Auditor Report of Koutons Retail India Ltd.

Mar 31, 2012

1. We have audited the attached Balance Sheet of KOUTONS RETAIL INDIA LTD. as at 31st March 2012, the Profit & Loss Account and the Cash Flow Statement of the company for the year ended on that date annexed thereto. These financial statements are the responsibility of the company''s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

3. As required by the Companies (Auditors Report) Order 2003 as amended by the Companies (Auditors Report) (Amendment) order 2004 issued by the Central Government of India in terms of section 227 (4A) of the Companies Act 1956, and on the basis of such checks as we considered appropriate and according to information & explanations given to us, we annexed hereto a statement on the matters specified in paragraph 4 & 5 of the said order.

4. Attention is invited to matters:

a) As stated in Note no 1B(22) regarding accounts having been drawn on going concern assumption despite significant erosion of net worth, winding up petitions filed by some lenders/ creditors and in one case Delhi High Court has admitted the winding up petition and the approved Debt Restructuring package which is still to be completely implemented by the lenders.

b) As stated in Note no 1B(21) regarding recording of sales, expenses relating to stores, accordingly the impact on the amount of sale, expenses relating to stores, stocks lying with stores and current assets is not ascertainable.

c) As stated in Note no 1B(19) relating quality and valuation of stocks, in the absence of confirmation from franchisee, job workers and transporters, the impact on the current year loss and current assets is not ascertainable.

d) As stated in Note no 1B(23) regarding pending action on the part of some of the banks regarding implementation of CDR scheme, the impact on the current year loss and liabilities is not ascertainable.

e) As stated in Note no 1B(17) regarding pending Bank reconciliation statement, the impact on individual debtor balances is not ascertainable.

f) As stated in Note no 1B(27) of schedule 21, regarding income tax demands of Rs 48.84 cr, the impact on current assets as stated in the balance sheet would be overstated by the said amount of Rs 48.84 cr.

g) The company has entered into same transaction with related parties without complying with the provisions of the law and we are unable to comment on the arm,s length pricing of said transactions

h) As stated in Note no 1B(2) regarding pending confirmations and reconciliations with debtors, creditors, franchisee store balances including stocks lying with franchisee store and advances to supplier which might require financial adjustments. The Impact on the loss of the year and current assets, if any, is unascertainable.

i) As stated in Note no 1B(16) with regard to sundry debtors outstanding for a long period and Note no 1B(20) with regard to Advances given, We are unable to comment on the extent of realisablity of these debts and advances given and no provision for doubtful debts is considered necessary by the Company. The impact on the loss of current year and current assets, if any, is unascertainable.

j) With regard to non provision for loss of assets in respect of closed stores, the impact of which on the loss of the year is Rs 10,25,83,413/-and accordingly the current year loss has been understated by Rs. 10,25,83,413/-. k) As stated in Note no IB (5) with regard to non provision of penal interest and liquidated damages etc. for loans in default and Debentures not redeemed on due dates. As informed by the management the negotiations with the lenders are still underway, the impact on loss of the year, if any, of this none provisioning is presently unascertainable. "*

I) No provision has been made for interest for non deposit of admitted statutory dues like Income Tax, TDS, DVAT, Dividend Distribution Tax, Wealth Tax, ESI and Service Tax on renting. If provided loss would have been higher by Rs 23,80,83,427/-.

m) An insurance claim of Rs.16.59 Crores which is pending for recovery for the last four years has been considered as Good. We are unable to comment on the realisablity of the same, n) As stated in Note No 1B(24) with regard to recognition of Deferred Tax Assets, the Accounting Standard-22 dealing with the matter demands convincing evidence as to virtual certainty of future income, but which in our opinion would depend on verification of achievability of business plan estimating the future income. This being a technical matter cannot be commented upon by us and the financial impact, if any is not ascertainable,

o) The company has contingent liabilities on account of some court cases including winding up of the company. We are unable to comment on the impact of those cases on the current year Loss, current assets and current liabilities of the company.

p) Deferred revenue expenditure relating to closed stores has not been fully debited to profit and loss account and the impact of current year prof it is not ascertainable, q) The company has made provisions of interest on security received from franchisee up to Nov, 2011 only and balance amount of Rs 31,41,270/- has not been debited to profit and loss account for the year ended 31st March, 2012 and accordingly the current year loss has been understated by Rs. 31,41,270/-.

5. Further to our comments in the annexure referred to in paragraphs 3 & 4 above We report that:

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

(b) In our opinion, proper books of accounts as required by law have been kept by the company so far as appears from our examination of those books of account of the company;

(c) The Balance Sheet, Profit & loss account and Cash Flow Statement dealt with by this report are in agreement with the books of account of the company.

