Essar Energy

W13226
ESSAR ENERGY: INDIAN GAAP, U.S. GAAP OR IFRS? (A)
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INTRODUCTION
On April 16, 2007, the top leadership team of Essar Group (Essar) was meeting on the 21st floor of Essar
House overlooking the Mahalaxmi racecourse in Mumbai to consider some long-term financial issues.
The family-founded company had grown rapidly over the previous 10 years, to the point where some
subsidiaries would need to raise large amounts of capital in the next three years, possibly beyond the
resources of the Indian capital markets. The group’s chief financial officer (CFO) had to explain the
challenges to the team, and recommend solutions. Prospective investors would need up-to-date financial
information about the company in a form that they would understand and trust, since Indian GAAP
(generally accepted accounting principles) was not a universally accepted accounting framework and
reporting language. If Essar were to use the U.S. financial markets, it could prepare consolidated financial
statements under U.S. GAAP. Alternatively, since the Securities and Exchange Commission (SEC)
permitted non-U.S.-listed companies to use International Financial Reporting Standards (IFRS), the
globally accepted standards promulgated by the International Accounting Standards Board (IASB), it
could choose IFRS. However, at that time, Essar would also be required to prepare a reconciliation of its
IFRS statements to U.S. GAAP, although there had been discussions among standard-setters and
regulators that this reconciliation might not be required in the future. If Essar raised capital in London, it
would be required to use IFRS. Another consideration was that India was moving toward IFRS adoption
and discussions were taking place on whether and how to converge Indian GAAP with IFRS. Though no
definite time line had been set, perhaps Essar should just wait until India adopted IFRS.
THE ESSAR GROUP
The Essar Group was founded in 1969 by two entrepreneurial brothers, Shashi and Ravi Ruia, who began
operations with the construction of an outer breakwater in Chennai port. Essar moved quickly to
capitalize on emerging business opportunities, becoming India’s first private company to buy a tanker in
1976. The group also invested in a diverse shipping fleet and oil rigs when the Indian government opened
up the shipping and drilling businesses to private players in the 1980s. Then, in the 1990s, Essar began its
iron-making business by setting up India’s first gas-based sponge iron plant in Hazira, Gujarat. By 2007,
This document is authorized for use only in Prof. Ashutosh Dash's Financial Reporting / PGDMIB at Management Development Institute - Gurgaon from Oct 2023 to Dec 2023.
Page 2 9B13B014
Essar Group had become a diversified multinational conglomerate with highly qualified professionals in
leadership roles, operations in multiple countries, about 20,000 employees and revenues of around
US$4.5 billion1 for the financial year 2007/08. The group would eventually expand its operations to 25
countries with 75,000 employees. It was the leading player in steel, energy (oil, gas and power),
infrastructure (ports, projects and concessions) and services (shipping, telecom, realty and business
process outsourcing). A brief description of its activity in each sector is presented in Exhibit 1.
The companies in the group were held by an entity known as Essar Global Limited. The group’s vision
was “to be a respected global entrepreneur, through the power of positive action.”2 It was considered one
of the major uniting, driving and motivating forces for all of Essar Group’s entities. To achieve the vision,
management believed that the first step was to report financial statements in one language that was
understandable to all stakeholders and prospective investors around the world. Secondly, the group’s
holding company had planned both vertical and horizontal expansions in early 2007 to achieve a higher
growth trajectory in terms of both operations and wealth creation. It planned both organic growth and
acquisitions. For that, Essar would have to tap international equity and debt markets, which would require
it to adopt a single global reporting standard. This would also help the group to control its operations
across its diversified business entities. Over time, the group had positioned itself for growth in high-
potential markets, including India, North America, United Kingdom, Middle East, Singapore, Indonesia,
Philippines, Africa and Mauritius. In most of the locations, there were major manufacturing and service
business operations, and some had regional offices. Subsequently the group expanded its operations in
many other countries, including China, Australia and Argentina.
ESSAR ENERGY — OIL, GAS AND POWER
Essar Oil and Gas, one of the largest business segments in the group, had a global refining capacity of
over 750,000 bpsd (barrels per stream day) with refineries in India, the United Kingdom and Kenya. It
was an oil and gas company of international scale with a strong presence across the hydrocarbon value
chain from exploration and production to refining and oil retail. It had a diverse portfolio of 15 blocks3
and fields in the various fields of oil and gas exploration and production in India, Indonesia, Nigeria and
Vietnam. It had a portfolio of onshore and offshore oil and gas blocks in India, and it owned the largest
acreage of coal bed methane blocks in the country. There were over 1,149 Essar-branded oil retail outlets
in various parts of India. Its target was to reach 1,600 outlets in the near future.
Essar Power was one of India’s largest private sector electrical power producers, with 1,600 megawatts
(MW) of installed capacity, enough to supply 15 million average consumers in India with further
expansion plans to scale up generation to 3,900 MW per year in the short term. It was one of the first
private sector players in India to be granted a transmission and trading license. It had plans to build new
power plants that would expand its capacity to around seven times its present generating capacity.
Exhibits 2 and 3 show the Essar Oil and Essar Power financial statements prepared under Indian GAAP.
The combined growth plans of the oil, gas and power segments would need about $2.5 billion of
additional equity financing no later than early 2010. The Essar Group planned to consolidate the oil and
gas business with the electricity business to form a company called Essar Energy, and then to raise that
capital through an initial public offering (IPO).
1
All currencies are in US$ unless otherwise stated.
2
www.essar.com/section_level1.aspx?cont_id=vyEUtlZ3m98=, accessed October 22, 2012.
3
Blocks are areas of land or sea where a company has been granted the right to explore and extract energy sources, such
as oil, coal and gas.
Page 3 9B13B014
RAISING EQUITY CAPITAL
Essar saw three possibilities for raising the capital they needed. The first was the local Mumbai stock
market, where various subsidiaries of the group were already listed. The Mumbai market had experienced
almost explosive growth since economic regulation had been relaxed in 1991. Essar was a household
name with an excellent reputation.
In India, during 2005 and 2006, 50 and 73 companies respectively had offered IPOs on the national stock
exchange, of which more than half subsequently traded above their listing price.4 In 2006, Indian
companies raised $4.5 billion in IPOs and a further $9.6 billion in secondary offerings, compared to $2
billion in IPOs and $8.6 billion in secondary offerings the previous year.5 However, the Indian stock
