus B 1,550,000.00 1,550,000.00

TOTAL 6,500,000.00 6,500,000.00

APPLICATION OF FUNDS

Fixed Assets C

Gross Block 2,155.00 2,155.00

Less:Depreciation 1,501.00 1,429.00

Net Block 654.00 726.00

Current Assets, Loans and

Advances D

Sundry Debtors 57,371.00 40,709.00

Cash & Bank Balances 47,739.65 39,739.65

Loans & Advances — 8,731.00

105,110.65 89,179.65

Less : Current Liabilities & Provisions

Current Liabilities E 1,250,624.08 1,216,362.08

Provisions — 8,731.00

1,250,624.08 1,225,093.08

Net Current Assets (1,145,513.43) (1,135,913.43)

Profit & Loss Account 7,644,859.43 7,635,187.43

TOTAL 6,500,000.00 6,500,000.00

Accounting Policies &

Notes on Accounts H

In terms of our Report of even date attached For and on behalf of the Board of Directors,

For Raghu Nath Rai & Co. H. R. Mustikar

Chartered Accountants Chairman

Samir Jain Suhas S. Kolhatkar

Partner Director

New Delhi, May 8, 2006 Pune, May 6, 2006


61

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED ON 31ST MARCH, 2006

(Amount in Rs.)

Schedules Current Previous

Annexed Year Year

INCOME

Sales & Services 24,662.00 9,452.00

24,662.00 9,452.00

EXPENDITURE

Employees Expenses F 6,000.00 6,000.00

Miscellaneous Expenses G 28,262.00 33,689.00

Depreciation C 72.00 72.00

34,334.00 39,761.00

Profit for the year (9,672.00) (30,309.00)

Provision Written back — 15,119.00

Provision for Taxation — —

Profit after Tax (9,672.00) (15,190.00)

Balance Brought forward (7,635,187.43) (7,619,997.43)

Balance Carried forward (7,644,859.43) (7,635,187.43)

Profit after Taxation being Profit attributable (9,672.00) (15,190.00)

to Equity Share Holders

Weighted Average no of Equity Shares outstanding 495,000.00 495,000.00

Basic & diluted earning per share in rupee (0.02) (0.03)

(face value Rs. 10 per share)

Accounting Policies &

Notes on Accounts H






Partner Director


62

SCHEDULES ANNEXED TO AND FORMING PART OF BALANCE SHEET AS AT 31ST MARCH, 2006

(Amount in Rs.)

As At As At31st March 2006 31st March 2005

SCHEDULE ‘A’- SHARE CAPITALAuthorised:495,000 Equity Shares of Rs. 10 each 4,950,000.00 4,950,000.00500 Preference Shares of Rs. 100 each 50,000.00 50,000.00

5,000,000.00 5,000,000.00

Issued, Subscribed & Paid Up:

495,000 Equity Shares of Rs.10 each fully paid up 4,950,000.00 4,950,000.00

Total 4,950,000.00 4,950,000.00

Notes : All Shares are held by the Holding Company,Kirloskar Pneumatic Co Ltd.

SCHEDULE ‘B’- RESERVES & SURPLUS

Capital Reserve ( Capital Subsidy ) 1,500,000.00 1,500,000.00Capital Redemption Reserve 50,000.00 50,000.00

Total 1,550,000.00 1,550,000.00

SCHEDULE ‘C’- FIXED ASSETS

(Amount in Rs.)

GROSS BLOCK DEPRECIATION NET BLOCK

Name of Assets As on Additions Sale/ Total as on As on For the Adjust- Total as on As On As On

1.4.2005 Transfer 31.03.2006 1.4.2006 Year ments 31.03.2006 31.03.2006 31.03.2005

Furnitures &

Fixtures 2,155.00 - - 2155.00 1429.00 72.00 - 1501.00 654.00 726.00

Total 2,155.00 - - 2,155.00 1,429.00 72.00 - 1,501.00 654.00 726.00

Previous year 2,155.00 - - 2155.00 1357.00 72.00 - 1429.00 726.00 798.00

SCHEDULE ‘D’- CURRENT ASSETS, LOANS AND ADVANCES

(A) Sundry Debtors (Unsecured Considered Good)Exceeding six months 40,709.00 40,709.00Others 16,662.00 —

As per Balance Sheet Total 57,371.00 40,709.00

(B) Cash and Bank BalancesCash & Imprest 8,837.16 837.16With Scheduled Banks inCurrent Accounts 38,902.49 38,902.49