(d) In our opinion, the Balance Sheet, Profit & Loss Account and the Cash Flow Statement complies with the mandatory Accounting Standards referred to in section 211 (3C) of the Companies Act, 195 except as mentioned below.

i) Accounting Standard 2 Valuation of Inventories: The net realizable value of slow/non moving stores has not been ascertained and no provision for the deficiency, if any, has been provided for. Further to its stock has been valued at cost instead of lower of the cost and net realizable value.

ii) Accounting Standard 15 (Revised) Employees Benefits: Actuarial Valuation for leave encashment liability has not been carried out and provisions for leave encashment has been made in the books on the basis on management estimates.

iii) Accounting Standard 22 Accounting for Taxes on Income: The Company has recognized Deferred Tax Assets amounting to Rs 63.06 Crores as at 31 March 2012. Even though the Company has incurred operating losses which are to be carried forward to be set off against future taxable income, there is no convincing evidence as to virtual certainty of future income.

iv) Accounting Standard 28 Impairment of Assets: whereby no assessment for impairment of assets, if any, was carried out during the year by the management.

(e) On the basis of the representation received from the directors of the Company as on 31st March 2012 and taken on record by the Board of Directors, we report that the directors are disqualified as on 31st March 2012 from being appointed as a director of the company in terms of clause (g) of sub section (1) of section 274 of the Companies Act, 1956.

(f) In our opinion and to the best of our information and according to the explanations given to us, the said accounts read with the notes thereon, give the information required by the Companies Act 1956 in the manner so required subject to these observations and other observations in paras 4.a to 4.q & d(i) to d(iv) as mentioned above, the consequential effect of which on relevant assets, liabilities and loss for the year is not quantifiable, we are unable to opine whether the said accounts give a true and fair view in conformity with the accounting principles generally accepted in India

(i) In the case of the Balance Sheet, of the state of affairs of the company as at 31st March, 2012.

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

(iii) In the case of the Cash Flow Statement, of the Cash Flow of the Company for the year ended on that date.

ANNEXURE REFERRED TO IN PARAGRAPH 3 OF OUR REPORT OF EVEN DATE TO THE MEMBERS OF KOUTONS RETAIL INDIA LTD. ON THE ACCOUNTS FOR THE YEAR ENDED MARCH 31,2012.

On the basis of such checks as we considered appropriate and in terms of the information and explanations given to us, we state that:-

i. (a) The Company has generally maintained records showing full particulars, including quantitative details and situation of fixed assets however, the records in respect of closed stores and warehouse could not be produced for our verification;

(b) As explained to us, the fixed assets have been physically verified by the management at reasonable intervals, in a phased verification programme, which, in our opinion, is reasonable, having regard to the size of the company and the nature of its business, except fixed assets lying in the closed stores and warehouses. No material discrepancies were noticed on such physical verification;

(c) During the year the Company has disposed off and written off assets to the tune of Rs. 54.57 lacs as few Galleries & warehouse have been closed. According to information & explanations given to us, we are of the opinion that the sale of said part of fixed asset has not affected the going concern status of the company.

ii. (a) As explained to us, inventories have been physically verified by the management and In our opinion, the frequency of the verification is reasonable;

(b) The procedures explained to us, which are followed by the management for physical verification of inventories, are, in our opinion, reasonable and adequate in relation to the size of the company and the nature of its business except in relation to identification of slow moving, non moving, obsolete and damaged items of inventory. Further the attention is drawn to the note no. 5(d)(i) in the main report, stock lying at galleries with fabricators and with these parties could not be verified.

(c) On the basis of our examination of the inventory records of the Company, we are of the opinion that, the company is maintaining proper records of its inventory.

iii. (a) The company has granted loan to one parties covered in the register maintained under section 301 of the Companies Act, 1956 on call basis. The maximum amount outstanding during the year was Rs. 40.00 lacs and the year-end balance was Rs .37.32 lacs.

(b) The said loan is interest free. Other terms and conditions on which the loans have been taken are prima facie, not prejudicial to the interest of the company;

(c) The company has taken loan from seven parties covered in the register maintained under section 301 of the Companies Act, 1956 on call basis. The maximum amount outstanding during the year was Rs. 88.44 Croreand the year-end balance was Rs. 88.44 Crore.

(d) The said loan is interest free. Other terms and conditions on which the loans have been taken are prima facie, not prejudicial to the interest of the company;

(e) In view of our comments in para (iii) (a) to (d) above, this clause of the said Order is not applicable.

iv. In our opinion and according to the information and explanations given to us, the company had no adequate internal control procedures commensurate with the size of the company and nature of its business with regard to purchase of inventory, fixed assets and sale of goods, which was disturbed during the year due to financial constraints and staff turnover and which needs to be improved.

v. (a) The particulars of contracts or arrangements referred to in Section 301 of the Companies Act, 1956 have been entered in the register required to be maintained in that section.

(b) The transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time.

vi. The Company has not accepted any deposits from the public, hence the directives issued by the Reserve Bank of India and the provisions of Section 58A&58AA of the Companies Act, 1956 are not applicable.

vii. In our opinion, during the year, the Company had an adequate an Internal Audit System but which has been disturbed in current year due to financial constraints and employee turnover and needs to be reviewed and strengthened to commensurate with the size and nature of the business of the company.

viii The Central Government has not prescribed for maintenance of cost records under section 209 (1) (d) of the Companies Act, 1956 forthe Company.

ix (a) The Company has defaulted in depositing with appropriate authorities undisputed statutory dues including provident fund, employees'' state insurance, income-tax, sales-tax, custom duty, cess and other material statutory dues applicable to it. The following statutory dues were in arrears as at March 31,2012 for a period of more than six months from the date they became payable.

