Swaraj Engines Limited - Morningstar

BOARD OF DIRECTORS

G.P. GUPTA

Dr. T.N. KAPOOR

ATUL C. KIRLOSKAR

GAUTAM KULKARNI

D.R. SWAR

DONALD PECK

S.C. BHARGAVA

P. SIVARAM

A.M. SAWHNEY

G.S. RIHAL - Managing Director

Company SecretaryM.S. GREWAL

AuditorsM/S DAVINDER S. JAAJ & CO.Chartered Accountants

BankersCANARA BANK

Registered OfficePHASE-IV, S.A.S. NAGAR (Mohali)Punjab 160 055

WorksPLOT NO. 2, INDUSTRIAL PHASE IX,S.A.S. NAGAR (Mohali)Punjab 160 059

Swaraj Engines Limited

SWARAJ ENGINES LIMITED


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ANNUAL GENERAL MEETINGon Wednesday, 20th September, 2006at 12 Noon at Swaraj Engines Limited,Plot No. 2, Industrial Phase IX,S.A.S. Nagar (Mohali)Punjab 160 059.

CONTENTS PAGE NO.

Key Performance Indicators – Last Twelve Years 3

Shareholders’ Information 4

Notice of Annual General Meeting 6

Report of the Directors 13

Management Discussion and Analysis 16

Corporate Governance Report 18

Corporate Governance Compliance Certificate 23

Auditors’ Report 24

Balance Sheet 26

Profit and Loss Account 27

Schedules to the Accounts 28

Notes forming part of the Accounts 33

Cash Flow Statement 38

Balance Sheet Abstract & Company’s General Business Profile 40


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KEY PERFORMANCE INDICATORS - LAST TWELVE YEARS

(Rs. in Crores)

Fiscal Year →→→→→ 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 CARG(1995-2006)

Engines Sold (Nos.) 10851 12498 15921 17382 24705 27532 22168 21013 13578 14844 18225 17631 4.5%

Total Revenue (Net) 39.85 51.33 72.59 83.74 124.57 139.75 118.91 114.60 77.86 89.79 123.52 128.18 11.2%

PBIDT 6.57 9.65 13.75 16.75 26.09 32.75 30.04 29.79 18.10 20.21 27.73 25.81 13.2%

Finance Charges (Net) 0.04 0.02 0.06 1.23 1.78 1.35 1.15 0.60 0.24 0.21 0.15 0.14

Depreciation 0.35 0.42 0.56 1.38 2.56 3.12 3.70 3.85 3.77 3.79 3.96 4.26

Profit Before Tax 6.18 9.21 13.13 14.14 21.75 28.28 25.19 25.34 14.09 16.21 23.62 21.41 12.0%

Income Tax 2.01 3.20 3.86 3.35 6.10 9.35 9.15 9.08 5.05 5.86 8.19 7.43

Profit After Tax 4.17 6.01 9.27 10.79 15.65 18.93 16.04 16.26 9.04 10.35 15.43 13.99 11.6%

Dividend % 80 100 65* 100 200 225 225 225 125 150 225 75**

Dividend Payout 1.66 2.07 2.69 4.14 8.28 9.31 9.31 9.31 5.17 6.21 9.31 9.31

Equity Share Capital 2.07 2.07 4.14* 4.14 4.14 4.14 4.14 4.14 4.14 4.14 4.14 12.42** .

Net worth 8.94 12.89 19.19 25.43 31.88 40.21 45.98 46.30 49.50 52.85 57.64 61.01 19.1%

Capital Employed 12.69 13.78 29.12 45.64 43.45 51.48 47.68 57.11 57.88 61.90 65.80 67.29

Market Capitalisation 51.75 69.35 161.46 200.37 349.82 169.32 110.12 98.94 71.62 97.70 144.07 183.20

PBIDT/Total Revenue % 16.5 18.8 18.9 20.0 20.9 23.4 25.3 26.0 23.2 22.5 22.4 20.1

Return on Net worth % 46.6 46.6 48.3 42.4 49.1 47.1 34.9 35.1 18.3 19.6 26.8 22.9

Earning Per Share (Rs.) 20.1 29.0 22.4* 26.1 37.8 45.7 38.7 39.3 21.8 25.0 37.3 11.3**

Book Value Per Share (Rs.) 43.2 62.3 46.4* 61.4 77.0 97.1 111.1 111.8 119.6 127.7 139.2 49.1**

*On Post Bonus (1:1) Equity ** On Post Bonus (2:1) Equity


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SHAREHOLDERS’ INFORMATION1. Annual General Meeting : 20th September, 2006 at 12 Noon2. Financial reporting Calendar (tentative)

• Quarter ending 30th June, 2006 : Taken on record on 31st July, 2006• Quarter ending 30th September, 2006 : Last week of October, 2006• Quarter ending 31st December, 2006 : Last week of January, 2007• Year ending 31st March, 2007 : May / June 2007

3. Book Closure Dates : 1st September, 2006 to 7th September, 2006 (both days inclusive)

4. Dividend Payment : On or after 20th September, 2006, but within statutory time limit.

5. Listing on Stock Exchanges : Bombay & National Stock Exchanges.

Listing Fee for 2006-07 for both these stock exchanges has been paid.

6. Stock Code : BSE – 500407 & NSE - SWARAJENG

7. Stock Market Data

Monthly High - Low quotations and Volume of Shares (Face value - Rs.10 each) traded at BSE & NSE are as under :

Month Bombay Stock Exchange (BSE) National Stock Exchange (NSE)

High (Rs.) Low (Rs.) Volume (Nos.) High (Rs.) Low (Rs.) Volume (Nos.)2005 April 395 349 19,805 400 342 22,347

May 445 365 42,763 444 361 55,740June 605 425 2,92,991 605 423 4,92,859July 629 562 1,38,737 630 561 2,06,088August 669 185* 1,17,917 670 187* 2,32,496September 199 170 1,33,015 196 169 1,88,322October 177 146 83,352 180 146 96,429November 173 147 72,976 180 149 64,571December 174 152 69,929 174 152 78,870

2006 January 175 157 1,31,977 175 153 95,248February 161 146 69,552 163 137 71,859March 174 143 1,61,300 165 143 1,36,905April 176 146 1,24,300 176 143 1,27,846May 185 122 1,11,331 185 125 1,52,492June 150 112 89,393 158 112 1,01,615July 141 118 27,485 141 118 69,166

* Ex bonus (2:1)

Note: 1. Pre Bonus Share Prices (April – July 2005) reflect adjustment for Bonus Shares (2:1).2. Share Price of SEL and BSE Sensex is based on the month end closing.

S E L S h a r e P r i c e V s B S E S e n s e x

1 2 0

1 3 0

1 4 0

1 5 0

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M o n t h

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6 0 0 06 5 0 07 0 0 07 5 0 08 0 0 08 5 0 09 0 0 09 5 0 01 0 0 0 01 0 5 0 01 1 0 0 01 1 5 0 01 2 0 0 01 2 5 0 0

BSE

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S E L S h a r e P r ic e B S E S e n s e x


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8. Dematerialisation of Shares :

Shares of Swaraj Engines Limited are in the compulsory demat list for all categories of investors. The Company hasjoined National Securities Depository Limited (NSDL) and Central Depository Services (India) Ltd. (CDSL) to facilitate thisfacility. On date, over 93% of Non Promoter’s Equity is held in electronic form.

International Securities Identification Number (with NSDL and CDSL) : INE277A01016

For Shares held in electronic form, all instructions regarding change of address, nomination, power of attorneyetc., should be given directly to their Depository Participants and the Company will not entertain any suchrequests directly from shareholders.

9. Transfer System for physical shares :

Share transfers would be registered & returned within a period of 30 days from the date of receipt, if the documents areclear in all respects. Total No. of shares transferred during 2005-06 was 8,201 (Previous Year 2,550).

10. Registrar and Transfer Agents :

M/s MCS Ltd., Sri Venkatesh Bhawan, W-40, Okhla Industrial Area, Phase – II, New Delhi – 110 020 are the Registrar andShare Transfer Agent for physical shares of the Company. MCS is also the depository interface of the Company with bothNSDL and CDSL.

Share Transfer & other Communication regarding Share Certificates, Dividends and Change of Address etc. may beaddressed to Registrar, MCS Ltd. or to the Share Department of the Company at its Registered Office at Phase IV,Industrial Area, S.A.S.Nagar (Mohali), Punjab – 160 055.

13. The Company has not issued any GDRs/ADRs/Warrants or any convertible instruments.

14. Plant Location : Swaraj Engines Limited,Plot No. 2, Industrial Phase IX,S.A.S. Nagar (Mohali), Punjab

15. Investor queries etc. may be addressed to :

Mr. M.S. Grewal, Company SecretarySwaraj Engines Limited, Phone : 0172-2268922-33Phase–IV, Industrial Area Fax : 0172-2272731 & 2271307S.A.S. Nagar (Mohali), Punjab–160 055Email : [email protected]

16. Website Address : www. swarajenterprise.com

11. Shareholding Pattern as on 31st March, 2006 :

Category No. of No. of % ofShare- Shares Holding

holders heldPromoters 2 62,79,000 50.56

UTI 1 3,150 0.03

Banks,Financial Institu-tions & Insurance Co’s 4 5,25,072 4.23

FII’s / NRI’s /OCB’s 106 3,09,809 2.49

Other Bodies Corporate 381 5,36,678 4.32

Individuals 11000 47,66,111 38.37

Total 11494 124,19,820 100.00

12. Distribution Pattern of Shareholdings as on 31st March, 2006 :

No. of Equity No. of Shareholders No. of Shares heldShares held

Numbers % total Numbers % total

1 - 100 5042 43.87 2,68,011 2.16

101 - 200 1851 16.10 2,92,787 2.36

201 - 500 2325 20.23 7,58,612 6.11

501 - 1000 1528 13.29 10,11,423 8.14

1001 - 5000 651 5.66 12,78,442 10.29

5001 & above 97 0.85 88,10,545 70.94

Total 11494 100.00 124,19,820 100.00


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NOTICE OF ANNUAL GENERAL MEETINGNotice is hereby given that the Twentieth Annual General Meeting of the Company will be held at Works of the Company atPlot No. 2, Industrial Phase-IX, S.A.S Nagar (Mohali), Punjab on 20th September, 2006 at 12 Noon to transact the followingbusiness:

ORDINARY BUSINESS

1. To receive, consider and adopt the Audited Balance Sheet and Profit & Loss Account for the year ended 31st March, 2006,together with the Directors’ Report and Auditors’ Report thereon.

2. To declare Dividend.

3. To appoint a Director in place of Shri Atul C. Kirloskar who retires by rotation and, being eligible, offers himself for re-election.

4. To appoint a Director in place of Shri G.P.Gupta who retires by rotation and, being eligible, offers himself for re-election.

5. To appoint a Director in place of Shri Donald Peck who retires by rotation and, being eligible, offers himself for re-election.