market had been very volatile, and management was concerned that the supply of equity capital at a
reasonable cost would not be sufficient to meet their needs. Exhibit 4 provides information on the
volatility and volume of issues on the Mumbai Stock Exchange. A failed issue would have adverse
consequences for the company’s reputation.
The second possibility was Europe, specifically the London Stock Exchange (LSE). In 2005, $31 billion
of capital had been raised on the LSE through IPOs and a further $21 billion in secondary offerings;
almost double these figures ($56 billion in IPOs and $39 billion in secondary offerings) was raised in
2006.6 Exhibit 5 provides information about the LSE, which was no stranger to Indian listings. The first
was the electricity company, CESC, in 1979. By 2005, the LSE had 18 Indian companies listed with a
total market capitalization of $2.94 billion (₹127.7 billion, £1.53billion). In addition, there were nine
Indian companies with depository receipts traded on the Exchange. During 2004, two Indian companies,
ACC Ltd. and Amtek Motors, successfully raised funds in excess of $100 million when they issued
depository receipts on the Exchange.7
The LSE had fewer oil and gas listings than the New York Stock Exchange (NYSE), so it was possible
that there would be more interest in the planned Essar Energy IPO. Management also felt that its cost of
capital in London would be much lower than in Mumbai. They had estimated that P/E ratios in London
were 20 per cent to 25 per cent higher for energy stocks than in Mumbai. There was still a risk, though;
the planned size of the Essar IPO would immediately catapult it into the top 100 companies and,
therefore, into the illustrious, and very carefully scrutinized, group of firms comprising the FT100 index.
In its wake, this would raise global awareness of the brand image of the group and its leadership team;
however, it also meant that the listing entity and its subsidiaries would be under critical research and
review by the analyst community.
A third possibility was the New York Stock Exchange (NYSE), the largest in the world. In 2005,
investors had raised $187 billion of equity capital in New York, of which $56 billion was from IPOs; in
2006, the corresponding figures were $130 billion and $54 billion respectively.8 Indian companies had
performed well on the NYSE, and for most Indian conglomerates, this was the preferred location for their
4
Piyu Sen, “FY 2006 Was a Better Year For IPOs,” moneycontrol.com, www.moneycontrol.com/news/market-edge/fy-2006-
wasbetter-year-for-ipos_280018.html, accessed October 22, 2012.
5
“Investment Flows - New Capital Raised by Shares,” World Federation of Exchanges, www.world-
exchanges.org/statistics/annual/2006/investment-flows-new-capital-raised-shares, accessed November 10, 2012.
6
Investment Flows - New capital Raised by Shares,” World Federation of Exchanges, www.world-
7
“London Stock Exchange Markets Opened by Indian Finance Minister,” London Stock Exchange, Press Release,
www.londonstockexchange.com/about-the-exchange/media-relations/press-
releases/2005/indianfinanceopensthemarkets.htm, accessed October 17, 2012.
8
Investment Flows - New capital Raised by Shares,” World Federation of Exchanges, www.world-
Page 4 9B13B014
first international capital issue. Infosys had led the way in 1999, followed by a dozen more, including
such luminaries as ICICI Bank, Dr. Reddy’s, Infosys Technologies, Tata Motors, and Wipro. In addition,
in 2007, Indian ADRs9 on the NYSE were trading at an average of 5.1 per cent above the price of the
underlying stocks on the Mumbai exchange.10 If Essar Energy listed on the NYSE, it would be following
in sound footsteps.
However, Essar management had some concerns about New York. There were already many oil and gas
companies listed on the NYSE, so the addition of Essar Energy would not add much diversification.
Management wondered whether there would be an appetite among investors for more oil and gas stocks.
The listing requirements in New York were very stringent. On the one hand, meeting the requirements
would be expensive; on the other hand, meeting them also demonstrated to the markets that Essar could
be counted among the best global businesses.
In addition to historical financial information, prospective equity investors would look into various other
aspects of the company and the business for which the capital was raised. Prospective investors would be
concerned about various risk factors related to the group, each of its businesses, the industry’s overall
prospects and the regulatory environment in India. They would be keen to understand whether the
company could meet the timelines for principal events and its detailed plans for doing so. However,
probably the most important information for prospective investors was the company’s forecasted future
cash flows. Investors would need to ensure that they could evaluate performance in the future. For this,
they would need financial statements prepared using familiar accounting standards.
If Essar chose to raise capital outside of India, then it would have to prepare financial statements under
either U.S. GAAP or IFRS. Regardless of the choice of locale in which it raised capital, Essar would need
to continue using Indian GAAP for its accounting records and statements to meet the local Indian
regulatory requirements. U.S. GAAP or IFRS disclosure would be an additional requirement, not an
alternative.
If the IPO were in the United States, Essar could prepare statements under U.S. GAAP. Alternatively, the
company could provide Indian GAAP statements, but it would then be required to prepare a reconciliation
of those statements with U.S. GAAP. One concern with this approach was that U.S. investors would not
be familiar with Indian GAAP, which might affect their willingness to invest. The company could,
however, also prepare statements under IFRS, and reconcile those to U.S. GAAP. This reconciliation was
required of all foreign companies whose shares were listed on the NYSE. While this appeared to be a very
complicated approach, it might turn out to be simpler. The SEC had proposed a “roadmap” by which U.S.
GAAP would gradually converge toward IFRS. One of the proposed steps in that roadmap was the SEC’s
acceptance of statements from non-U.S. companies prepared under IFRS, without the need for this
reconciliation. This proposal’s implementation date was expected to be announced later that year. When
the proposal was implemented, Essar would then simply be able to file IFRS statements without
reconciliation.
If the IPO was in London, Essar would be required to prepare IFRS statements. If the capital was raised in
Mumbai, no change in its reporting would be required. Despite this, there was general agreement among
Essar’s senior management that, as an increasingly global company, Essar should report using accounting
standards that were accepted globally. This meant either IFRS or U.S. GAAP. Since Essar Energy would
9
An ADR is an American Depositary Receipt. Most non-U.S. companies used this indirect vehicle to trade their shares on
the NYSE, rather than the shares themselves.
10
“Indian ADRs on NYSE Euronext Trade at 10% Premium,” Business Standard, February 16, 2010, www.business-
standard.com/india/news/indian-adrsnyse-euronext-trade-at-10-premium/85894/on, accessed October 17, 2012.
Page 5 9B13B014
be such a large part of the group, it would make sense that whatever accounting standard Essar Energy
used, the same reporting standard would be adopted throughout the whole Essar Group.
U.S. GAAP
U.S. GAAP was considered “rules-based,” meaning that the standards prescribed exactly what the