Name of Nature of Due Amount (Rs.) Statute

Sales Tax Dvat payable 1,96,88,105/-

Sales Tax Dvat payable 2,32,18,941/-

Sales Tax Dvat payable 49,58,697/-

Income Tax Dividend 51,92,210/- Distribution Tax Income Tax Dividend 10,14,841/- Distribution Tax

Income Tax TDS 3,53,51,859/-

Income Tax Interest. On TDS 1,60,71,028/-

Name of Statute Period to which Due Date Date of amount payment Relates(F.Y.)

Sales Tax 2009-2010 June,2009- Not paid April,2010

Sales Tax 2010-2011 May,2010- Not paid April,2011

Sales Tax 2011-2012 July,2011- Not paid Oct,2011

Income Tax 2008-2009 Oct,2009 Not Paid

Income Tax 2009-2010 Oct,2010 Not Paid

Income Tax 2009-2010 Nov, 2009 - Not Paid April, 2010

Income Tax 2009-2010 May, 2009- Not Paid April, 2010

Name of Nature of Due Amount (Rs.) Statute

Income Tax Interest. On TDS 1,31,27,516/-

Income Tax TDS 13,93,70,.38/-

Income Tax Inte rest. On TDS 33,96,910/-

Income Tax TDS 5,56,35,472/-

Income Taxx Self Assessment 69,84,51,297/- Tax

Income Tax Interest on Self 8,03,06,958/- Assessment Tax

Income Tax Wealth Tax 80,737/-

Income Tax Wealth Tax 1,03,001/-

Income Tax Wealth Tax 98,141/-

Income Tax Wealth Tax 69,433/-

Income Tax Wealth Tax 49,190/-

Income Tax FBT 4,95,574/-

Income Tax FBT 27,19,139/-

ESIC ESIC (Contractor) 75,11,795/-

ESIC ESIC (Contractor) 9,62,046/-

ESIC ESIC (Contractor) 16,655/-

Service Tax Service Tax on 7,36,91,674/- Rent

Income Tax Income Tax 1,12,681/- Act

Income Tax Income Tax 2,61,470/- Act

Income Tax Income Tax 10,21,12,147/- Act

Income Tax Income Tax 3,65,92,812/- Act

Income Tax Income Tax 1,74,72,733/- Act

Income Income Tax 33,19,04759/- Tax Act

Name of Statute Period to which Due Date Date of amount payment Relates(F.Y.)

Income Tax 2009-2010 May, 2010- Not Paid Oct, 2010

Income Tax 2010-2011 May, 2010 - Not Paid April, 2011

Income Tax 2010-2011 May, 2010- Not Paid Oct, 2010

Income Tax 2011-2012 May, 2011 - Not Paid Oct, 2011

Income Tax 2009-2010 March-2010 Not Paid

Income Tax 2009-2010 Apr-2010- Not Paid Oct,2010

Income Tax 2007-2008 Mar-2008 Not Paid

Income Tax 2008-2009 Mar-2009 Not Paid

Income Tax 2009-2010 Mar-2010 Not Paid

Income Tax 2010-2011 Mar-2011 Not Paid

Income Tax 2011-2012 Mar-2012 Not Paid

Income Tax 2007-2008 Mar-2008 Not Paid

Income Tax 2008-2009 Mar-2009 Not Paid

ESIC 2009-2010 May,2009 - Not paid April,2010

ESIC 2010-2011 May,2010 - Not paid April, 2011

ESIC 2011-2012 JUNE,2011 - Not paid JULY, 2011

Service Tax Up to Sept, 2011 May, 2008 & Not paid onwards

Income Tax Act 2002-2003 F.Y. 2011-12 Not paid

Income Tax Act 2003-2004 F.Y. 2011-12 Not paid

Income Tax Act 2005-2006 F.Y. 2011-12 Not paid

Income Tax Act 2006-2007 F.Y. 2011-12 Not paid

Income Tax Act 2007-2008 F.Y. 2011-12 Not paid

Income Tax Act 2008-2009 F.Y. 2011-12 Not paid

(b) According to the information and explanations given to us, particulars of outstanding dues of sales-tax, income-tax, custom duty and cess not deposited on account of any dispute are given below:-

Name of Statute Nature Amount (Rs.) of Due

Sales Tax Act Sales Tax 9,48,193/-

Sales Tax Act Sales Tax 4,47,660/-

Sales Tax Act Sales Tax 1,24,261/-

Sales Tax Act Sales Tax 78,60,241/-

Sales Tax Act Sales Tax 1,21,43,474/-

Sales Tax Act Sales Tax 30,99,02,421/-

Name of Statute Period to which Forum where dispute amount Relates (F.Y.) is pending

Sales Tax Act 2001-2002 Deputy Commissioner- Delhi (Appeals)

Sales Tax Act 2002-2003 Deputy Commissioner- Delhi (Appeals)