6. To appoint Auditors and fix their remuneration.

SPECIAL BUSINESS

To consider and, if thought fit, to pass with or without modification(s), the following resolutions:

7. As an Ordinary Resolution:

“RESOLVED THAT Shri S.C.Bhargava, who has been co-opted as Director of the Company and who in terms of Section260 of the Companies Act, 1956 holds office as Additional Director until this Annual General Meeting, be and is herebyappointed as a Director of the Company”.


“RESOLVED THAT Shri A.M.Sawhney, who has been co-opted as Director of the Company and who in terms of Section260 of the Companies Act, 1956 holds office as Additional Director until this Annual General Meeting, be and is herebyappointed as a Director of the Company”.


“RESOLVED THAT Shri P.Sivaram, who has been co-opted as Director of the Company and who in terms of Section 260of the Companies Act, 1956 holds office as Additional Director until this Annual General Meeting, be and is herebyappointed as a Director of the Company”.


“RESOLVED THAT pursuant to the provisions of Section 198, 269, 309 and 316 read with Schedule XIII and all otherapplicable provisions, if any, of the Companies Act, 1956, consent of the Company be and is hereby accorded to there-appointment of Shri G.S.Rihal as Managing Director of the Company for the period commencing from 21.11.2005 to20.11.2009 on the terms and conditions as set out in the Explanatory Statement, with liberty and authority to the Boardof Directors to alter and vary the terms and conditions thereof and as may be agreed by Shri G.S.Rihal”.

By Order of the BoardRegd. Office:Phase-IV, Industrial Area,S.A.S. Nagar (Mohali), Punjab–160 055 (M.S. GREWAL)Date : 4th August, 2006 Company Secretary


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NOTES:

1. An explanatory statement pursuant to Section 173(2) of the Companies Act, 1956 is enclosed hereto and forms part of theNotice.

2. A MEMBER ENTITLED TO ATTEND AND VOTE IS ENTITLED TO APPOINT A PROXY TO ATTEND AND VOTEINSTEAD OF HIMSELF. SUCH PROXY NEED NOT BE A MEMBER OF THE COMPANY. Proxies in the Form annexedhereto must be lodged at the Registered Office of the Company not later than 48 hours before the commencement of theMeeting.

3. The Register of Members and Transfer Books of the Company shall remain closed from 1st September, 2006 to7th September, 2006 (both days inclusive).

4. Members are requested to bring their copy of Annual Report to the Meeting. Members desirous of obtaining any informationconcerning the accounts and operations of the Company are requested to address their questions in writing to theSecretary of the Company at least 10 days before the date of the Meeting so that information required may be madeavailable at the Meeting.

5. Subject to the provisions of Section 206A of the Companies Act, 1956, dividend, as recommended by the Board ofDirectors, if approved at the Meeting, will be payable on or after 20th September, 2006, but within the Statutory time limit,to those Members whose names appear in the Register of Members as on 7th September, 2006. In respect of shares heldin electronic form, dividend will be payable to the beneficiary owner of shares as on the closing hours of business on31st August, 2006 as per details furnished by the depositories for this purpose.

6. The Company has already transferred all unclaimed dividends for and upto the financial year ended 31st March, 1995 tothe General Revenue Account of the Central Government as required by the Companies Unpaid Dividend (Transfer to theGeneral Revenue Account of the Central Government) Rules, 1978. Members who have not encashed dividend warrantsfor the said period are requested to claim the amount from the Registrar of Companies, Punjab, Chandigarh and HimachalPradesh, 286, Defence Colony, Jalandhar (Punjab) – 144 001.

Consequent upon amendment to Section 205A of the Companies Act, 1956 and introduction of Section 205C by theCompanies (Amendment) Act, 1999, the amount of dividend for the Financial Year ended 31st March, 1996 and thereafter,which remain unpaid or unclaimed for a period of 7 years from the date of transfer to Unpaid Dividend Account of theCompany shall be transferred to the Investor Education and Protection Fund (IEPF) set up by the Government ofIndia. Accordingly, the Company has transferred to IEPF all unclaimed/unpaid dividend in respect of financial year ended31st March, 1998.

Members who have not encashed their dividend warrant(s) for the financial year ended 31st March, 1999 and onward arerequested to make their claims to the Company accordingly, without any delay. It may be noted that unclaimed dividendfor the financial year ended 31st March, 1999 is due for transfer to IEPF latest by 4th September, 2006. It may also benoted that once the unclaimed dividend is transferred to the Central Government, as above, no claim shall lie inrespect thereof with the Company.

7. Payment of Dividend through ECS:

a) Members holding shares in demat form may please note that the bank details as furnished by the respectiveDepositories to the Company will be used for the purpose of distribution of dividend through Electronic ClearingService (ECS) as directed by the Stock Exchanges. In the absence of ECS facility, the bank account details, ifavailable, will be printed on the dividend warrants. Members holding shares in demat form may forward detailsregarding bank account in which they wish to receive dividend, to their Depository Participants. The Company or the


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Registrar and Share Transfer Agents will not act on any direct request from these members for change/deletion insuch bank details.

b) Members holding shares in physical form are advised to submit particulars of their bank account, viz., name andaddress of the branch of the bank, 9 digit MICR code of the branch, type of account and account number latest by7th September, 2006 to the Company’s Registrar and Share Transfer Agents, M/s MCS Ltd., Sri Venkatesh Bhawan,W-40, Okhla Industrial Area, Phase II, New Delhi – 110 020.

8. Members holding shares in physical form are requested to notify any change in their address, mandates etc., to theCompany’s Registrar and Share Transfer Agents, M/s MCS Ltd., Sri Venkatesh Bhawan, W-40, Okhla Industrial Area,Phase-II, New Delhi-110 020.

In case of dematerialised shares, the change of address requests, bank mandates etc. should be directly sent tothe Depository Participant concerned.

9. Members who hold shares in physical form may nominate a person in respect of all the shares held by them whethersingly or jointly. Members who hold shares singly are advised to avail nomination facility by filling Form 2B in their owninterest. Blank forms will be supplied by the Company on request. Members holding shares in demat form may contacttheir respective depository participants for recording of nomination.

10. Members / Proxy holders are requested to produce the attached admission slip duly completed and signed, for admissionto the Meeting Hall.

11. Appointment / Re-appointment of Directors:

At the ensuing Annual General Meeting, S/Shri Atul C. Kirloskar, G.P.Gupta and Donald Peck retire by rotation and beingeligible offer themselves for re-election.

S/Shri S.C.Bhargava, A.M.Sawhney and P.Sivaram are being appointed as Directors of the Company.

The Directors have also reappointed Shri G.S.Rihal as Managing Director of the Company on the expiry of his last tenure.

Information or details to be provided for the aforesaid Directors under Corporate Governance code are as under:

a) Shri Atul C. Kirloskar is the Chairman and Managing Director of Kirloskar Oil Engines Limited. He is also theChairman of G.G.Dandekar Machine Works Ltd. and Kirloskar Ferrous Industries Ltd. and a Director in KirloskarSystems Ltd.

Details of Shri Atul C. Kirloskar’s Membership in Committees are given below:

Name of Company Name of Committee

1. Kirloskar Ferrous Industries Ltd. Shareholders’ Grievances Committee, Chairman

2. Kirloskar Systems Ltd. Audit Committee, ChairmanShare Transfer and Investor Relations Committee, ChairmanRemuneration Committee, Chairman

3. Swaraj Engines Ltd. Nomination / Remuneration Committee

Shri Kirloskar holds 600 shares in the Company.


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b) Shri G.P.Gupta retired as Chairman, Industrial Development Bank of India in 2001. He holds Masters degree inCommerce. Shri G.P. Gupta is also on the Board of NTPC Ltd., Hindustan Aeronautics Ltd., SIDBI Venture CapitalLtd., Jammu & Kashmir Bank Ltd., PTC India Ltd., M.P.Power Generation Co. Ltd., Birla Sun Life Insurance Co.Ltd., Aditya Birla Nuvo Ltd., Su-Raj Diamonds and Jewellery Ltd., Emkay Share and Stock Brokers Ltd., PowerFinance Corporation Ltd. and Shree Digvijay Cement Company Ltd.

Details of Shri G.P.Gupta’ s Membership in Committees are given below:


1. Aditya Birla Nuvo Ltd. Audit Committee

2. NTPC Ltd. Audit Committee, Chairman

3. Jammu & Kashmir Bank Ltd. Audit CommitteeInvestor Grievance Committee, Chairman

4. PTC India Ltd. Audit Committee

5. Birla Sun Life Insurance Co. Ltd. Audit Committee

6. Hindustan Aeronautics Ltd. Audit Committee

7. Power Finance Corporation Ltd. Audit Committee, Chairman

8. Shree Digvijay Cement Co. Ltd. Audit Committee

9. Swaraj Engines Ltd. Audit Committee, Chairman

Shri Gupta does not hold any shares in the Company.

c) Shri Donald Peck is based in Delhi and is currently a Managing Partner of Actis Capital. Shri Peck holds a Ph.D inEconomic History from Oxford University. He worked for thirteen years in Merchant Banking at Lloyds Bank,Morgan Grenfell and then in Equity Investment / Fund Management at IFC (Washington) before joining the Actis /CDC Group at its London headquarters in 1991.

Shri Peck is also on the Board of Punjab Tractors Ltd., Swaraj Mazda Ltd., Industrial Development Finance CompanyLtd., Alumnus Software Ltd., CICO Technologies Ltd., Avtec Ltd. and Dalmia Cement (Bharat) Ltd.

Details of Shri Donald Peck’ s Membership in Committees are given below:


1. Punjab Tractors Ltd. Shareholder / Investor Relations Committee, Chairman

2. Swaraj Engines Ltd. Nomination / Remuneration Committee, Chairman

Shri Peck does not hold any shares in the Company.

d) Shri S.C.Bhargava is a Fellow Member of the Institute of Chartered Accountants of India and also holds a Bachelor’sDegree with Honours in Commerce from Delhi University. He served Life Insurance Corporation of India (LIC) for 38years and had retired in 2005 as Executive Director (Investment). He had vast experience in Finance / Insurancerelated matters in LIC and had been deeply involved in the investment portfolio at LIC which virtually covered allsegments of Indian Economy.


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Shri S.C. Bhargava, currently a financial consultant, is also on the Board of Aditya Birla Nuvo Ltd., DCM ShriramConsolidated Ltd., Bank of Maharashtra, Escorts Ltd., Jaiprakash Associates Ltd., Jaiprakash Enterprises Ltd.,Jaiprakash Power Ventures Ltd., Jaypee Cement Ltd., IL&FS Insurance & Risk Management Services Ltd., IL&FSAcademy for Insurance & Finance Ltd., OTC Exchange of India Ltd., OTC Securities Ltd. and Mudra Life Styles Ltd.

Details of Shri S.C.Bhargava’ s Membership in Committees are given below:


1. Bank of Maharashtra Audit Committee, Chairman

2. Mudra Life Style Ltd. Audit Committee, Chairman

3. Swaraj Engines Ltd. Audit Committee

Shri Bhargava does not hold any shares in the Company.

e) Shri A.M.Sawhney is currently Director-Marketing of Punjab Tractors Ltd. (PTL) and has been associated with PTLsince 1972. He holds a Bachelor’s Degree with Honours in Mechanical Engineering. He has been instrumental, fromthe very beginning, in establishing the unknown SWARAJ name into a leading brand in the intensely competitiveIndian tractor market. Shri Sawhney is also on the Board of Punjab Tractors Ltd. and Swaraj Automotives Ltd. anda member of the Shareholder / Investor Relations Committee of Punjab Tractors Ltd. and Swaraj Engines Ltd.