preparer should do in just about every situation (in contrast to a principle-based approach that emphasized
how to decide what to do). The Financial Accounting Standards Board (FASB) and the regulator, the
SEC, frequently issued detailed accounting rules. Though it minimized confusion and the need to apply
professional judgment, these exhaustive rules resulted in a high level of detail and complexity. For many
years, the FASB and IASB had collaborated closely on standard-setting, so that any new standards that
were promulgated were essentially identical under IFRS and U.S. GAAP.
U.S. GAAP was very different from Indian accounting standards. The Institute of Chartered Accountants
of India (ICAI) had for several years developed accounting standards that were closer to the more
principles-based IFRS with a larger emphasis on substance over form.
U.S. GAAP stipulated more stringent accounting treatment than Indian GAAP, as well as higher
disclosure norms, e.g., for related party disclosures (Indian AS18), segment reporting (Indian AS17) and
cash flow statements (Indian AS3). There were also several economic transactions for which no standards
were issued by the ICAI. Some of the more important differences between Indian GAAP and U.S. GAAP
were:
 Under US GAAP, the current portion of long term debt was classified as a current liability, whereas
under Indian GAAP there was no such requirement. As a result, neither interest accrued on long term
debt nor the current portion of long term debt was a current liability under Indian GAAP.
 Equity issue costs: Under U.S. GAAP, capital issue expenses were required to be written off when
incurred against proceeds of the capital issue, whereas under Indian GAAP, capital issue expenses
could be amortized or written off against reserves.
 PPE valuation: Under Indian GAAP, an enterprise was permitted to revalue its assets to reflect an
increase in cost of replacement, which would also be reflected in a higher depreciation expense, and
the unrealized gain credited directly to a revaluation reserve (Guidance note 57). However, some
companies credited the gain through the profit and loss account, in order to increase profitability.
Managers had used this accounting treatment to mislead investors on many occasions. U.S. GAAP
did not allow revaluation of property, plant and equipment (PP&E), or investments, except under
specified circumstances.
 Financial instruments: U.S. GAAP provided detailed rules for valuation of financial instruments,
including derivatives, whereas Indian GAAP provided no comprehensive guidance on derivatives.
These differences could result in large differences in the results of Indian companies when computed
under U.S. GAAP; profits computed under U.S. GAAP were generally lower.
IFRS
Whether the IPO was to take place in London or New York, Essar could prepare statements under IFRS.
But IFRS was still new in the United States, and there was concern that U.S. investors might feel less
Page 6 9B13B014
comfortable with IFRS than U.S. GAAP statements, especially from an Indian company that would still
be using Indian GAAP for its own use.
International Financial Reporting Standards were promulgated by the IASB, an international standards-
setting body based in London. Since its earliest appearance as International Accounting Standards (IAS)
in 1973, IFRS, in its current form, had become widely adopted around the world, most significantly in
2005, when the EU adopted IFRS for all public companies. There were still some regional differences,
when particular jurisdictions would “carve out” sections of IFRS that they were unhappy with. For
example, the EU had required that some sections relating to fair-valuation of assets in IAS 39 be
removed, in response to political pressure applied by the banking industry. This particular carve-out had a
significant impact on the financial statements and capital adequacy measures for some troubled banks.
The IASB was committed to developing, in the public interest, a single set of high-quality, global
accounting standards that required transparent and comparable information in financial statements. By
2007, over 100 countries around the world had adopted IFRS, were planning to adopt IFRS or were
revising their own accounting standards in a manner that converged toward IFRS.
IFRS were described as “principles-based” standards, i.e., they provided guidelines for reporting based on
fundamental concepts, rather than explicit rules. IFRS thus required an implementation team to exercise
significant professional judgment and analysis to reach the underlying basis of its accounting choices and
to focus on substance over form, except in certain areas where IFRS was prescriptive. The structure of
these standards gave a clear insight as to why the standard was introduced, what its objectives were, its
scope, accounting guidelines, the basis for its conclusions with the dissenting opinion of the board
members, and illustrative examples. Thus, IFRS established conceptual principles that could be applied
universally and hence improve comparability. IFRS emphasized the economic substance of a transaction.
The rapid increase in the global integration of economic zones and financial markets had underscored the
need for harmonized accounting standards that would facilitate the trade of goods and capital. The IASB
and the FASB had therefore publicly committed to work toward the convergence of both standards, which
were expected to be completed as early as 2015.
INDIAN GAAP
Preparing additional statements under a second accounting standard would be a very expensive and time-
consuming task. A third possibility was to continue to use Indian GAAP and defer the IPO until India was
close to adopting IFRS.
The Institute of Chartered Accountants of India (ICAI) had been established within two years of
independence, but had its roots in the Society of Auditors founded in Madras (Chennai) in 1927, and the
Indian Accountancy Board, created to advise the governor-general and maintain the qualification
standards and conduct of auditors in 1932.11 The present ICAI was incorporated under an Act of the
Indian Parliament in 1949. The ICAI had created a task force to prepare a concept paper on convergence
with IFRS, with the objective of laying down a road map for achieving convergence with IFRS and
making Indian standards IFRS-compliant.12 This paper, published on October 15, 2006, had proposed
11
The Institute of Chartered Accountants of India, “History,” www.icai.org/new_post.html?post_id=197&c_id=196, accessed
November 13, 2012.
12
The Institute of Chartered Accountants of India, “Concept paper on convergence with IFRSs in
India,.www.icai.org/resource_file/12436announ1186.pdf, accessed November 9, 2012.
Page 7 9B13B014
new Indian accounting standards known as IndAS, which would be converged with IFRS. Immediately
after publication, however, both the regulator and companies started pushing for “carve-outs,” i.e.,
exceptions that would make IndAS different from IFRS as promulgated by the IASB. The concept paper
had proposed that IFRS should be adopted for public entities starting on April 1, 2011. However, given
the amount of pressure for carve-outs, it was doubtful that this date would be met, and even if it was,
there was uncertainty as to how closely IndAS would resemble the “official” IFRS.
Even though Indian GAAP was closer to IFRS than U.S. GAAP, there were still many differences. The
overriding principle to be followed for accounting and disclosure under IFRS was substance over form.
Exhibit 6 provides examples of some important differences.
COMPARISON OF U.S. GAAP AND IFRS WITH INDIAN GAAP