Sales Tax Act 2003-2004 Deputy Commissioner- Delhi (Appeals)

Sales Tax Act 2004-2005 Addl. Commissioner- Delhi (Appeals)

Sales Tax Act 2007-2008 D.E.T.C. Gurgaon

Sales Tax Act 2008-2009 D.E.T.C. Gurgaon

x. The company has accumulated loss at the end of the financial year which is more than fifty percent of its net worth .Further the impact on accumulated loss because of qualifications made in our audit report is not ascertainable and hence the accumulated loss has not been adjusted to that extent.

xi. The company has defaulted in repayment of dues to Banks and to debenture holders. The details of such defaults are as given below:-

Due to Amount Due since Remarks (Rs. in Cores)

Allahabad Bank 16.67 Aug 2010 Still Unpaid

Allahabad Bank 5.59 July 2010 Still Unpaid

Bank of India 28.00 June 2010 Still Unpaid

Bank of India 5.12 June 2010 Still Unpaid

10.15% NCD (11.50% w.e.f. Dec''2009) 28.56 Dec 2009 Still Unpaid

13.00 % NCD (13.05% w.e.f. Nov'' 2009) 48.00 Feb 2010 Still Unpaid

NCD Interest 23.13 Dec 2009 Still Unpaid

D B S Bank Ltd. 13.93 July 10- Sept 10 Still Unpaid

DBS Bank Ltd. 4.89 July 2010 Still Unpaid

Standard Chartered Bank 25.78 July 2010 Still Unpaid

Standard Chartered Bank 7.72 July 2010 Still Unpaid

Bibby Financial Services India Pvt. Ltd. 9.61 April 2010 Still Unpaid

xii. As explained to us, the company has not granted loan & advance on the basis of security by way of pledge of shares, debentures & other securities.

xiii. In our opinion, the Company is not a chit fund or a nidhi/mutual benefit fund/ society. Therefore, the provisions of clause 4 (xiii) of the Order, are not applicable to the Company.

xiv In our opinion, the Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, the provisions of clause 4(xiv) of the Order are not applicable to the Company.

xv. According to the information and explanations given to us, the Company has not given any Corporate Guarantee forloans taken by others fromfinancial institution.

xvi In our opinion and according to the information given to us, the term loan have been applied for the purpose for which they were raised.

xvii. According to the information and explanations given to us and on an overall examination of the Balance Sheet of the Company, we are of the opinion that, prima facie short term funds have not been used for long term investment.

xviii. The Company has not made any preferential allotment of shares to parties and companies covered in the register maintained under section 301 of the Companies Act, 1956.

xix. According to the information and explanations given to us the Company has not issued any debenture during the year. Therefore, the provision of clause 4 (xix) of the order, are not applicable to the company.

xx. According to the information and explanations given to us, the Company has not raised money by way of public issue during the year.

xxi. According to the information and explanations given to us and to the best of our knowledge and belief ,no fraud on or by the company, has been noticed or reported by the company during the year. For R. Chadha & Associates

Chartered Accountants

Place: - New Delhi Rakesh Chadha

Date:-27/12/2012 (Partner)

M. No. 83135

---

Mar 31, 2011

1. We have audited the attached Balance Sheet of KOUTONS RETAIL INDIA LTD. as at 31st March 2011, the Profits Loss Account and the Cash Flow Statement of the company for the year ended on that date annexed thereto. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

3. As required by the Companies (Auditors Report) Order 2003 as amended by the Companies (Auditors Report) (Amendment) order 2004 issued by the Central Government of India in terms of section 227 (4A) of the Companies Act 1956, and on the basis of such checks as we considered appropriate and according to information & explanations given to us, we annexed hereto a statement on the matters specified in paragraph 4 & 5 of the said order.

4. Attention is invited to matters:

a) As stated in Note no 20 of the Schedule 21 regarding accounts having been drawn on going concern assumption despite significant erosion of net worth, winding up petitions filed by some lenders/ creditors and the proposed Debt Restructuring under CDR mechanism which is still to be approved by lenders.

b) As stated in Note No 2 of the Schedule 21 regarding pending confirmations and reconciliations with debtors, creditors and advances to supplier which might require financial adjustments. The Impact on the loss of the year, if any, is unascertainable.

c) As stated in Note no 16 of the Schedule 21 with regard to sundry debtors outstanding for a long period and Note no 20 of the Schedule 21 with regard to Advances, We are unable to comment on the extent of reliability of these debts and consequently on the adequacy of the provision for doubtful debts made by the Company. Impact of this on the loss of the year, if any, is unascertainable.

d) As stated in Note no 18 of the Schedule 21 with regard to observations of stock auditors which class ifies certain portion of receivables and stocks as not eligible for Drawing Power and the management has not considered any further provisioning necessary in this regard. Being a matter which requires detailed assessment and technical skills, we are unable to comment on the adequacy or otherwise of the provisions made. The impact on the loss of the year, if any, is unascertainable.

e) As stated in Note no 19 of the Schedule 21 with regard to non provision for loss of assets in respect of closed stores, the impact of which on the loss of the year is unascertainable.

f) As stated in Note no 3 of the Schedule 21 with regard to provision of interest payable to MSME suppliers, the adequacy or otherwise of which we are unable to comment on in view of non receipt of status confirmations from many suppliers.

g) As stated in Note no 5 of the Schedule 21 with regard to non provision of penal interest and liquidated damages etc. for loans in default and Debentures not redeemed on due dates. As informed by the management the negotiations with the lenders are still underway, the impact on loss of the year, if any, of this non provisioning is presently unascertainable.

h) No provision has been made for interest and/or penalties for non deposit of DVAT, Dividend Distribution Tax, Wealth Tax, ESI and Service Tax on renting as reported at Point No. IX (a) of the Annexure to this report.