Shri Sawhney holds 600 shares in the Company.

f) Shri P.Sivaram is a Chartered Accountant and also holds a Bachelor’s Degree in Commerce. He joined PunjabTractors Ltd. in 1978 and is currently Chief Operating Officer of PTL. He has made significant contributions toSwaraj Group in cost control, management & judicious allocation of financial resources plus setting groupwiseethical standards and transparent approach.

In addition to Swaraj Engines, Shri Sivaram is also on the Board of Punjab Tractors Ltd. and Swaraj Automotives Ltd.

Details of Shri P.Sivaram’s Membership in Committees are given below:


1. Punjab Tractors Ltd. Shareholder / Investor Relations Committee

2. Swaraj Automotives Ltd. Shareholder / Investor Relations Committee

3. Swaraj Engines Ltd. Audit Committee

Shri Sivaram holds 60 shares in the Company.

g) Shri G.S.Rihal holds a Bachelor’s Degree in Mechanical Engineering and a Master’s Degree (M.Tech) in Machine

Design from IIT, Kharagpur. He is also a Fellow of The Institution of Engineers (India).

Shri Rihal has been associated with the Swaraj group since its inception and has been actively involved in Swaraj

Engines Project from the very beginning (1987). He was appointed Managing Director of the Company in November

1995 and has made outstanding contributions in all facets of corporate operations.

Shri Rihal is a member of the Shareholder / Investor Relations Committee of the Company.

Shri Rihal holds 4860 shares in the Company.


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ANNEXURE TO NOTICE

Explanatory Statement Relating to the Special Business

As required by Section 173 of the Companies Act, 1956, the following Explanatory Statement sets out all material facts relatingto the Special Business mentioned under Item Nos. 7 to 10 of the accompanying Notice dated 4th August, 2006.

Item No. 7

Shri S.C.Bhargava, co-opted as an Additional Director, vacates office at the forthcoming Annual General Meeting. The Companyhas received a notice in writing from a member u/s 257 of the Companies Act, 1956 proposing the appointment ofShri Bhargava as a Director of the Company.

Shri S.C.Bhargava with vast experience in the fields of finance and management, has recently retired as Executive Director(Investment), Life Insurance of India. Given, this experience and background of Shri Bhargava, Directors consider that hisassociation at the Board level would be of large value to the Company and hence recommend his appointment in terms ofResolution set out in Item No. 7 of the convening notice.

Shri S.C.Bhargava is interested and concerned in the Item.

Item No. 8

Shri A.M.Sawhney, co-opted as an Additional Director, vacates office at the forthcoming Annual General Meeting. The Companyhas received a notice in writing from a member u/s 257 of the Companies Act, 1956 proposing the appointment of Shri Sawhneyas a Director of the Company.

Shri A.M.Sawhney, nominated by Punjab Tractors Ltd., has vast experience in domestic as well as overseas marketing. He iscurrently Director – Marketing of Punjab Tractors Ltd. and has played a significant role towards the growth of PTL. TheDirectors consider that his association at the Board level would be of large value to the Company and hence recommend hisappointment in terms of Resolution set out in Item No. 8 of the convening notice.

Shri A.M.Sawhney is interested and concerned in the Item.

Item No. 9

Shri P.Sivaram, co-opted as an Additional Director, vacates office at the forthcoming Annual General Meeting. The Companyhas received a notice in writing from a member u/s 257 of the Companies Act, 1956 proposing the appointment of Shri Sivaramas a Director of the Company.

Shri P.Sivaram, nominated by Punjab Tractors Ltd., is currently Chief Operating Officer of Punjab Tractors Ltd. and has longexperience in the field of corporate management and finance. The Directors consider that his association at the Board levelwould be of large value to the Company and hence recommend his appointment in terms of Resolution set out in Item No. 9 ofthe convening notice.

Shri P.Sivaram is interested and concerned in the Item.

Item No. 10

Shri G.S.Rihal completed his second 5 year tenure of office as Managing Director on 20.11.2005.

Members are fully aware of the outstanding role and contributions of Shri Rihal who has been associated with the Companysince inception, firstly as Director and w.e.f. 21.11.1995 as Managing Director.

Having regard to the invaluable contributions of Shri G.S.Rihal in all facets of corporate operations and the future needs of theCompany, the Directors in their meeting held on 17.10.2005 decided to re-appoint Shri Rihal as Managing Director of the


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Company for another term of 4 years w.e.f. 21.11.2005. In the same meeting, the Board had also considered Shri G.S.Rihal’sexisting structure of emoluments against prevalent industry levels/trends, the need to provide remuneration commensurate toresponsibilities and contributions, and decided to revise the terms of emoluments of Shri G.S.Rihal, Managing Directorw.e.f. 21.11.2005.

Shri Rihal’s re-appointment and terms of remuneration are subject to approval of Shareholders in General Meeting.

Subsequently, in terms of Section 302 of the Companies Act, 1956 an abstract dated 7th November, 2005 covering the revisedterms of remuneration was also circulated to all Shareholders. Revised terms of remuneration are:

A. SALARY

(i) Rs.170,000/- per month from 21.11.2005 in the scale of Rs.160,000 - 10,000 - 300,000.

(ii) Dearness Allowance of Rs. 20,000/- per month.

(iii) Annual Increment will be effective from 01.12.2006 and the additional increment will be decided by the Board ofDirectors having regard to corporate profits.

B. COMMISSION

1% of net profits subject to a maximum of 100% of annual salary (Basic + Dearness Allowance).

C. PERQUISITES AND ALLOWANCES

(i) Company contribution to Provident Fund and Gratuity as applicable to Senior Management staff from time to time.

(ii) Medical reimbursement for self and family.

(iii) Leave, its accumulation and encashment as applicable to Senior Management staff from time to time.

(iv) Provision of a car and telephone at residence.

(v) Premium in respect of personal accident insurance.

Provided that the remuneration payable to Managing Director (including the salary, commission, perquisites, allowancesand benefits) shall not exceed the limits laid down in Sections 198 and 309 of the Companies Act, 1956, and the Rulesmade thereunder or any statutory modification or re-enactment thereof.

D. MINIMUM REMUNERATION

Notwithstanding anything to the contrary herein contained, where in any financial year during the currency of the tenure ofShri G.S.Rihal, the Company has no profits or its profits are inadequate, the remuneration by way of salary, perquisites,allowances and benefits payable to Shri Rihal shall be as stated above, subject to limits prescribed under the CompaniesAct, 1956, and the Rules made thereunder or any statutory modification or re-enactment thereof.

The Directors commend acceptance of the re-appointment and remuneration in terms of resolution set out in Item No. 10of the convening notice.

Shri G.S.Rihal is interested and concerned in the Item.


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REPORT OF THE DIRECTORSDirectors present their Twentieth Annual Report together with Audited Accounts for financial year ended31st March, 2006.

FINANCIAL RESULTS 2005-06

Year ended Year ended31st March, 2006 31st March, 2005

Rs. Crores Rs. Crores

Net Operating Revenue 128.18 123.52Operating Profit 25.81 27.73Profit Before Tax 21.41 23.62Tax Provision— Current 7.89 8.90— Deferred (0.47) (0.71)Profit After Tax 13.99 15.43Balance of Profit from Prior Years 9.07 7.27Surplus available for Appropriation : 23.06 22.70Appropriations :Transfer to General Reserve 2.00 3.00Proposed Dividend 9.31 9.31Tax on Dividend 1.31 1.32

Balance carried to Balance Sheet 10.44 9.07

DIVIDEND

Having regard to the above performance and current outlook, the Directors have decided to recommend a Dividend of 75% onthe post-bonus (2:1) equity against 225% declared and paid for 2004-05.

FINANCECompany’s internal generations were utilised towards normal capital expenditure (Rs. 3.44 crores) and additional workingcapital requirements to support operations.

CURRENT PERFORMANCEOperations for fiscal 2006-07 has begun on a positive note, with higher demand for engines from Punjab Tractors. From therecently published unaudited results for the first quarter, Members would have noted that net revenue for April – June 2006 hasmoved to Rs. 29.00 crores against corresponding previous year level of Rs. 26.25 crores. Pre tax profit for the first quarter hasreached Rs. 5.25 crores against Rs. 5.10 crores posted for same period last year.

CORPORATE GOVERNANCEAs required by provisions of the Listing Agreement(s) with the Stock Exchange(s), reports on Management Discussion andAnalysis, Corporate Governance as well as the Auditors’ Certificate regarding compliance of conditions of Corporate Governanceare contained in this Report.

HUMAN RESOURCESIndustrial Relations and work atmosphere remained stable throughout the year under review. Information in accordance withSection 217(2A) of the Companies Act 1956, read with Companies (Particulars of employees) Rules, 1975 is annexed to thisreport.

ENERGY CONSERVATION, TECHNOLOGY ABSORPTION ETC.Particulars in respect of the above activities under the Companies (Disclosure of particulars in the Report of Directors) Rules,1988 are given in the Annexure to this Report.


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DIRECTORS’ RESPONSIBILITY STATEMENTPursuant to the requirement under Section 217(2AA) of the Companies (Amendment) Act, 2000, with respect to Directors’Responsibility Statement, it is hereby confirmed:a) that in preparation of the accounts for the financial year ended 31st March, 2006, the applicable accounting standards

have been followed and there have been no material departures;b) that the Directors have selected such accounting policies and applied them consistently and made judgements and

estimates that were reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at theend of the financial year and of the profit of the Company for the year under review;

c) that the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordancewith the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing anddetecting fraud and other irregularities;

d) that the Directors have prepared the accounts for the financial year ended 31st March, 2006 on a ‘going concern’ basis.

DIRECTORSConsequent upon Shri Y.P.Mahajan’s decision to step down from the Board of Punjab Tractors Limited (PTL) w.e.f. 1st June,2006, PTL withdrew his nomination from the Board of Swaraj Engines Limited and accordingly Shri Mahajan ceased to be aDirector of the Company w.e.f. 31st May, 2006. The Board of Directors place on record their appreciation to the leadership ofShri Mahajan in building the Company to its present position of eminence during his 21 year long association with the Company.

Following withdrawal of nomination by Punjab Tractors Limited, Shri S.K.Tuteja ceased to be a Director of the Company w.e.f.19th June, 2006. Directors record their deep appreciation to the large contributions of Shri Tuteja during his tenure as Director.

Shri S.C.Bhargava has been co-opted to the Company’s Board on 25th January, 2006 as an Independent Director.Shri S.C.Bhargava holds office upto the date of forthcoming Annual General Meeting and is eligible for re-appointment. Noticeu/s 257 of the Companies Act, 1956 has been received from a member proposing Shri Bhargava’s appointment as a Director ofthe Company.