Changing from Indian GAAP to either U.S. GAAP or IFRS would likely have a significant impact on
performance indicators. The most affected ratios would be the current ratio, fixed assets to long-term
debt, debt to equity, return on net worth and the debt service coverage ratio. The current ratio was likely
to be adversely affected by the change in the classification to current from non-current liabilities. The
fixed assets to loan ratio could move in either a favorable or an adverse direction depending on the fair
valuation of PP&E, the reassessment of its economic life and its residual value. The debt to equity ratio
would most likely increase due to the reclassification of convertible preference shares as debt. Return on
net worth most likely would improve. The debt-service coverage ratio could change, and was a concern
for Indian banks, which had yet to set a policy with respect to IFRS adoption.
ESSAR’S IMPLEMENTATION CHALLENGES
If the top management team at Essar decided to change, it would not only be implementing the adoption
of another standard, as European companies had done two years previously (and in which the “big four”
global accounting firms had considerable expertise), but also undertaking the unique, more complex task,
of adding a second standard while retaining their existing Indian GAAP. In 2007, knowledge of IFRS and
U.S. GAAP was very limited within the company. One challenge was to obtain the expertise necessary to
implement this dual reporting system. Outside consultants, even the big four, would not have experienced
a transition of this complexity, so they would be very expensive. An alternative would be to build the
expertise internally; a consultant could be hired to train an internal team, who would then be able to train
the rest of the group. But it was not clear that they had sufficient depth of expertise within the company
even for this. There would also be the risk of errors and possibly opposition from managers who were
either less enthusiastic about the change, or who would see their measured performance decrease under
the new standard. A new IT architecture would be needed to prepare the dual set of books.
The complexity of adoption and preparation of the first set of financial statements with comparative
numbers for the previous year would be especially daunting. The company was planning the
consolidation of the financial statements of the oil and gas and electric power companies, and IFRS
required that many fixed assets would have to be “componentized,” i.e., broken down into smaller
identifiable assets, with separate evaluation of the technical and actual feasible working life of each
component asset. While U.S. GAAP required assets to be recorded at cost, IFRS allowed the fair value to
be used. To get their converted financial statements audited, local auditors would need to gain experience
with the process of conversion. Communicating this to them would be a challenge.
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EXHIBIT 1: ESSAR BUSINESS GROUPS
Essar Oil and Gas had a global portfolio of oil and gas blocks, with about 35,000 sq. km available for
exploration in India, Indonesia, Nigeria and Vietnam. It operated refineries with combined capacity over
750,000 barrels per day in India, the United Kingdom and Kenya, and over 1,100 Essar-branded retail outlets in
various parts of India.
Essar Power was one of India’s largest private sector electrical power producers, with 1,600 megawatts (MW)
of installed capacity.
Essar Steel was a fully integrated global producer of flat carbon steel with a production capacity of 14 MTPA
(million tons per annum) in India, North America, Europe, Middle East and South East Asia. Products of this
business group found wide acceptance in highly discerning consumer sectors such as automotive, white
goods, construction, engineering, hydrocarbon and shipbuilding. Essar Steel was a highly versatile producer
whose facilities included five meter wide plate making, hot rolling, cold rolling, galvanizing and colour coating,
and pipes. It had a full service distribution business consisting of steel processing, distribution centers and retail
outlets under the brand, Essar Hypermart.
Essar Shipping operated sea transportation, logistics and oilfield services businesses. The sea transportation
business provided crude oil and dry bulk transportation services to leading Indian and global oil majors, core
sector industries and commodity traders. It had a diversified fleet of 27 vessels, including VLCCs (Very Large
Crude Carriers), capsizes, supramaxes, mini-bulk carriers and tugs, with 24 more on order. The logistics
business provided end-to-end inter-modal logistics services from ships to ports, lighterage services and intra-
plant logistics and dispatch of finished products to the final customer. It managed a fleet of 5,000 trucks for
inland transportation of steel and petroleum products. The Oilfields Services business provided contract drilling
and related services to oil and gas companies worldwide, operating both offshore and onshore. It owned a fleet
of 13 rigs, which included one semi-submersible rig and 12 onshore rigs.
Essar Ports was one of India’s largest port operators with a cargo handling capacity of 88 MMTPA that was
being expanded to 158 MMTPA by 2013. Essar Ports had two operational ports, at Hazira and Vadinar. The
Hazira port was an all-weather, deep-draft port with 30 million tonnes of dry bulk cargo handling capacity. The
company was constructing two terminals at Paradip on the north-east coast 200km south of Kolkata, and
planned to set up a dry bulk terminal at Salaya on the north-west coast in Gujarat, some 500km north of
Mumbai.
Essar Projects was a leading EPC (Engineering, Procurement and Construction) contractor with a global
presence. In India, it operated through its wholly-owned subsidiary, Essar Projects (India) Ltd. The company
was supported by a specialized team of about 1,100 engineers with expertise in diverse sectors. The company
had a strong procurement function, with a vendor base of around 15,000 suppliers. Its construction capability
was underpinned by its ability to mobilize and manage a large number of labourers across multiple sites, along
with access to one of the largest construction equipment fleets in India. Essar Projects carried out its business
activities through eight Specialized Business Units (SBUs), e.g., Hydrocarbons, Steel, Power, Ports and Jetties,
Pipelines and Terminals, Offshore and Subsea, Civil and Buildings, and Heavy Engineering Services.
Essar Telecom operated a mobile services network in Kenya under the brand name “Yu,” which had over a
million subscribers. Essar had a significant presence in telecom retail, with over 1,000 “The Mobile Store”
outlets spread across several Indian cities. Essar was also present in consumer durables and IT appliance
retail with several “The Electronic Store” outlets across India.
Aegis was a global provider of business services offering the complete spectrum of business process
outsourcing, technology solutions, shared services, and consulting and analytics. With almost 30 years of
experience and more than 55,000 employees across 50 centers in 12 countries, Aegis worked with over 150
global clients to manage, enable, enhance and extend the customer experience.
Equinox Realty was a wholly owned business unit of the Essar Group. It had grown rapidly since its
commencement, and had a portfolio of approximately 16 million square feet, including those under various
stages of development. It was present in five Indian states.
Source: Company records
Page 9 9B13B014
EXHIBIT 2: ESSAR OIL LTD FINANCIAL STATEMENTS (INDIAN GAAP)
Balance Sheets (₹Crores)13