I) An insurance claim of Rs.16.59 Crores which is pending for recovery for the last three years has been considered as Good. We are unable to comment on the reliability of the same.

j) As stated in Note no. 23 of Schedule 21 with regard to recognition of Deferred Tax Assets, the Accounting Standard-22 dealing with the matter demands convincing evidence as to virtual certainty of future income, but which in our opinion would depend on verification of achievability of business plan estimating the future income. This being a technical matter cannot be commented upon by us and the financial impact, if any is not ascertainable.

k) The company has contingent liabilities on account of some court cases including winding up of the company. We are unable to comment on the impact of those cases on the Loss of the company

i) Pending the decision of the courts regarding the applicability of Service Tax on commercial renting, we are unable to comment on the liability on the company and the impact thereof on the loss of the company.

5. Further to our comments in the annexure referred to in paragraphs 3 & 4 above We report that:

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

(b) In our opinion , proper books of accounts as required by law have been kept by the company so far as appears from our examination of those books of account of the company ;

(c) The Balance Sheet, Profit & loss account and Cash Flow Statement dealt with by this report are in agreement with the books of account of the company.

(d) In our opinion, the Balance Sheet, Profit & Loss Account and the Cash Flow Statement complies with the mandatory Accounting Standards referred to in section 211 (3C) of the Companies Act, 1956 except as mentioned below.

i) Accounting Standard 2 Valuation of Inventories: The net realizable value of slow/non moving stores has not been ascertained and no provision for the deficiency, if any, has been provided for.

ii) Accounting Standard 15(Revised) Employees Benefits: Actuarial Valuation for leave encashment liability has not been carried out and provisions for leave encashment has been made in the books on the basis on management estimates.

iii) Accounting Standard 22 Accounting for Taxes on Income: The Company has recognized Deferred Tax Assets amounting to Rs 167.80 Crores as at 31 March 2011. Even though the Company has incurred operating losses which are to be carried forward to be set off against future taxable income, there is no convincing evidence as to virtual certainty of future income.

iv) Accounting Standard 28 Impairment of Assets: whereby no assessment for impairment of assets, if any, was carried out during the year by the management;

(e) On the basis of the representation received from the directors of the Company as on 31st March 2011 and taken on record by the Board of Directors, we report that none of the directors is disqualified as on 31st March 2011 from being appointed as a director of the company in terms of clause (g) of sub section (1) of section 274 of the Companies Act, 1956.

(f) In our opinion and to the best of our information and according to the explanations given to us, the said accounts read with the notes thereon, give the information required by the Companies Act 1956 in the manner so required subject to these observations and other observations in paras 4.b to 4.l & d(i) to d(iv) as mentioned above, the consequential effect of which on relevant assets, liabilities and loss for the year is not quantifiable, give a true and fair view in conformity with the accounting principles generally accepted in India

(i)In the case of the Balance Sheet, of the state of affairs of the company as at 31st March, 2011;

(ii) In the case of the Profit & Loss Account, of the Profit of the company for the year ended on that date; and (iii) In the case of the Cash Flow Statement, of the Cash Flow of the Company for the year ended on that date.

ANNEXURE REFERRED TO IN PARAGRAPH 3 OF OUR REPORT OF EVEN DATE TO THE MEMBERS OF KOUTONS RETAIL INDIA LTD. ON THE ACCOUNTS FOR THE YEAR ENDED MARCH 31, 2011.

On the basis of such checks as we considered appropriate and in terms of the information and explanations given to us, we state that:- I. (a) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets, however, the records in respect of closed stores could not be produced for our verification;

(b) As explained to us, the fixed assets have been physically verified by the management at reasonable intervals, in a phased verification programme, which, in our opinion, is reasonable, having regard to the size of the company and the nature of its business, except fixed assets lying in the closed stores . No material discrepancies were noticed on such physical verification

(c) During the year the Company has disposed off and written off assets to the tune of Rs. 2.99 Crores as a few Galleries & Units have been closed. According to information & explanations given to us, we are of the opinion that the sale of said part of fixed asset has not affected the going concern status of the company.

ii. (a) As explained to us, inventories have been physically verified by the management and other chartered accountants (Stock Auditors) appointed by Bankers,. In our opinion, the frequency of the verification is reasonable;

(b) The procedures explained to us, which are followed by the management for physical verification of inventories, are, in our opinion, reasonable and adequate in relation to the size of the company and the nature of its business except in relation to identification of slow moving, non moving, obsolete and damaged items of inventory;

(c) On the basis of our examination of the inventory records of the Company, we are of the opinion that, the company is maintaining proper records of its inventory.

iii. (a) According to the information and explanations given to us, the Company has not granted loan to party covered in the register maintained under section 301 of the Companies Act, 1956 .