Punjab Tractors Limited has nominated Shri A.M.Sawhney as Director of the Company vice Shri Y.P. Mahajan. Co-opted tothe Company’s Board on 31st May, 2006, Shri Sawhney holds office upto the date of forthcoming Annual General Meeting andis eligible for re-appointment. Notice u/s 257 of the Companies Act, 1956 has been received from a member proposingShri Sawhney’s appointment as a Director of the Company.

Punjab Tractors Limited has also nominated Shri P.Sivaram as Director of the Company. Co-opted to the Company’s Board on31st May, 2006, Shri Sivaram holds office upto the date of forthcoming Annual General Meeting and is eligible for re-appointment.Notice u/s 257 of the Companies Act, 1956 has been received from a member proposing Shri Sivaram’s appointment as aDirector of the Company.

Shri G.S.Rihal completed his last tenure of office as Managing Director on 20th November, 2005. In the context of hisoutstanding contributions to the Company’s growth and taking note of future needs, Directors have reappointed Shri G.S.Rihalas Managing Director of the Company for a further period of 4 years w.e.f. 21st November, 2005. Appropriate resolution for hisreappointment has been proposed at the forthcoming Annual General Meeting.

S/Shri Atul C. Kirloskar, G.P.Gupta and Donald Peck retire by rotation and, being eligible, offer themselves for re-appointment.

AUDITORS

Company’s Statutory Auditors M/s. Davinder S. Jaaj & Company, Chartered Accountants, hold office upto the forthcomingAnnual General Meeting and are eligible for re-appointment. The Company has received a certificate from them that their re-appointment, if made, would be within the limits under Section 224(IB) of the Companies Act, 1956.

FOR AND ON BEHALF OF THE BOARD

G.P. GUPTADirector

Place : S.A.S. Nagar G.S. RIHALDate : 4th August, 2006 Managing Director


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ANNEXURE TO DIRECTORS’ REPORT

A) Information in accordance with the Companies (Disclosure of Particulars in the Report of Directors) Rules, 1988 :

CONSERVATION OF ENERGY:

1. Company’s Production process is not energy-intensive. Discipline to switch off lights and machines when not in use isthe practice.

2. CNC machines are automatically switched off if slides are not moved for 15 minutes.

3. Timers are installed to automatically switch off roof exhaust fans, when not required.

RESEARCH & DEVELOPMENT:

1. SEL represents fruition of technological and commercial relationship of 2 decades of two Indian Companies, bothpioneers in Indian R&D and Engineering : Kirloskar Oil Engines Ltd. and Punjab Tractors Ltd. In this background, Companyhas fully absorbed engine manufacturing technology producing five models.

2. Keeping in view the need to meet CMVR emission norms, Emission Measuring Equipments have been installed.In addition, the Company has full benefit and support of Research & Development at both KOEL and PTL, both withsubstantial strengths in Research & Development.

FOREIGN EXCHANGE EARNINGS AND OUTGO

There are no direct exports, but Company’s Engines are a part of Swaraj Tractors exported by Punjab Tractors Limited.Foreign Exchange Outgo is contained in Note No. 17 & 18 of Notes on Accounts (Schedule – K).

B) Information as per Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of employees)Rules, 1975 :

Sr. Name/ Qualification Exp. Date of Designation/ Gross Last Employment Held DesignationNo. (Age) (Years) comm. of Nature of Remune-

Employment Duties ration (Rs.)

(1) (2) (3) (4) (5) (6) (7) (8) (9)

1. Rihal G.S. B.E. Mech., 40 21.11.95 Managing Director 33,54,403 Punjab Tractors Ltd. Executive Director-(62) M.Tech., FIE, MISAE Material Services

Notes :

1. Remuneration includes Salary, Allowances, Bonus, Encashment of Earned Leave, Company’s contribution to Provident Fund,Gratuity & Superannuation Funds, reimbursement of Medical expenses and Leave Travel Assistance, wherever applicable andwhere it is not possible to ascertain the actual expenditure on a perquisite, valuation has been done on the basis of Income Tax Act,1961 and Rules made there under.

2. Nature of employment is contractual.

3. Shri G.S. Rihal is not related to any Director of the Company.


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MANAGEMENT DISCUSSION AND ANALYSISCOMPANY PROFILE

Swaraj Engines Ltd. (SEL) is a joint venture between Punjab Tractors Ltd.(PTL) and Kirloskar Oil Engines Ltd. (KOEL). Originallyset up to manufacture engines for PTL, in recent years, SEL has also been a supplier of hi-tech engine components to SwarajMazda Ltd. (SML).

Since start of commercial operations in 1989-90, SEL has supplied over 2,55,000 engines for fitment into Swaraj tractors beingproduced and sold by PTL. SEL’s engine business currently constitutes some 85% of Company’s product revenue, balance15% represents value of hi-tech engine components being supplied to SML for assembly of engines for their commercialvehicles.

PERFORMANCE APPRAISAL

SEL’s financial performance has been exceptional right from the beginning. Its operations have been characterised by a leanorganisation structure, continuous improvement in process efficiencies and optimised resource utilisation.

FINANCIAL ANALYSIS (2005-06)

While details of financial position and performance are available in the Balance Sheet, Profit & Loss Account, alongwith relatedschedules and notes, key aspects are highlighted in the following paragraphs:

a) Profit & Loss Account

Total revenue for the year was Rs. 128.18 crores (last year Rs. 123.52 crores) with the following breakdown :

(Rs. in Crores)

Particulars 2005-06 2004-05

Value of engines supplied to PTL 108.96 104.29

Value of engine components supplied to SML 19.22 19.23

Total Value 128.18 123.52

Supplies to PTL aggregated to 17631 engines (last year 18225), all of them compliant with Bharat (Trem) Stage III EmissionNorms.

Reflecting pressure from rise in price of steel and other commodities, material cost as a percentage of total revenue moved to70.3% (last year’s 69.0%).

Personnel cost for the year at Rs. 7.87 crores (last year Rs. 7.17 crores) was 6.1% of total product revenue (Last year 5.8%).

Manufacturing, administrative and marketing expenses increased to Rs. 4.35 crores from previous year’s Rs. 3.45 crores –some 3.4% of total product revenue (last year 2.8%), mainly on account of expenses relating to bonus issue, royalty paymentand overhauling cost of two major machines.

Finance costs at Rs. 0.14 crores stayed almost at last year’s level.

Depreciation at Rs. 4.26 crores was marginally higher from previous year’s Rs.3.96 crores.

Profit Before Tax reached to Rs. 21.41 crores (last year Rs. 23.62 crores), represents a margin of 16.7% (last year 19.1%).

Corporate tax at Rs. 7.42 crores translates to an effective rate of 34.7% (last year 34.7%).

Directors’ have recommended a dividend of 75% on enhanced share capital after issue of Bonus Share in the ratio of 2:1allotted during the year. With dividend absorbing Rs. 9.31 crores and dividend tax Rs. 1.31 crores, pay out ratio works out to75.9% (last year 68.8%).

B) Balance Sheet

Company’s networth on 31st March 2006 comprised of equity capital of Rs.12.42 crores (last year Rs. 4.14 crores) and reservesof Rs. 48.59 crores (last year Rs. 53.50 crores). During the year, the Company had allotted Bonus Share in the ratio of 2:1 bycapitalisation of reserves to the tune of Rs. 8.28 crores. 83% of the paid up equity capital of Rs. 12.42 crores comprises ofshares issued by way of bonus.


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Gross Block and Net Block of assets on 31st March, 2006 stood at Rs. 66.73 crores (last year Rs.63.21 crores) andRs. 34.53 crores (last year Rs. 35.05 crores) respectively. These assets represent a capacity of 36000 engines on double shiftbasis.

Value of inventories at year-end was Rs. 9.38 crores (last year Rs. 9.84 crores).

Sundry Debtors at Rs. 40.48 crores (last year Rs. 46.40 crores) represent dues for supply of engines and components.

Year-end dues to creditors came down to Rs. 11.30 Crores (last year Rs. 17.35 Crores).

INTERNAL CONTROL SYSTEM AND ADEQUACY

There are established procedures for internal control on a Company-wide basis. Policies and Procedures have been laid downto provide reasonable assurances that assets are safeguarded from risks of unauthorised use / disposition and transactions arerecorded and reported with proprietary, accuracy and speed. These aspects are regularly reviewed during internal audit andstatutory audits. Finance and Accounts function is well staffed with experienced and qualified personnel. This team participatesin the preparation & monitoring of budgets. Internal Audit Reports to the top management are also reviewed by the AuditCommittee of the Board from time to time.

HUMAN RESOURCES

The Swaraj practice of a lean organisation manned by involved and motivated employees with team orientation has beenreplicated in Swaraj Engines. The atmosphere encourages learning and informal communication. Employee strength on31st March, 2006 stood at 310 (31st March, 2005 - 313).

TRACTOR INDUSTRY

Since the Company’s principal business is to supply engines to PTL, it would be appropriate to take note of developments in thetractor industry and their impact on PTL. Indian Tractor Industry today comprises of 14 players, 3 of whom are multi nationalcorporations. Given the size of farm holdings and geo-climatic conditions, 31 to 40 HP segment is the largest one, accountingfor around 49% of total sales while below 30 HP segment represents some 19% of total sales. Balance 32% comes from the+40 HP range.

After the de-growth phase which lasted nearly 4 years from September 1999, tractor industry volumes started growing againfrom October 2003 onwards. Overcoming subsequent monsoon hiccups and supported by excise exemption for tractors plusimproved flow of credit to the farm sector, Industry as a whole has recovered and grown to 291000 tractors in 2005-06 from thelevel of 171000 registered in 2002-03.

COMMERCIAL VEHICLES

On the back of Industrial growth, road construction activity and increased availability of softer retail credit, India’s commercialvehicle industry has been on a growth curve in the last 3-4 years. In the 5-10 T GVW range where SML operates, industryvolumes for 2005-06 at 97450 vehicles with SML sales reaching 11887 for a market share of 12%.

PROSPECTS

Long term prospects of both tractor and commercial vehicle industry are rated good. Initiatives taken by recent Governmentstowards addressing major needs of the farm sector such as water, credit, marketing and technology, the massive investmentsplanned for urban and rural infrastructure including roads, ports, power etc., coupled with on going growth trends in industry,global trade and tourism plus regulatory changes are expected to drive future demand in both these sectors. As an OEMsupplier to PTL and SML, SEL’s own business prospects based on the above factors appear to be founded on a sustainable basis.

RISKS

As a component supplier to PTL & SML, SEL would be directly affected by factors impacting tractor industry and commercialvehicle industry. These would include issues like the rain-dependant nature of our agriculture, Government policy on procurement,credit availability, auto regulations, price trends in diesel, steel etc.

CAUTIONARY STATEMENT

Statement in the Management Discussion and Analysis Report describing company’s objectives, projections, estimates andexpectations may constitute “forward looking statements” with in the meaning of applicable laws and regulations. Actual resultsmight differ materially from those either expressed or implied.