March 31 March 31 March 31
Year ending 2007 2006 2005
Sources of funds:
Share capital 1,345.52 1,100.18 955.9
Reserves total 1,649.61 1,420.55 1,448.92
Total shareholders’ funds 2,995.13 2,520.73 2,404.82
Secured loans 7,739.08 5,602.96 4,833.06
Unsecured loans 832.36 464.62 281.65
Total debt 8,571.44 6,067.58 5,114.71
Total liabilities 11,566.57 8,588.31 7,519.53
Application of funds:
Gross block 303.86 279.12 233.52
Less : accumulated depreciation 99.97 87.14 80.95
Net block 203.89 191.98 152.57
Lease adjustment -7.62 -7.62 -7.68
Capital Work in Progress 10,633.63 8,304.07 7,311.98
Investments 109.37 89.65 73.05
Current assets, loans & advances:
Inventories 3,417.97 36.49 134.61
Sundry debtors 176.84 81.12 102.06
Cash and Bank 642.97 519.93 699.31
Loans and Advances 432.49 336.01 303.82
Total current assets 4,670.27 973.55 1,239.80
Less current liabilities & provisions:
Current liabilities 3,970.48 897.96 671.17
Provisions 40.39 32.28 546.78
Total current liabilities 4,010.87 930.24 1,217.95
Net current assets 659.4 43.31 21.85
Deferred tax assets 0.17 0 0
Deferred tax liability 32.27 33.08 32.24
Net deferred tax -32.1 -33.08 -32.24
Total assets 11,566.57 8,588.31 7,519.53
Contingent liabilities 628.34 998.55 957.66
Source: www.capitaline.com, accessed November 9, 2012.
13
A crore is 10 million. $1 was worth about ₹44 in 2005 and ₹45 in 2006. Therefore, 1 crore rupees was worth about
US$227,000 in 2005 and US$222,000 in 2006.
Page 10 9B13B014
EXHIBIT 2 (CONTINUED)
Income Statements (₹Crores)