(b) In view of our comments in Para (iii) (a) clauses 4 (iii) (b) to (d) of the said Order are not applicable.

(e) The company has taken loan from 12 parties covered in the register maintained under section 301 of the Companies Act, 1956 on call basis. The maximum amount outstanding during the year was Rs. 65.98 Crore and the year-end balance was Rs . 65.98 Crore.

(f) The said loan is interest free. Other terms and conditions on which the loans have been taken are prima facie, not prejudicial to the interest of the company;

(g) In view of our comments in para (iii) (e) and (f) above, this clause of the said Order is not applicable.

iv. In our opinion and according to the information and explanations given to us, the company had adequate internal control procedures commensurate with the size of the company and nature of its business with regard to purchase of inventory, fixed assets and sale of goods, which was disturbed during the year due to financial constraints and staff turnover.

v. (a) The particulars of contracts or arrangements referred to in Section 301 of the Companies Act, 1956 have been entered in the register required to be maintained in that section.

(b) The ransactions made in pursuance of such contracts or arrangements havebeen made at prices which are reasonable having regard to the prevailing market prices at the relevant time.

vi. The Company has not accepted any deposits from the public, hence the directives issued by the Reserve Bank of India and the provisions of Section 58A & 58AA of the Companies Act, 1956 are not applicable.

vii. In our opinion, during the year, the Company had adequate an Internal Audit System but which was disturbed due to financial constraints and employee turnover and needs to be reviewed and strengthened to commensurate with the size and nature of the business of the company .

viii The Central Government has not prescribed for maintenance of cost records under section 209 (1) (d) of the Companies Act, 1956 for the Company.

ix (a) The Company has defaulted in depositing with appropriate authorities undisputed statutory dues including provident fund, employees' state insurance, income-tax, sales-tax, custom duty, cess and other material statutory dues applicable to it. The following statutory dues were in arrears as at March 31, 2011 for a period of more than six months from the date they became payable.

Name of Nature of Due Amount (Rs.) Period to which Due Date Date of amount Relates Statute payment (F.Y.)

Sales Tax Dvat payable 1,96,88,105/- 2009 -2010 June,2009 Not paid April,2010

Sales Tax Dvat payable 1,44,52,630/- 2010 -2011 May,2010 Not paid Oct,2010

Income Tax Dividend Distribution 51,92,210/ 2008 -2009 Oct,2009 Not Paid Tax

Income Tax Dividend Distribution 10,14,841/ 2009 -2010 Oct,2010 Not Paid Tax

Income Tax TDS 4,15,15,948/ 2009 -2010 Nov,2009 -Apr- Not Paid 2010

Income Tax Interest. On TDS 1,60,71,028/ - 2009 -2010 May,2009 -April- Not Paid 2010

Income Tax Interest. On TDS 1,31,27,516/ 2009 -2010 May,2010 -Oct- Not Paid 2010

Income Tax TDS 8,82,93,945/- 2010 -2011 May,2010 -Oct- Not Paid 2010

Income Tax Interest. On TDS 33,96,910/ 2010 -2011 May,2010 -Oct- Not Paid 2010

Income Tax Self Assessment Tax 69,84,51,297 2009 -2010 Mar-2010 Not Paid

Income Tax Interest on Self 8,03,06,958/ 2009 -2010 Apr-2010 - Oct- Not Paid Asses sment Tax 2010

Income Tax Wealth Tax 80,737/ 2007 -2008 Mar-2008 Not Paid

Income Tax Wealth Tax 1,03,001/-2008 -2009 Mar-2009 Not Paid

Income Tax Wealth Tax 98,141/ 2009 -2010 Mar-2010 Not Paid

Income Tax FBT 4,95,574/-2007 -2008 Mar-2008 Not Paid

Income Tax FBT 27,19,139/-2008 -2009 Mar-2009 Not Paid

ESIC ESIC (Contractor) 75,11,795/-2009 -2010 May,2009 Not paid April ,2010

ESIC ESIC (Contractor) 6,34,907/-2010 -2011 May,2010 Not paid Oct, 2010

Service Tax Service Tax on Rent 4,55,70,599 Up to Sep.2010 May, 2008 Not paid onwards

(b) According to the information and explanations given to us, particulars of outstanding dues of sales-tax, income-tax, custom duty and cess not deposited on account of any dispute are given below:

Name of Statute Nature of Amount (Rs.) Period to which Forum where dispute Due amount Relates (F.Y.) is pending

Sales Tax Act Sales Tax 9,48,193/ 2001-2002 Deputy Commissioner - Delhi (Appeals)

Sales Tax Act Sales Tax 4,47,660/ 2002-2003 Deputy Commissioner - Delhi (Appeals)

Sales Tax Act Sales Tax 1,24,261/ -2003-2004 Deputy Commissioner - Delhi (Appeals)