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CORPORATE GOVERNANCE REPORT1. Company’s philosophy on Code of Governance

Swaraj Engines Ltd. (SEL) has been practicing the principles of good corporate governance, disclosure and transparencyright from its incorporation. It has been a core belief and practice with the Company to consider itself the custodian andtrustee of all the constituencies of our business – customers, business associates, shareholders and society. SEL hassought and will continue to seek corporate excellence and profits through ethics, passion and perseverance.

2. Board of Directors

The Company’s Board currently comprises of 10 Directors of which the Managing Director is the only Whole-time Director.

The Non-Executive Directors bring wide ranging experience and independent judgement to the Board’s deliberations and decisions.

The Board meets at regular intervals and in addition to review of operations, formulates corporate policies and sets upgoals. The Board has constituted following committees viz;

- Audit Committee- Shareholder / Investor Relations Committee- Nomination / Remuneration Committee

None of the Directors on the Board is a Member on more than 10 Committees and Chairman of more than 5 Committees (asspecified in Clause 49), across all the companies in which he is a Director.The information on Composition of the Board, Category of Directors, Attendance at Board meetings held during the yearand at the last Annual General Meeting, Directorships in other public companies and committees of other public companiesof which the Director is Member / Chairman is as under:-

Name of the Director Category Financial Year Attendance Number of Committee2005-06 at the Directorships Position held in

last AGM in other public other companies#+

Board Board companiesMeetings Meetings incorporated Chairman Member

held^ attended in India#

Present Directors

Shri Atul C. Kirloskar * Non Executive 4 3 Yes 4 3 Nil

Shri Gautam Kulkarni * Non Executive 4 1 No 2 Nil 2

Shri D.R.Swar Non Executive 4 2 No 1 Nil Nil

Dr. T.N.Kapoor Independent 4 4 Yes 6 4 4Non Executive

Shri G.P.Gupta Independent 4 4 Yes 12 3 6Non Executive

Shri Donald Peck Independent 4 3 No 7 1 NilNon Executive

Shri S.C.Bhargava Independent - - N.A. 13 2 Nil(co-opted on 25.01.2006) Non Executive

Shri P.Sivaram Non Executive - - N.A. 2 Nil 2(co-opted on 31.05.2006)

Shri A.M.Sawhney Non Executive - - N.A. 2 Nil 1(co-opted on 31.05.2006)

Shri G.S.Rihal Executive 4 4 Yes Nil Nil Nil(Managing Director)


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Name of the Director Category Financial Year Attendance Number of Committee2005-06 at the Directorships Position held in

last AGM in other public other companies#+

Board Board companiesMeetings Meetings incorporated Chairman Member

held^ attended in India#

Ex-Directors

Shri Y.P.Mahajan Chairman 4 4 Yes N.A. N.A. N.A.(ceased w.e.f. 31.05.2006) Non Executive

Shri S.K.Tuteja Independent 4 4 Yes N.A. N.A. N.A.(ceased w.e.f. 19.06.2006) Non Executive

* Deemed to be promoter within the meaning of SEBI (Substantial Acquisition of Shares & Takeovers) Regulation, 1997.^ Indicates the Board meetings held during the tenure of Director(s).# Excluding private, foreign and companies registered under Section 25 of the Companies Act, 1956.+ Represents Chairmanships / Memberships of Audit Committee and Shareholders’ / Investors’ Grievance Committee.

During financial year 2005-06, 4 Board Meetings were held on 17th June, 2005, 18th July, 2005, 17th October, 2005and 25th January, 2006.

3. Audit Committee

Terms of Reference

The role, terms of reference and the authority and powers of this Committee are in conformity with the requirements of theCompanies Act, 1956 and the Listing Agreements. The essential functions of the Audit Committee include review ofsystems and procedures, overseeing the functioning of internal audit, the effectiveness of controls and regulatorycompliances. It also reviews Company’s financial reporting process, disclosure of financial information, observations ofauditors and recommends the appointment of statutory auditors, their fees and reviews with management quarterly /annual financial statements before submission to the Board.

Composition and Attendance

During the financial year under review, the Audit Committee comprised of S/Shri S.K.Tuteja, Chairman, G.P.Gupta,Dr. T.N.Kapoor and S.C.Bhargava, all being independent Directors with vast experience and knowledge of corporateaffairs & finance.

As and when necessary, representatives of Statutory Auditors, Internal Auditors, Cost Auditors and senior functionariesof the Company are called to the meeting. The Company Secretary acts as the Secretary of the Committee.

During the year ended 31st March, 2006, 4 meetings of Audit Committee of the Board were held on 17th June, 2005,18th July, 2005, 17th October, 2005, and 25th January, 2006.

Attendance record of the members of the Audit Committee is as under:

Name of the Member Director No. of Meetings Held * No. of Meetings attended

Shri S.K.Tuteja, Chairman 4 4

Shri G.P.Gupta 4 4

Dr. T.N. Kapoor 4 4

Shri S.C. Bhargava – –

* indicates the meetings held during the tenure of Member(s)


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4. Shareholder / Investor Relations Committee

Terms of Reference

The Committee meets at frequent intervals, to approve inter-alia, transfer / transmission of shares, issue of duplicateshare certificates and review status of investors’ grievances and the functioning of the Share Department to rendereffective and quality services to investors.

Composition

During the financial year under review, the Shareholder / Investor Relations Committee comprised of following Directorsas members:

– Dr. T.N.Kapoor, Chairman

– Shri S.K.Tuteja

– Shri Y.P.Mahajan

– Shri G.S.Rihal

Shri M.S.Grewal, Company Secretary is the Compliance Officer of the Company.

The Company has not received any Shareholders’ complaints from Stock Exchanges / SEBI / Department of CompanyAffairs / Registrar of Companies. No requests for share transfers are pending except those that are disputed or sub-judice.

During the year ended 31st March, 2006, 11 meetings of Shareholder / Investor Relations Committee were held.

5. Nomination / Remuneration Committee

Terms of Reference

This Board Committee is vested with the responsibility to review, assess and recommend to the Board the appointmentof Executive and Non-Executive Directors and the compensation package for the Wholetime Director(s) and the feespayable to other members of the Board besides framing guidelines for the grant of stock options to employees.

Composition

During the financial year under review, the Nomination / Remuneration Committee comprised of S/Shri S.K.Tuteja, Chairman,Y.P.Mahajan and Atul C. Kirloskar, all being Non-Executive Directors.

2 (Two) meetings of this Committee were held during the year ended 31st March, 2006.

Remuneration of Directors

Remuneration paid to the Executive Director(s) is decided by the Board of Directors on the recommendation of NominationRemuneration Committee. Non-Executive Directors are paid sitting fee for attending the meetings of the Board of Directorsand committees thereof within the prescribed limits as decided by the Board.

Following are the details of Directors’ remuneration for 2005-06;

Executive – Managing Director (Rs.)

Name of Salary Commission Other Allownces, Stock Total ServiceDirector (Basic & Perquisites and Contribution Option Contract

DA) to Provident Fund (Tenure)

G.S.Rihal 14,74,999 8,23,333 10,56,071 Nil 33,54,403 Upto 20.11.09


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Non-Executive Directors

Name of Director Sitting Fees Commission(Rs.) (Rs.)

Shri S.K.Tuteja 1,50,000 Nil

Dr. T.N.Kapoor 1,95,000 Nil

Shri G.P.Gupta 1,20,000 Nil

Shareholding of Non-Executive Directors

Following Non-Executive Directors are holding shares in the Company.

Name of Director No. ofShares Held

Shri Atul C. Kirloskar 600

Shri P.Sivaram 60

Shri A.M.Sawhney 600

6. General Body Meetings

Details of last three Annual General Meetings of the Company are given below:

Financial Year Date Time Venue

2002-03 30th September, 2003 4.00 P.M. Swaraj Engines Limited, Plot no. 2,Industrial Phase-IX, S.A.S. Nagar

2003-04 28th August, 2004 9.30 A.M. Swaraj Engines Limited, Plot no. 2,Industrial Phase-IX, S.A.S. Nagar

2004-05 18th July, 2005 11.00 A.M. Swaraj Engines Limited, Plot no. 2,Industrial Phase-IX, S.A.S. Nagar

Following Special Resolutions were taken up in the last three AGMs, and were passed with requisite majority.

2002-03

Delisting of Company’s equity shares from the Stock Exchanges at Ludhiana, Delhi and Ahmedabad.

2003-04

Nil

2004-05

Amendment in Company’s Articles of Association to increase Authorised Share Capital of the Company.

Pursuant to the provisions of Section 192A of the Companies Act, 1956, there was no matter required to be dealt by theCompany to be passed through postal ballot.

7. Code of Conduct

Company’s Board has laid down a well-defined Code of Conduct (the “Code”) to be followed by Board Members andemployees of the Company for ethical professional conduct. The Code is available on the website of the Company(www.swarajenterprise.com). All the Directors and senior management personnel have affirmed compliance with theCode as approved and adopted by the Board of Directors.


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8. Disclosures

a) The Company has not entered into any transaction of material nature with the promoters, the Directors or the managementthat may have any potential conflict with the interest of the Company. The Company has no subsidiary. Details ofrelated parties and transactions with them are furnished under para 5 of Schedule K of the Annual Accounts.

b) There has neither been any non-compliance of any legal provision of applicable law, nor any penalty, strictureimposed by the Stock Exchanges or SEBI or any other authorities, on any matters related to capital market duringthe last three years.

c) The Company has complied with the mandatory requirements of the Code of Corporate Governance as stipulatedunder clause 49 of the listing agreement with the Stock Exchanges. The Company has also complied with therequirements of amended Clause 49 after it came into force.

d) Adoption of non-mandatory requirements

i) The BoardThe Company does not maintain the office of the non-executive Chairman.No specific tenure has been specified for the Independent Directors.

ii) Remuneration CommitteeThe Company has constituted Nomination / Remuneration Committee to recommend to the Board thecompensation package for the Wholetime Director(s) and the fees payable to other members of the Boardbesides framing guidelines for the grant of stock options to employees.

iii) Shareholder RightsCompany regularly publishes its quarterly results in the leading national / regional newspapers. These resultsare also available on Company’s website www.swarajenterprise.com and at SEBI websitewww.sebiedifar.nic.in. A half-yearly declaration of financial performance including summary of significantevents is presently not being sent to each household of shareholders.

iv) Audit QualificationsFor the financial year under review, there is no audit qualification in Company’s financial statements. TheCompany continues to adopt best practices to ensure regime of unqualified financial statements.

v) Training of Board Members / Mechanism for evaluating non-executive Board MembersAll Non-executive Directors are given presentations by Wholetime Director from time to time for an overview ofCompany operations. The Company’s Board of Directors consists of professionals with expertise in theirrespective fields and industry. They endeavour to keep themselves updated with the trends in economy andchanges in the legislation.

vi) Whistle Blower PolicyCompany encourages employees and business associates to raise their concerns relating to any unethicalbusiness practice at work place with protection against victimisation.