Year ending 31 March 2007 2006 2005
Income: 12 months 12 months 15 months
Sales turnover 473.98 636.63 1,045.12
Other income 10.39 62.59 101.46
Stock adjustments 96.85 -97.79 118.78
Total income 581.22 601.43 1,265.36
Expenditures:
Raw materials 562.93 569.67 1,079.72
Power & fuel cost 0.14 0.58 0.06
Employee cost 9.43 15.96 13.52
Other manufacturing expenses 0.16 0.41 23.79
Selling and Administration Expenses 45.29 79.04 44.15
Miscellaneous expenses 2.66 2.02 66.53
Total expenditures 620.61 667.68 1,227.77
Operating profit -39.39 -66.25 37.59
Interest 10.65 21.14 17.01
Profit before depreciation and tax -50.04 -87.39 20.58
Depreciation 4.51 4.66 6.22
Profit before tax -54.55 -92.05 14.36
Tax 13.34 0 -0.98
Fringe benefit tax 0.59 0.79 0
Deferred tax -0.99 0.84 5.48
Reported net profit -67.49 -93.68 9.86
Extraordinary items 0 -12.52 -0.01
Adjusted net profit -67.49 -81.16 9.87
Cash flow Summary (₹Crores)

Year ending 31 March 2007 2006 2005
Cash and cash equivalents at beginning of the year 34.95 707.28 405.97
Net cash from operating activities (93.72) (118.27) 31.24
Net cash used in investing activities (2,495.99) (2,097.78) (3,405.40)
Net cash used in financing activities 2,672.01 1,543.72 3,675.47
Net inc/(dec) in cash and cash equivalent 82.30 (672.33) 301.31
Cash and cash equivalents at end of the year 117.25 34.95 707.28
Page 11 9B13B014
EXHIBIT 3: ESSAR POWER LTD FINANCIAL STATEMENTS (INDIAN GAAP)
Balance Sheets (₹Crores)