Sales Tax Act Sales Tax 78,60,241/- 2004 -2005 Addl. Commissioner - Delhi (Appeals)

Sales Tax Act Sales Tax 2,46,10,672/- 2007 -2008 D.E.T.C. Gurgaon

Income Tax Act Income Tax 1,12,681/- 2002 -2003 CIT (Appeal-1) New Delhi

Income Tax Act Income Tax 2,61,470/- 2003 -2004 CIT (Appeal-1) New Delhi

Income Tax Act Income Tax 10,21,12,147/- 2005 -2006 CIT (Appeal-1) New Delhi

Income Tax Act Income Tax 3,65,92,812/- 2006 -2007 CIT (Appeal-1) New Delhi

Income Tax Act Income Tax 1,74,72,733/- 2007 -2008 CIT (Appeal-1) New Delhi

Income Tax Act Income Tax 33,19,04,759/ 2008 -2009 CIT (Appeal-1) New Delhi

x. The company has accumulated loss at the end of the financial year which is more than fifty percent of its net worth .Further

the company has incurred cash loss in the current financial year . But the company has not incurred any cash loss in the immediate preceding financial year .Further the impact on accumulated loss because of qualifications made in our audit report is not ascertainable and hence the accumulated loss has not been adjusted to that extent.

xi. The company has defaulted in repayment of dues to Banks and to debenture holders. The details of such defaults are as given below :-

Due to Amount (Rs. in Cores) Due since Remarks

Allahabad Bank 16.67 Aug 2010 Still Unpaid

Allahabad Bank 1.14 July 2010 Still Unpaid

Allahabad Bank 1.12 Dec 2010 Still Unpaid

Bank of India 13.90 June 2010 Still Unpaid

Bank of India 1.61 June 2010 Still Unpaid

Bank of India 1.78 Nov 2010 Still Unpaid

10.15 % NCD (11.50% w.e.f. Dec' 2009) 28.56 Dec 2009 Still Unpaid

13.00 % NCD (1 3.05% w e.f. Nov' 2009) 48.00 Feb 2010 Still Unpaid

NCD Interest 13.55 Dec 2009 Still Unpaid

DBS Bank Ltd. 13.93 July 10 Sept 10 Still Unpaid

DBS Bank Ltd. 1.57 July 2010 Still Unpaid

Standard Chartered Bank 25.78 July 2010 Still Unpaid

Standard Chartered Bank 2.65 July 2010 Still Unpaid

SE Investments Ltd. Loan -1 10.30 Oct 2010 Still Unpaid

SE Investments Ltd Loan -1 1.17 Oct 2010 Still Unpaid

SE Investments Ltd Loan -2 5.98 June 2010 Still Unpaid

SE Investments Ltd. Loan -2 2.47 Sept 2010 Still Unpaid

Bibby Financial Services 9.61 April 2010 Still Unpaid

India Pvt. Ltd.

xii. As explained to us, the company has not granted loan & advance on the basis of security by way of pledge of shares, debentures & other securities.

xiii. In our opinion, the Company is not a chit fund or a nidhi/mutual benefit fund/ society. Therefore, the provisions of clause 4 (xiii) of the Order, are not applicable to the Company.

xiv In our opinion, the Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, the provisions of clause 4(xiv) of the Order, are not applicable to the Company.

xv. According to the information and explanations given to us, the Company has not given any Corporate Guarantee for loans taken by others from financial institution..

xvi In our opinion and according to the information & explanation given to us, the term loans were not fully applied for the purpose for which the loans were obtained.

xvii. According to the information and explanations given to us and on an overall examination of the Balance Sheet of the Company, we are of the opinion that, prima facie short term funds have not been used for long term investment.

xviii. The Company has not made any preferential allotment of shares to parties and companies covered in the register maintained under section 301 of the Companies Act, 1956.

xix. According to the information and explanations given to us the Company has not issued any debenture during the year. Therefore, the provision of clause 4 (xix) of the order, are not applicable to the company.

xx. According to the information and explanations given to us, the Company has not raised money by way of public issue during the year.

xxi. According to the information and explanations given to us and to the best of our knowledge and belief ,no fraud on or by the company ,has been noticed or reported by the company during the year.

For R .Chadha & Associates

Chartered Accountants

Place: - New Delhi Sd/-

Date: 12/07/2011

Rakesh Chadha

(Partner) M.No. 83135

---

Mar 31, 2010

We have audited the attached Balance Sheet of KOUTONS RETAIL INDIA LTD. as at 31st March 2010, the Profit & Loss Account and the Cash Flow Statement of the company for the year ended on that date annexed thereto. These financial statements are the responsibility of the companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

As required by the Companies (Auditors Report) Order 2003 as amended by the Companies (Auditors Report) (Amendment) order 2004 issued by the Central Government of India in terms of section 227 (4A) of the Companies Act 1956, and on the basis of such checks as we considered appropriate and according to information & explanations given to us, we annexed hereto a statement on the matters specified in paragraph 4 & 5 of the said order.