9. Means of Communication

a) In compliance with the requirements of Listing Agreement, the Company regularly intimates un-audited as well asaudited financial results to the Stock Exchanges immediately after they are taken on record by the Board. Thesefinancial results are normally published in the leading financial papers and other national / regional newspapers andare also displayed on the website of the Company www.swarajenterprise.com. Moreover, pursuant to Clause 51of the Listing Agreement, financial results and shareholding pattern are also available on SEBI web-sitewww.sebiedifar.nic.in. Results are not sent individually to the shareholders;

b) The official news releases are displayed on the Company’s website;

c) During the year ended 31st March, 2006, no presentations were made to institutional investors or analysts;

d) Management Discussion and Analysis Report forms part of the Directors’ Report.

10. General Shareholders’ Information

Covered under separate section in this Annual Report.


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AUDITORS’ CERTIFICATE ON COMPLIANCE WITH THE CONDITIONS OF CORPORATEGOVERNANCE UNDER CLAUSE 49 OF THE LISTING AGREEMENT(S)

To the Members of Swaraj Engines Limited

1. We have reviewed the implementation of Corporate Governance procedures by Swaraj Engines Limited (the Company) forthe year ended 31st March, 2006 with relevant records and documents maintained by the Company, furnished to us forour review.

2. The compliance of conditions of Corporate Governance is the responsibility of the Management. Our examination waslimited to procedures and implementation thereof, adopted by the Company for ensuring the compliance of the conditionsof Corporate Governance. It is neither an audit nor an expression of opinion on the financial statements of the Company.

We further state that such compliance is neither an assurance as to the future viability of the Company nor the efficiencyor effectiveness with which the Management has conducted the affairs of the Company.

3. On the basis of our review and according to the information and explanations given to us, the conditions of CorporateGovernance as stipulated in Clause 49 of the listing agreement(s) with the stock exchange(s) have been complied with inall material respect by the Company and that no investor grievance(s) is/are pending for a period exceeding one monthagainst the Company as per the records maintained by the Company.

For DAVINDER S. JAAJ & CO.Chartered Accountants

Place : Chandigarh SUMEET SINGH DHIRDate : 4th August, 2006 Partner


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AUDITORS’ REPORTTo the Members of Swaraj Engines Limited

We have examined the attached Balance Sheet of Swaraj Engines Limited as at March 31, 2006, the annexed Profit and LossAccount and the Cash Flow Statement for the Year Ended on that date, which are in agreement with the books of account.These financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion onthese financial statements based on our audit.

We have conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any materialmis-statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimates made by themanagement, as well evaluating the overall financial statement presentation. We believe that our audit provides a reasonablebasis for our opinion.

1. In our opinion and to the best of our information and according to the explanations given to us, the said accounts togetherwith the notes thereon and attached thereto and the Statement on Significant Accounting policies, given in the prescribedmanner the information required by the Companies Act, 1956 of India (the ‘Act’) and also give a true and fair view inconformity with the accounting principles generally accepted in India :–

a. in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2006;

b. in the case of the Profit and Loss Account, of the Profit for the year ended on that date; and

c. in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.

2. We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary forthe purpose of our audit.

3. In our opinion, proper books of account have been kept by the Company as required by law so far as appears from ourexamination of these books and the aforementioned Balance Sheet, Profit and Loss Account and Cash Flow Statementare in agreement therewith.

4. In our opinion these accounts have been prepared in compliance with the applicable accounting standards referred to inSection 211 (3C) of the Act.

5. On the basis of written representations received from the Directors, as on 31st March, 2006 and taken on record by theBoard of Directors, we report that none of the directors is disqualified as on 31st March, 2006 from being appointed as adirector in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956.

As required by the Companies Auditors’ Report Order, 2003 issued by the Central Government of India in terms of Section227 (4A) of the Act and on basis of such checks as we considered appropriate and according to the information andexplanations given to us, we further report that:

(i) Regarding Fixed Assets:

a. The Company has maintained proper records to show full particulars, including quantitative details and situationof Fixed Assets.

b. During the year verification of the Fixed Assets was carried out. To the best of our knowledge no materialdiscrepancies have been noticed on verification.

c. Moreover, no substantial part of the Fixed Assets was disposed off during the year.

(ii) Regarding Inventory Controls:

a. The stocks of finished goods, stores, spare parts and raw materials of the Company in its possession havebeen physically verified by the management at reasonable period. Stock-in-transit as on 31st March 2006 hasbeen verified by the management on subsequent receipt of the goods.

b. In our opinion, the procedures of physical verification of stocks followed by the management were reasonableand adequate in relation to the size of the Company and nature of its business.

c. The Company is maintaining proper records for inventory and discrepancies between the physical stocks andthe book stocks, which have been properly dealt with in the books of account, were not material.


25

(iii) Company neither took nor granted any loan, secured or unsecured to / from companies, firms or other partiescovered in the register maintained under Section 301 of the Act.

(iv) In our opinion, there is an adequate internal control procedure commensurate with the size of the Company andnature of business, for purchase and sale of stores, raw materials including components, plant and machinery,equipment and similar assets.

(v) On the basis of documents produced before us, the Company has not entered in any transactions required to berecorded in register mentioned under section 301 of the Act.

(vi) The Company has not accepted any deposits from the Public.

(vii) In our opinion, the Company’s present internal audit system is commensurate with its size and nature of business.

(viii) On the basis of the records produced, we are of the opinion that, prima facie, the cost records and accountsprescribed by the Central Government of India, under Section 209 (1) (d) of the Act, have been maintained. However,we are not required to and have not carried out any detailed examination of such accounts and records.

(ix) Regarding Statutory Dues:

a) The Company has been regular during the year in depositing undisputed dues with Provident Fund, Employees’State Insurance, Income Tax, Sales Tax, Excise Duty and other statutory dues with the appropriate authorities.

b) According to the information given to us, there were no disputed unpaid dues with Sales Tax, Income Tax,Custom Tax, Wealth Tax. However in case of Excise Duty/Cess there is a disputed unpaid amount ofRs. 2.06 Lacs pending before Commissioner (Appeals).

(x) The Company neither has accumulated losses at the end of the financial year nor any cash losses for this financialyear as well as for financial year immediately preceding financial year.

(xi) The Company has not defaulted in repayment of dues to any financial institution or banks.

(xii) To the best of our knowledge and information provided to us, the Company has not granted loans and advances onthe basis of security by way of pledge of shares, debenture and other securities.

(xiii) The Company is not a Chit fund, Nidhi or Mutual benefit society. Hence the requirements of item (xiii) of paragraph4 of the order are not applicable to the Company.

(xiv) Company has no transactions regarding contracts in shares, securities, debentures or other investments.

(xv) On the basis of records produced before us, the Company has not given any guarantee for loans taken by othersfrom bank or financial institutions.

(xvi) The Company has not taken any long-term loans.

(xvii) According to the Cash Flow Statement and other records examined by us and explanations given to us, funds raisedon short term basis have, prima facie, not been used for long term investment and vice-versa.

(xviii)On the basis of information provided to us, the Company has not made any preferential allotment during the year.

(xix) The Company has not issued any secured debentures. Hence the requirement of the clause (xix) of paragraph 4 ofthe Order is not applicable to the Company.

(xx) No money was raised by the Company through Public Issue during the year.

(xxi) To the best of our knowledge, no fraud was noticed or reported on or by the Company.

For DAVINDER S. JAAJ & CO.Chartered Accountants

Place : Chandigarh SUMEET SINGH DHIRDate : 31st May, 2006 Partner


26

BALANCE SHEET AS AT 31ST MARCH, 2006 (Rs. in lacs)

Schedule 2006 2005

SOURCES OF FUNDS

Shareholders’ FundsCapital A 1241.98 413.99Reserves and Surplus B 4858.75 6100.73 5350.22 5764.21

Loan FundsSecured Loans C – 141.40Unsecured Loans – – – 141.40

Deferred Tax Liability D 628.27 674.84

6729.00 6580.45

APPLICATION OF FUNDS

Fixed Assets EGross Block 6672.83 6320.60Less : Depreciation 3219.43 2815.37

Net Block 3453.40 3505.23Capital Work-in-Progress 52.57 3505.97 87.26 3592.49

Current Assets, Loans & Advances FInventories 938.01 984.50Sundry Debtors 4047.82 4639.51Cash and Bank Balances 368.11 59.06Loans and Advances 419.56 313.43

5773.50 5996.50

Less :Current Liabilities and Provisions G 2550.47 3008.54

Net Current Assets 3223.03 2987.96

6729.00 6580.45Notes on Accounts K

The Schedules referred to above form an integral part of the Balance Sheet in our report of even date


For DAVINDER S. JAAJ & CO. D.R. SWAR S.K. TUTEJAChartered Accountants Director Chairman

SUMEET SINGH DHIR M.S. GREWAL P. SIVARAM G.S. RIHALPartner Company Secretary Director Managing Director

Chandigarh, 31st May, 2006 Asron, 31st May, 2006


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PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2006 (Rs. in lacs)

Schedule 2006 2005

INCOMERevenue from Operations (Gross) 14841.60 14307.48Less : Excise Duty 2023.78 1955.59

Revenue from Operations (Net) 12817.82 12351.89

EXPENDITUREManufacturing & Other Expenses H 10236.47 9579.13Finance Charges J 13.65 14.72Depreciation 426.44 10676.56 396.26 9990.11

Profit before Tax 2141.26 2361.78Provision for Tax

Current Tax 780.00 890.00Deferred Tax (46.57) (71.32)Fringe Benefit Tax 9.18 742.61 – 818.68

Profit after Tax 1398.65 1543.10

APPROPRIATIONSProposed Dividend 931.49 931.49Dividend Tax and Surcharge (Current Year) 130.64 130.64Dividend Tax and Surcharge (Previous Year) – 1.59Transfer to General Reserve 200.00 300.00Profit carried to Balance Sheet 136.52 179.38

1398.65 1543.10

Earning per Share (Rs.) K(7)Basic / Diluted 11.26 12.42

Nominal Value (Rs.) 10.00 10.00

The Schedules referred to above form an integral part of the Profit and Loss Account in our report of even date






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SCHEDULE A (Rs. in lacs)

2006 2005

SHARE CAPITAL

Authorised2,50,00,000 (2005 – 1,00,00,000) Equity Shares of Rs. 10/- each 2500.00 1000.00

Issued, Subscribed & Paid-Up1,24,19,820 (2005 – 41,39,940) Equity Shares of Rs. 10/- each fully paid up 1241.98 413.99

Note : Paid up capital includes 1,03,49,850 (2005 – 20,69,970) Equity Shares allotted as fully paid bonus shares by capitalisationof General Reserve.

SCHEDULE B (Rs. in lacs)

2006 2005

RESERVES AND SURPLUS

Capital ReserveBrought Forward 18.71 18.71

General ReserveBrought Forward 4424.75 4124.75Less : Capitalised by issue of Bonus Shares 827.99 –Add : Transferred from Profit and Loss Account 200.00 3796.76 300.00 4424.75

SurplusAmount Brought Forward 906.76 727.38Add : Transferred from Profit and Loss Account 136.52 1043.28 179.38 906.76

4858.75 5350.22

SCHEDULE C (Rs. in lacs)

2006 2005

SECURED LOANSLoans from Banks

On Cash Credit Accounts – 141.40

– 141.40

Note : Cash Credit from bank is secured by way of hypothecation of stocks, stores & books debts.It is further secured by way of mortgage of all the Company’s immovable properties.