As at 31 March 2007 2006
Sources of funds:
Share capital 598.5 598.5
Reserves total 518.22 490.12
Total shareholders’ funds 1,116.72 1,088.62
Secured loans 1,282.46 1,370.64
Unsecured loans 85 5.55
Total debt 1,367.46 1,376.19
Total liabilities 2,484.18 2,464.81
Application of funds:
Gross block 2,277.14 2,235.33
Less: accumulated depreciation 1,103.14 984.89
Net block 1,174.00 1,250.44
Capital work in progress 55.38 49.63
Investments 777.24 489.8
Current assets, loans & advances:
Inventories 64.07 52.78
Sundry debtors 420.79 321.46
Cash and bank 101.94 298.88
Loans and advances 133.00 81.96
Total current assets 719.80 755.08
Less: current liabilities and provisions:
Current liabilities 252.52 90.12
Provisions 1.19 1.7
Total current liabilities 253.71 91.82
Net current assets 466.09 663.26
Misc. Expenses not written off 0.07 0.21
Deferred tax assets 11.4 11.47
Net deferred tax 11.4 11.47
Total assets 2,484.18 2,464.81
Contingent liabilities 378.46 264.83
Page 12 9B13B014
EXHIBIT 3 (CONTINUED)
Income Statements (₹Crores)

Year ending 31 March 2007 2006
Income :
Operating income 749.99 699.25
Net operating income 749.99 699.25
Other income 35.85 19.71
Total income 785.84 718.96
Expenditure :
Electricity & fuel expenses 373.19 313.71
Operating expenses 39.25 23.53
Employee cost 17.79 11.65
Selling & administration expenses 26.88 27.8
Miscellaneous expenses 2.2 2.14
Total expenditure 459.31 378.83
Operating profit 326.53 340.13
Interest 178.62 171.16
Profit before depreciation and tax 147.91 168.97
Depreciation 118.31 118.55
Profit before tax 28.60 50.42
Tax -0.1 0.02
Fringe benefit tax 0.57 0.68
Deferred tax 0.16 -1.38
Reported net profit 28.97 51.1
Extraordinary items -0.03 -0.23
Adjusted net profit 28.94 51.87
Cash Flow Summary (₹Crores)

Year ending 31 March 2007 2006
Cash and cash equivalents at beginning of the year 293.29 50.62
Net cash from operating activities 228.75 348.09
Net cash used in investing activities (301.06) (49.11)
Net cash used in financing activities (188.27) (56.31)
Net inc/(dec) in cash and cash equivalent (260.58) 242.67
Cash and cash equivalents at end of the year 32.71 293.29
Page 13 9B13B014
EXHIBIT 4: MUMBAI STOCK MARKET DATA
2004 2005 2006

Number of listed companies 4,730 4,763 4,796
Domestic market capitalization ($ millions) 386,321 553,074 818,879
Value of shares traded ($ millions) 118,248 158,982 214,488
Average daily turnover ($ millions) 466 633 858
Average value of trades ($ thousands) 0.5 0.6 0.7
New capital raised from initial public offerings ($ millions) 2,918 1,319 5,601
New capital raised from secondary public offerings ($ millions) 392 7,179 1,320
Source: www.wikinvest.com/wiki/Bombay_Stock_Exchange, accessed November 6, 2012.
Source: www.tradingeconomics.com/india/stock-market, accessed November 7, 2012.
Page 14 9B13B014
EXHIBIT 5: LONDON STOCK EXCHANGE DATA
2004 2005 2006

Number of listed companies 2,837 3,091 3,256
Domestic market capitalization ($ million) 2,865,243 3,058,182 3,794,310
Value of shares traded ($ million) 5,169,024 5,677,721 7,571,699
Average daily turnover ($ million) 20,351 22,531 30,046
Average value of trades ($ thousand) 96.5 85.7 79.9
New capital raised from initial public offerings ($ million) 13,831 31,169 55,807
New capital raised from secondary public offerings ($million) 18,649 20,669 38,561
Source: www.wikinvest.com/wiki/London Stock Exchange, accessed November 7, 2012.
FTSE 100 Index