Total 47,739.65 39,739.65

(C) Loans & Advances (Unsecured)Advance Income Tax — 8,731.00

As per Balance Sheet Total — 8,731.00


63

SCHEDULES ANNEXED TO AND FORMING PART OF BALANCE SHEET AS AT 31ST MARCH, 2006

(Amount in Rs.)31st March 2006 31st March 2005

SCHEDULE ‘E’- CURRENT LIABILITIES & PROVISIONS

Current LiabilitiesDue to Holding Co. 1,184,089.08 1,149,807.08Sundry Creditors

For Supplies 55,535.00 55,535.00For Expenses 11,000.00 11,020.00Other Liabilities — —

Total 1,250,624.08 1,216,362.08

ProvisionsProvision for Income Tax — 8,731.00

SCHEDULE ‘F’ - EMPLOYEES REMUNERATION & EXP.

Salary, Wages, Bonus & Retainership 6,000.00 6,000.00

Total 6,000.00 6,000.00

Schedule ‘G’- Miscellaneous Expenses

Rent 6,000.00 6,000.00Rates & Taxes 7,500.00 1,500.00Legal & Consultation 1,250.00 12,250.00Auditors Remuneration 11,000.00 11,020.00Other Expenses 2,512.00 2,919.00

Total 28,262.00 33,689.00


64

SCHEDULE ‘H’ - ACCOUNTING POLICIES AND NOTES FORMING PART OF THE ACCOUNTS

A. Significant Accounting Policies:

i) BASIS OF ACCOUNTING :

The Accounts of the Company are prepared under the Historical Cost convention in accordance withapplicable Accounting Standards, except where otherwise stated. For recognition of Income and Expenditure,Mercantile System of Accounting is followed, except to the extent stated below.a) Due to uncertainty, Income on account of Insurance Claims are accounted for as and when

received.b) Expenses incurred on services during warranty period are accounted for on cash basis.

ii) REVENUE RECOGNITION :

a) Revenue from the sale of goods, except otherwise stated are recognised upon the passage of titles tothe customers, which generally coincides with the delivery.

b) Sales are exclusive of Sales tax.

iii) FIXED ASSETS :

Fixed Assets are shown at cost less accumulated depreciation.

iv) DEPRECIATION :

Depreciation has been provided on straight line method as per old rates given in Schedule XIV of theCompanies Act, 1956.

v) VALUATION OF INVENTORIES

Inventories are valued as follows :a) Raw material & General Stores are valued at cost.b) Work in Progress are valued at cost.c) Finished Goods are valued at cost or market value whichever is lower.

B. Notes to Accounts

i) Miscellaneous Expenses in Schedule ‘G’ include :Current Year Previous Year

Auditors Remuneration Rs. Rs.Audit Fee 11,000 11,020

ii) The Accounts have been prepared on going concern basis despite the fact that the entire networth of thecompany has been wiped out. There has been no trading during this year and the company has scheme ofenhancing its activities in near future.

iii) The Company has treated closing balance of the holding company amounting to Rs. 11.84 lac as a currentliability instead of unsecured loan.

iv) Taking into account the consideration of prudence, no asset or liability is anticipated on account ofDeferred Tax.

v) The previous year figures have been regrouped or rearranged wherever considered necessary.


65

vi) Additional information pursuant to provisions of Para 3 and 4 of Part II of Schedule VI to the Companies Act1956 is as follows :

(A) Turnover

Particulars Quantity in Units Value in Rupees

Current Year Previous Year Current Year Previous Year

a) Compressors — — — —

b) Service Charges & Job Work — — 24,662.00 9,452.00

Total — — 24,662.00 9,452.00

(B) Particulars of Stock

Particulars Opening Stock Closing Stock

Qty. in Value in Qty. in Value inUnits Rs. Unit Rs.

Compressors — — — —(—) (—) (—) (—)

NOTE:

(1) The above information has been given by the Management and relied upon by the Auditors.

(2) Figures shown in brackets pertain to previous year.