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SCHEDULE D (Rs. in lacs)

2006 2005

DEFERRED TAX LIABILITY(Refer Note 1 (g) & 8 on Schedule K)- At the beginning of the year 674.84 746.16- Adjustment during the year (46.57) 628.27 (71.32) 674.84

628.27 674.84

SCHEDULE E

FIXED ASSETS (Rs. in lacs)

Particulars Gross Block Depreciation Net Block

As at Additions Ded/Adj. As at Upto As at As at31.03.2005 31.03.2006 31.03.2006 31.03.2006 31.03.2005

Land 50.68 – – 50.68 – 50.68 50.68Building 842.30 – – 842.30 235.32 606.98 632.28Plant & Machinery 5289.93 377.82 20.11 5647.64 2887.59 2760.05 2773.26Furniture, Fixtures &Other Equipments 78.40 0.91 – 79.31 63.71 15.60 20.82Vehicles 59.29 – 6.39 52.90 32.81 20.09 28.19

Grand Total 6320.60 378.73 26.50 6672.83 3219.43 3453.40 3505.23

Capital Work-in-Progress* 52.57 87.26

3505.97 3592.49Previous Year 5995.62 346.08 21.10 6320.60 2815.37

31.03.2006 31.03.2005

* Capital Work-in-Progress includes :– Capital Advances 47.55 87.26– Capital Spares 5.02 –

52.57 87.26


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SCHEDULE F (Rs. in lacs)

2006 2005

CURRENT ASSETS, LOANS & ADVANCES

A. CURRENT ASSETS

I. Inventories (refer Note 1(c) Schedule K)a) Stores & Spare Parts 89.68 105.30b) Loose Tools 162.99 179.77c) Raw Material & Components 345.24 477.27d) Goods-in-Transit 290.62 150.98e) Work-in-Progress 37.73 62.66f) Finished Goods 11.75 938.01 8.52 984.50

II. Sundry Debtors(Unsecured-Considered Good)Debts Outstanding for a periodexceeding six months – –Other Debts 4047.82 4047.82 4639.51 4639.51

III. Cash and Bank BalancesCash in Hand 6.83 4.88Balance with Scheduled Banks– Cash Credit Account 291.32 –– Current Accounts 26.19 13.18– Unpaid/Unclaimed Dividend Accounts 43.77 368.11 41.00 59.06

B. LOANS & ADVANCES(Unsecured-Considered Good)Advances recoverable in cash orin kind for value to be received 163.07 112.31Security Deposits 26.27 26.27Balance on Current Accounts withExcise Authorities 55.67 87.59Income & Wealth Tax (Net of Provisions) 174.55 419.56 87.26 313.43

5773.50 5996.50

Note : Inventories are as certified by the Management.


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SCHEDULE G (Rs. in lacs)

2006 2005

CURRENT LIABILITIES & PROVISIONS

Current LiabilitiesSundry Creditors– Due to Small Scale Industrial Undertakings* 313.14 422.04– Others 816.39 1313.42Other Liabilities 299.44 153.85Dividends pending encashment 43.77 41.00

ProvisionsProposed Dividend 931.49 931.49Corporate Tax on Proposed Dividend 130.64 130.64Others 15.60 16.10

2550.47 3008.54

*Note : The amount due to Small Scale Industrial Undertakings is compiled on the basis of information available with theCompany. List as prescribed is enclosed.

SCHEDULE H (Rs. in lacs)

2006 2005

MANUFACTURING & OTHER EXPENSES

Consumption of Raw Materials, Componentsand Spares

Opening Stock 477.27 458.78Add : Purchases 8589.41 9066.68 8309.38 8768.16

Less : Closing Stock 345.24 477.27Other Jobs 0.75 345.99 8.78 486.05

8720.69 8282.11Accretion/Decretion of Stock ofFinished Products & Work-in-Progress

Opening Stock 71.18 43.85Less : Closing Stock 49.48 71.18(Increase)/Decrease 21.70 (27.33)

Operating & Administrative Expenses 1494.08 1324.35(As per Schedule I)

10236.47 9579.13


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SCHEDULE I (Rs. in lacs)

2006 2005

OPERATING AND ADMINISTRATIVE EXPENSES

Salary, Wages & Bonus 662.27 599.24Contribution to Provident & Other Funds 64.78 58.78Workmen & Staff Welfare 59.21 58.53Consumption of Stores & Spare Parts 273.22 262.27Repairs to Machinery 79.56 61.66Repairs to Building 5.76 2.76Other Repairs 3.06 2.69Electricity & Water Charges 118.04 115.49Rates & Taxes 9.02 0.39Insurance 12.45 12.27Printing, Stationery, Postage & Telephone 13.66 16.03Travelling & Conveyance 52.64 55.17[includes Rs. 1.21 Lacs (2005 – Rs. 1.72 Lacs) for Directors]Royalty 75.76 –Other Marketing Expenses 12.41 17.65Auditors’ Remuneration 2.04 2.04Miscellaneous Expenses 50.20 59.38

1494.08 1324.35

SCHEDULE J (Rs. in lacs)

2006 2005

FINANCE CHARGES

Interest on Loans 118.48 114.64Bank & other Financial Charges 1.95 120.43 1.22 115.86

Less : Interest received on Loans 106.78 101.14[Tax deducted at source Rs. 10.31 Lacs (2005 - Rs. 11.60 lacs)]

13.65 14.72


33

SCHEDULE K

NOTES FORMING PART OF THE ACCOUNTS

1. Accounting Policies

a) Accounting Convention

These accounts are prepared under the historical cost convention and on the basis of going concern. All expensesand income to the extent considered payable and receivable respectively, unless stated otherwise, have beenaccounted for on mercantile basis.

b) Fixed Assets and Depreciation

i) All fixed assets are carried at cost of construction or acquisition less depreciation. All expenses includingfinancing costs on borrowed funds upto the date the asset is ready for use and attributable to the constructionor acquisition of fixed assets are capitalised.

When an asset is scrapped, or otherwise disposed off, the cost and related depreciation are removed from thebooks of account and resultant profit (including capital profit) or loss, if any, is reflected in Profit and LossAccount.

ii) Depreciation on all the fixed assets is provided on Straight Line Method, pro-rata monthly rests, at the ratesprescribed in Schedule XIV of the Companies Act, 1956 except for fixed assets mentioned in para (iii) below.

iii) In the following cases, depreciation rates are higher than the rates prescribed in Schedule XIV of the CompaniesAct, 1956.

Nature of Assets Rates adopted in Accounts (%)

a) Electrical Installations 7.42b) Office Equipments 15.00c) Patterns, Blocks and Dies 25.00d) Vehicles 25.00e) Data Processing Equipments 30.00

iv) Assets individually costing up to Rs. 5000/- are depreciated at 100% in the year of purchase.

v) Capital spares are amortised in a systematic manner over the useful life of the asset to which it relates.

c) Inventories:

Raw Materials, Stores & Spares, Loose Tools, Goods-in-Transit and Work-in-Progress are valued at material costexcluding cenvat credit. Finished Goods are valued at cost or net realisable value, whichever is lower and includesExcise Duty payable. Cost of inventories includes appropriate portion of allocable overheads, wherever applicable,and is ascertained on monthly weighted average basis.

Excise Duty payable on finished goods is charged to Profit and Loss Account.

d) Foreign currency transactions are recorded at rates of exchange prevailing on the date of transaction. All exchangedifferences during the year are on account of raw material purchases. These are dealt with in the statement of profitand loss.

e) Retirement Benefits:

The Company contributes to a trust, which has taken Master Policy with the Life Insurance Corporation of India tocover its liability towards employees’ gratuity. The Company contributes to the appropriate authorities its share ofthe Members Provident Fund Account as per the Employees’ Provident Fund Act, 1952. Leave encashment liabilityhas been provided for on the basis of actuarial valuation as on 31st March, 2006.

f) Sales are recognised at the time of despatches to customers and include Excise Duty.

g) Taxes on Income

Current tax is the tax payable for the period determined as per Provisions of the Income Tax Act, 1961.


34

The provision for deferred tax has been made in accordance with the requirement of Accounting Standard – 22issued by the Institute of Chartered Accountants of India.

h) Accounting policies not specifically referred above are consistent with generally accepted accounting practices.

2. There are contingent liabilities in respect of :2006 2005

Rs. in lacs Rs. in lacsi) Sale Bills discounted – 907.05

ii) Estimated amount of contracts remaining to be executed onCapital Account and not provided for (net of advances) 272.31 414.39

iii) Excise matters in dispute in respect of which Company is in appeal 2.06 –

iv) Assessment of Income Tax is complete upto assessment year 2003-04, demand disputed in appeals being Rs.92.63Lacs (2005 - Rs.37.66 Lacs).

Pending decisions on these appeals and based on Company’s opinion, no additional liability is expected on theabove accounts.

3 While letters for confirmation of balance of sundry creditors, sundry debtors and material lying with vendors have beensent, only few responded. Rest are subject to confirmation.

4. Other liabilities in Schedule “G” includes Rs.1.61 lacs (2005 – Rs 1.61 lacs) on account of Share Application Moneypending refund.

5. Related party disclosures as required under Accounting Standard –18 are given below :

a) Names of related parties and description of relationships having transactions during the year :

i) Associate Companies : 1) Punjab Tractors Limited 2) Swaraj Mazda Limited3) Swaraj Automotives Limited 4) Kirloskar Oil Engines Limited

ii) Key Management Personnel : Shri G.S. Rihal - Managing Director

b) Volume of Transactions with related parties :

i) Associates 2006 2005Rs. in Lacs Rs. in Lacs

a. Purchase of Raw Materials and components 1695.11 2036.61b. Purchase of Fixed Assets 5.76 3.21c. Sale of Finished Goods 15430.91 14158.20d. Sale of Fixed Assets – 0.13e. Receiving of services 195.53 192.47f. Rendering of services 45.03 32.73g. Royalty Expenses 75.76 –h. Inter-Corporate Deposit received – 1000.00i. Inter-Corporate Deposit paid 1400.00 2960.00j. Interest paid – 8.77k. Interest income 46.25 55.45l. Dividend paid 470.93 313.95Aggregate balances outstanding as at the year end

- Receivables 4047.82 4639.51- Payables 47.79 113.65

ii) Key Management PersonnelRemuneration 33.54 20.69

Note : Details of remuneration to key management personnel are given in note 9.


35

6. Segment Reporting

Company’s business activities relate to diesel engines, diesel engine components & spare parts and fall within a singleprimary business segment. As such, no separate segment reporting is required under Accounting Standard–17, issued bythe Institute of Chartered Accountants of India.

7. Earnings Per Share (EPS)

Basic earnings are calculated by dividing the Net Profit after Taxation for the year, which is attributable to equity shareholders,by 1,24,19,820 being the weighted average numbers of equity shares outstanding during the year. In view of the BonusShares (2:1) allotted during the year, EPS for the financial year 2004-05 is restated on the basis of enhanced ShareCapital in accordance with Accounting Standard–20, issued by the Institute of Chartered Accountants of India. TheCompany has not issued any potential equity shares, and accordingly, the basic earnings per share and diluted earningsper share are the same.