8,000.00
7,000.00
6,000.00
5,000.00
4,000.00
3,000.00 FTSE 100 Index
2,000.00
1,000.00
0.00
Jan‐00
Aug‐00
Mar‐01
Jul‐03
Feb‐04
Sep‐04
Apr‐05
Jun‐06
Jan‐07
Oct‐01
May‐02
Dec‐02
Nov‐05
Source: http://ca.moneycentral.msn.com/investor/charts/historicdata.aspx?symbol=%24GB%3aUKX, accessed November 7,

2012.
Page 15 9B13B014
EXHIBIT 6: EXAMPLES OF IFRS–INDIAN GAAP DIFFERENCES
Example 1: Car manufacturers sell cars with two to three years’ warranty. Under Indian GAAP, a
manufacturer would recognize the entire invoice value as revenue in the first year, and would make
provision for warranty depending upon the estimated replacement cost. But under IFRS the estimated
value of future expenses to meet warranty conditions were deducted from revenue. Thus, the revenue of
the car maker would be lower under IFRS than Indian GAAP.
Example 2: An entity engaged in the shipping business in India could buy ships from abroad, finance the
purchase with overseas borrowing denominated in dollars, collect proceeds of invoices against transport
services from overseas customers, pays its crew and buy diesel fuel abroad. All these transactions take
place in foreign currencies, typically the dollar or euro. But because the entity is in India, financial
statements must be prepared and reported in Indian Rupees. Under IFRS, from a substance over form
point of view, the entire financial state of affairs of the organization is predominantly influenced by the
U.S. dollar. In such a situation, even though the entity’s legal jurisdiction is in India, IFRS required that
the functional currency and reporting currency be the dollar or euro.
Example 3: If a power plant was owned by entity A, and entity B entered into a long-term take-or-pay
agreement such that B would use the power generated by the plant for a long period almost on a captive
basis, and A’s revenue from other customers was insignificant, subject to a few other conditions being
satisfied, IFRS would treat the owner of the power plant as not being in the business of generating power,
but in the business of leasing assets. Thus, the power plant would be reported on B’s balance sheet even
though A was the legal owner. A’s asset would be “Future Receivables.”
Example 4: Indian GAAP focused on stand-alone financial statements and did not require the disclosure
of consolidated statements (nor did the Indian Companies Act). Consolidation was only required by the
regulator (SEBI) if the group itself was listed. IFRS required the consolidation of controlled subsidiaries
wherever there were relationships through actual and/or potential shareholding, including call or put
options, control over economic and operating decisions, and special purpose entities. The objective of
IFRS was to present to all stakeholders the financial state of affairs of all such holding and subsidiary
companies in a group as a combined economic entity, rather than individual standalone entities.

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ESSAR ENERGY: INDIAN GAAP, U.S. GAAP OR IFRS? (A)

Copyright © 2013, Richard Ivey School of Business Foundation Version: 2013-06-10

THE ESSAR GROUP

ESSAR ENERGY — OIL, GAS AND POWER

RAISING EQUITY CAPITAL

COMPARISON OF U.S. GAAP AND IFRS WITH INDIAN GAAP

ESSAR’S IMPLEMENTATION CHALLENGES

EXHIBIT 1: ESSAR BUSINESS GROUPS

Source: Company records

EXHIBIT 2: ESSAR OIL LTD FINANCIAL STATEMENTS (INDIAN GAAP)

Balance Sheets (₹Crores)13

Total liabilities 11,566.57 8,588.31 7,519.53

Income Statements (₹Crores)

Source: www.capitaline.com, accessed November 9, 2012.

Cash flow Summary (₹Crores)

Source: www.capitaline.com, accessed November 9, 2012.

EXHIBIT 3: ESSAR POWER LTD FINANCIAL STATEMENTS (INDIAN GAAP)

Balance Sheets (₹Crores)

Income Statements (₹Crores)

Source: www.capitaline.com, accessed November 9, 2012.

Cash Flow Summary (₹Crores)

Source: www.capitaline.com, accessed November 9, 2012.

EXHIBIT 4: MUMBAI STOCK MARKET DATA

2004 2005 2006

Source: www.wikinvest.com/wiki/Bombay_Stock_Exchange, accessed November 6, 2012.

Source: www.tradingeconomics.com/india/stock-market, accessed November 7, 2012.

EXHIBIT 5: LONDON STOCK EXCHANGE DATA

2004 2005 2006

Source: www.wikinvest.com/wiki/London Stock Exchange, accessed November 7, 2012.

FTSE 100 Index

Source: http://ca.moneycentral.msn.com/investor/charts/historicdata.aspx?symbol=%24GB%3aUKX, accessed November 7,

EXHIBIT 6: EXAMPLES OF IFRS–INDIAN GAAP DIFFERENCES

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