SCHEDULE ‘H’ - ACCOUNTING POLICIES AND NOTES FORMING PART OF THE ACCOUNTS






Partner Director


66

BALANCE SHEET ABSTRACT AND COMPANY’S GENERAL BUSINESS PROFILEI. Registration Details

Registration No. 0 2 2 0 8 4

State Code 2 5 Balance Sheet Date 3 1 0 3 0 6

II. Capital raised during the year: ( Amount in Rs. Thousands )

Public Issue Rights Issue

N I L N I L

Bonus Issue Private Placement

N I L N I L

III. Position of Mobilisation and Deployment of Funds ( Amount in Rs. Thousands )

Total Liabilities Total Assets

6 5 0 0 6 5 0 0

Sources of FundsPaid Up Capital Reserves and Surplus

4 9 5 0 1 5 5 0

Secured Loans Unsecured Loans

1 N I LApplication of Funds

Net Fixed Assets Investments

N I L N I L

Net Current Assets Misc. Expenses

( 1 1 4 6 ) N I L

Accumulated Losses

7 6 4 5

IV. Performance of the Company ( Amount in Rs. Thousands )

Turnover Total Expenditure

2 4 3 4

V. Profit of CompanyProfit/( Loss ) before tax Profit/( Loss ) after tax

( 1 0 ) ( 1 0 )

Earning per share ( Rs. ) Dividend Rate

( 0 . 0 2 ) N I L

VI. Generic name of three principal products/services of Company ( as per monetary terms )

Item Code No. 8 4 1 4 4 0 . 0 1

( ITC Code )

Product Description R E C I P R O C A T I N G A I R

C O M P R E S S O R

Item Code No. 8 4 1 4 4 0 . 0 3

( ITC Code )

Product Description S C R E W A I R C O M P R E S S O R

Item Code No. 8 4 1 4 4 0 . 0 8

( ITC Code )

Product Description G A S C O M P R E S S O R


67

KIRLOSKAR PNEUMATIC COMPANY LIMITEDREGISTERED OFFICE : HADAPSAR INDUSTRIAL ESTATE, PUNE 411 013

ATTENDANCE SLIP

PLEASE BRING THIS ATTENDANCE SLIP AND HAND IT OVER AT THE ENTRANCE OF THE MEETING HALL AT MAHRATTACHAMBER OF COMMERCE, INDUSTRIES AND AGRICULTURE, PUNE 411 002.

NAME & ADDRESS OF THE MEMBER FOLIO NO.

DP ID*

CLIENT ID *

I/We hereby record my/our presence at the Annual General Meeting of the Company at the Mahratta Chamber of Commerce,Industries and Agriculture, Tilak Road, Pune 411 002 on Friday, the 21st July 2006 at 4.00 p.m.

SIGNATURE OF THE MEMBER OR PROXY SHARE(S) HELD

* Applicable to members holding shares in Electronic Form

KIRLOSKAR PNEUMATIC COMPANY LIMITEDREGISTERED OFFICE : HADAPSAR INDUSTRIAL ESTATE, PUNE 411 013

PROXY FORM

I / We....................................................................................................................................................................................................of

....................................................................................................................................of...................................................................in the

district of..................................................................................................................being a member(s) of the above named Company

hereby appoint........................................................................................................of.........................................................in the district

of...................................................................................................................................................................................or failing him / her

.......................................................................................................................of..............................................................in the district of

..................................................................................................as my / our Proxy to vote for me / us on my / our behalf at the Annual

General Meeting of the Company to be held on Friday, the 21st July 2006 at 4.00 p.m. and at any adjournment thereof.

Signed this.............................day of..................2006.

FOLIO NO.

*DP ID *CLIENT ID

* Applicable to members holding shares in Electronic FormNOTE : The Proxy Form must be deposited at the Registered Office of the Company, not less than 48 hours before the time for holding

the meeting.

Affix 15Paise

RevenueStamp

!

!

!!

l Substantial growth in High Pressure Air

Compressor business for Air Separation

application.

l Manufactured and supplied environment

friendly compressor for Indian Railways EMUs.

l ACR maintained dominant leadership

position in Hydrocarbon based Refrigeration

systems.

l ACR - Process Gas System, in 3 years since

inception attained a market share of 27% for

CNG compressor package in India.

l Breakthrough in High HP 5000KW + Marine

Gear boxes for Naval application.

l ‘Category I’ supplier of Traction Gears and

Pinions for Indian Railways.

As one of India’ s leading engineer ing

conglomerates, Kirloskar has been enriching the

lives of millions through world-class engineering

solutions. And now, we are making forays in global

markets as well. Pillared on the values of true

understanding, true effort and true commitment in

every endeavour, small or big, our global foothold

is getting stronger with every passing moment. So,

while we continue to excel in India, our exports will

also be contributing significantly to our economic

growth in the years to come. And with your

continued support and faith, we’re sure to make a

bigger difference.

From India to the world, we are going places.

15 to 55 KWIndustrial Electric Screw Compressor

1000 KW Natural Gas Compressor Package

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