8. In view of Accounting Standard – 22 ‘Accounting for Taxes on Income’ issued by the Institute of Chartered Accountantsof India, the Company has accounted for deferred tax as follows :

Amount (Rs. in lacs) Particulars Balance as Expense/ Balance as

at (Saving) during at01.04.2005 the year 31.03.2006

A) Deferred Tax LiabilitiesOn Depreciation 703.20 (43.84) 659.36

B) Deferred Tax AssetsOn provision for Leave Encashment (28.36) (2.73) (31.09)

Net Deferred Tax Liabilities (A-B) 674.84 (46.57) 628.27

The tax impact for the above purpose has been arrived at by applying the prevailing tax rate as on Balance Sheet dateunder the Income Tax Act, 1961.Gross reduction in Net Deferred Tax Liability amounting Rs 46.57 Lacs has been creditedto Profit and Loss Account.

9. Director’s Emoluments : 2006 2005Rs. in lacs Rs. in lacs

i) Salary 22.58 18.49ii) Commission 8.23 –iii) Contribution to Provident Fund 1.80 1.18iv) Other Perquisites 0.93 1.02

33.54 20.69

2006 2005Rs. in lacs Rs. in lacs

v) Statement showing the computation of Net Profit in accordancewith Section198(1) of the Companies Act , 1956:Profit Before Tax 2141.26 N.A.Add : Director’s emoluments including sitting fee 38.19

2179.45Less: Profit on disposal of Fixed Assets 0.37Net Profit in accordance with section 198(1)/349 2179.08Maximum Commission to whole time Director@ 1% for the appropriate period 21.79Restricted to maximum of 100% of Salary 8.23

Note : The above represents emoluments package as approved by the Board of Directors for whole time Director,subject to the approval of the Members at the forthcoming Annual General Meeting.


36

10. Auditors’ Remuneration* : 2006 2005Statutory Auditor’s Rs. in lacs Rs. in lacs

Audit Fee 1.00 1.00Tax Audit Fee 0.25 0.25Other Services 0.32 0.30Out of Pocket Expenses Reimbursed 0.07 0.09

Cost Auditor’s - Audit Fee 0.40 0.40

2.04 2.04

* excluding Service Tax

11. Particulars in respect of goods manufactured:

Class of Goods Unit of Qty. Licensed Capacity Installed Capacity Actual Production2006 2005 2006 2005 2006 2005

Engines Nos. N.A. N.A. 36,000 36,000 17,638 18,231

Note: 1. Installed capacity as Certified by the Management and not verified by the Auditors being a technical matter. 2. Actual Production excludes re-assembly of 47 Engines received back during the year as Sales Return.

12. Particulars in respect of Revenue from Operations (Gross) :2006 2005

Class of Goods Unit of Qty Qty. Rs. in Lacs Qty. Rs. in Lacs

Engines Nos. 17,631 12191.40 18,225 11716.28Engine Components – – 2213.28 – 2229.68Spares & Others – – 436.92 – 361.52

14841.60 14307.4813. Particulars in respect of Finished Goods:

Class of Goods Unit of Qty. Opening Balance Closing BalanceQty. Rs. in lacs Qty. Rs. in lacs

i) Engines Nos. 9 4.39 16 9.26(3) (1.42) (9) (4.39)

ii) Engine Parts – 4.13 2.48(–) (4.13)

14. Analysis of Raw Materials consumed:2006 2005

Class of Goods Unit of Qty. Qty. Rs.in lacs Qty. Rs.in lacs

Crank Shaft Assy Nos. 17,672 813.30 18,383 847.15Crank Case Assy Nos. 17,680 710.60 18,357 732.33Flywheel Nos. 17,882 317.76 18,400 326.00Fuel Pump Assy Nos. 17,697 1150.11 18,364 1056.50Others (including components) 5728.92 5320.13

8720.69 8282.11Notes:i) It is not practicable to furnish quantitative information of all the components in view of large number of items varied in size

and nature.ii) The quantities and amounts of all the items in Analysis of Raw Materials consumed represents the issues during the year.

The figure of others (including components) is a balancing figure based on total consumption shown in Schedule “H” andincludes adjustments for excess/shortage/ damages found on physical verification.


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15. Value of imported and indigenous Raw Materials, Components, Stores and Spares etc. consumed and percentageof each in total consumption:

2006 2005%age Rs.in lacs %age Rs.in lacs

a) Raw Material & ComponentsImported 0.54 46.66 0.68 55.96Indigenous 99.46 8674.03 99.32 8226.15

8720.69 8282.11

b) Stores, Consumables, Spares & Loose Tools Imported – –

Indigenous 100.00 273.22 100.00 262.27

273.22 262.2716. Earnings in Foreign Exchange :

Export (FOB basis) – –

17. Value of Imports on CIF Basis:Raw Material & Components 43.06 45.24Stores & Spares – –Capital Goods 6.48 –

49.54 45.2418. Expenditure in Foreign Currency :

Travelling – –

19. Previous year figures have been regrouped, wherever necessary, so as to correspond with those of the current year.

INFORMATION RELATING TO SMALL SCALE INDUSTRIES

According to the information available, Company owes sum for more than thirty days to the following Small Scale Industrialundertakings as on March 31,2006 :

1 Atop Fasteners Pvt. Ltd.2 A.R. Industries3 Amarpal Industries4 Allena Auto Industries Ltd.5 Ahluwalia Industrial Corporation6 Agro Industries7 Auto Pump Engineers8 Atop Fastners Pvt . Ltd.(Mohali)9 Bhogal Industries10 Balwant Engg. Works11 Bhogal Engineers12 Bharat Iron & Brass Foundry13 Bharat Foundry14 Beacon Industries15 Biloree Cast (I) Pvt. Ltd.16 C.J. Engineers Corpn.17 Cooper Gaskets Pvt. Ltd.18 D.P. Auto Industries19 Dhamija Enterprises20 Daljit Industries21 Dattana International22 Essco Engineers

23 EXL Industries24 Fit-o-Fit Seals & Angles Pvt. Ltd.25 Friends Auto Industries26 Falcon Industrial Enterprises27 Grewal Enterprises28 Gobind Enterprises29 Grumann Enterprises30 Gutsy Engg. Pvt. Ltd.31 Hero Metal Cast Engineers32 Imperial Auto Industries33 Industrial Rubber Works34 Jay Enginerring35 Kapoor Steel Industries36 Kew Engineering Works37 Lonavala Engg. & Casting P. Ltd.38 Manoj Enterprises39 Micro Turners40 Making Ways Auto Inds.41 Musafir Brothers Industries42 Mahajan Industrial Corporation43 Metlonics Industries Pvt. Ltd.44 Narula Mechanical Works

45 Narindera Industrial Corporation46 Navketan Auto Industries47 Ohri Industries48 Paul & Paul Enterprises49 Paulco Fabricators50 Pee Cee Castings Pvt. Ltd.51 Puneet Enterprises52 Rajindera Engineering Works53 S.R. Engineers54 Spencer India55 Sandeep Industries56 Sartaj Industries57 Shivani Industries58 Shine Auto Pvt. Ltd.59 Slatch Engineers60 Techno Sabharwal61 Universal Filtration Company62 United Gears63 Walia Industrial Corporation64 Winkle Engineering Works65 Zeto Engineers & Fabricators


38

CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH, 2006 (Rs. in lacs)

2006 2005

A. CASH FLOW FROM OPERATING ACTIVITIES

Net Profit before Tax and Extraordinary Items 2141.26 2361.78

Adjustments for :

Depreciation 426.44 396.26

Loss/(Profit) on disposal of Fixed Assets 3.43 (15.14)

Dividend/Interest (Net) 13.65 14.72

Operating Profit Before Woking Capital Changes 2584.78 2757.62

Adjustments for :

Trade and Other Receivables 572.85 (412.03)

Inventories 186.13 (60.13)

Trade Payables (600.48) (266.84)

Cash Generated From Operations 2743.28 2018.62

Direct Taxes Paid (1007.11) (969.01)

Cash Flow Before Extraordinary Items 1736.17 1049.61

Extraordinary Items – –

Net Cash From Operating Activities 1736.17 1049.61

B. CASH FLOW FROM INVESTING ACTIVITIES

Purchase of Fixed Assets (inclusive of capital WIP) (344.04) (406.01)

Sale of Fixed Assets 0.69 16.29

Sale of Investments – –

Purchase of Investments – –

Interest Received 106.78 101.14

Net Cash Used in Investing Activities (236.57) (288.58)


39

This is the Cash Flow Statement referred to in our report of even date.





(Rs. in lacs)

2006 2005

C. CASH FLOW FROM FINANCING ACTIVITIES

Increase/(Decrease) in bank borrowings for working capital (141.40) (17.34)Dividend Paid (928.72) (628.33)Interest Paid (120.43) (115.86)

Net Cash Used in Financing Activities (1190.55) (761.53)

Net Increase/(Decrease) in Cash and Cash Equivalents 309.05 (0.50)

Opening Cash and Cash Equivalents (Note 1) 59.06 59.56

Closing Cash and Cash Equivalents (Note 1) 368.11 59.06

Note : 1. Includes unuseable cash of Rs. 43.77 Lacs (2005 – Rs. 41.00 lacs) on account of Dividend pending encashmentand Rs. 1.61 lacs (2005 – Rs. 1.61 lacs) as Share Application money, pending refund.

2. Previous year figures have been regrouped, wherever found necessary.


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BALANCE SHEET ABSTRACT AND COMPANY’S GENERAL BUSINESS PROFILE :

a) Registration details :

Registration No. 6473State PunjabState Code 16Balance Sheet Date 31st March, 2006

2006 2005Rs. in lacs Rs. in lacs

b) Capital Raised during the year :Public Issue Nil NilBonus Issue 827.99 NilRight Issue Nil NilPrivate Placement Nil Nil

c) Position of Mobilisation and Deployment of Funds :Total Liabilities 9279.47 9588.99Total Assets 9279.47 9588.99

Sources of FundsPaid up Capital 1241.98 413.99Reserves & Surplus 4858.75 5350.22Secured Loans – 141.40Unsecured Loans – –Deferred Tax Liability 628.27 674.84

6729.00 6580.45

Application of FundsNet Fixed Assets 3505.97 3592.49Net Current Assets 3223.03 2987.96Investments – –Misc. Expenditure – –Accumulated losses – –

6729.00 6580.45

d) Performance of Company :Total Income 14841.60 14307.48Total Expenditure 12700.34 11945.70Profit before Tax 2141.26 2361.78Profit after Tax 1398.65 1543.10Earning Per Share (Rs.) 11.26 12.42Dividend Rate 75% 225%

e) Generic Names of three Principal Products/Services of Company1. Item Code No. (ITC Code) 84.08

Product Description Internal CombustionDiesel Engine

2. Item Code No. (ITC Code) 84.09Product Description Diesel Engine Parts

Swaraj Engines Limited - Morningstar

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