Further to our comments in the annexure referred to in paragraph 3 above, we report that:

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

(b) In our opinion , proper books of accounts as required by law have been kept by the company so far as appears from our examination of those books of account of the company ;

(c) The Balance Sheet, Profit & loss account and Cash Flow Statement dealt with by this report are in agreement with the books of account of the company.

(d) In our opinion, the Balance Sheet, Profit & Loss Account and the Cash Flow Statement complies with the mandatory Accounting Standards referred to in section 211 (3C) of the Companies Act, 1956.

(e) On the basis of the representation received from the directors of the Company as on 31st March 2010 and taken on record by the Board of Directors, we report that none of the directors is disqualified as on 31st March 2010 from being appointed as a director of the company in terms of clause (g) of sub section (1) of section 274 of the Companies Act, 1956.

(f) In our opinion and to the best of our information and according to the explanations given to us, the said accounts read with the notes thereon, give the information required by the Companies Act 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:

(i) in the case of the Balance Sheet, of the state of affairs of the company as at 31st march, 2010;

(ii) in the case of the Profit & Loss Account, of the Profit of the company for the year ended on that date; and

(iii) in the case of the Cash Flow Statement, of the Cash Flow of the Company for the year ended on that date.

ANNEXURE REFERRED TO IN PARAGRAPH 3 OF OUR REPORT OF EVEN DATE TO THE MEMBERS OF KOUTONS RETAIL INDIA LTD. ON THE ACCOUNTS FOR THE YEAR ENDED MARCH 31, 2010.

On the basis of such checks as we considered appropriate and in terms of the information and explanations given to us, we state that:- i. (a) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets;

(b) As explained to us, the fixed assets have been physically verified by the management at reasonable intervals, in a phased verification programme, which, in our opinion, is reasonable, having regard to the size of the company and the nature of its assets. No material discrepancies were noticed on such physical verification;

(c) The Company has not disposed off a substantial part of its fixed assets during the year.

ii. (a) As explained to us, inventories have been physically verified during the year by the management at reasonable intervals;

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

(c) On the basis of our examination of the inventory records of the Company, we are of the opinion that, the company is maintaining proper records of its inventory. We are informed that there were no material discrepancies on physical verification as compared to books.

iii. (a) According to the information and explanations given to us, the Company has granted loan to one party covered in the register maintained under section 301 of the Companies Act, 1956 . The maximum amount due during the year was Rs.100.62 lacs and the year-end balance was Rs. Nil.

(b) The said loan is interest free. Other terms and conditions on which the loans have been given are prima facie, not prejudicial to the interest of the company;

(c) In view of our comments in para (iii) (a) and (b)above, clauses 4 (iii) (c) and (d) of the said Order are not applicable.

(d) The company has taken loan from one party covered in the register maintained under section 301 of the Companies Act, 1956 on call basis. The maximum amount outstanding during the year was Rs.2048.39 lacs and the year-end balance was Rs. 15.39 lacs;

(e) The said loan is interest free. Other terms and conditions on which the loans have been taken are prima facie, not prejudicial to the interest of the company;

(f) In view of our comments in para (iii) (d) and (e) above, clause 4 (iii) (g) of the said Order is not applicable.

iv. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures commensurate with the size of the Company and the nature of its business with regard to purchase of inventory and fixed assets and for sale of goods. During the course of our audit, we have not observed any major weakness in internal control.

v. (a) The particulars of contracts or arrangements referred to in Section 301 of the Companies Act, 1956 have been entered in the register required to be maintained in that section.

(b) The transactions made in pursuance of such contracts or arrangements have been made at prices which are reasonable having regard to the prevailing market prices at the relevant time.

vi. The Company has not accepted any deposits from the public, hence the directives issued by the Reserve Bank of India and the provisions of Section 58A & 58AA of the Companies Act, 1956 are not applicable.

vii. In our opinion, the Company has an internal audit system commensurate with the size and nature of its business.

viii The Central Government has not prescribed for maintenance of cost records under section 209 (1) (d) of the Companies Act, 1956 for the Company.

ix (a) The Company is generally regular in depositing with appropriate authorities undisputed statutory dues including provident fund, employees state insurance, income-tax, sales-tax, custom duty, cess and other material statutory dues applicable to it. The following statutory dues were in arrears as at March 31, 2010 for a period of more than six months from the date they became payable.(Refer Exhibit No. “A”)

(b) According to the information and explanations given to us, particulars of outstanding dues of sales-tax, income- tax, custom duty and cess not deposited on account of any dispute are given. (Refer Exhibit No. “B”)

x. The company has no accumulated loss at the end of the financial year and it has not incurred cash loss in the current and immediately preceding financial year.

xi. The company has defaulted in repayment of dues to some Banks and to debenture holders. The details of such defaults are as per Exhibit No. “C”.

xii. As explained to us, the company has not granted loan & advance on the basis of security by way of pledge of shares, debentures & other securities.

xiii. In our opinion, the Company is not a chit fund or a nidhi/mutual benefit fund/ society. Therefore, the provisions of clause 4 (xiii) of the Order, are not applicable to the Company.

Xiv. In our opinion, the Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, the provisions of clause 4(xiv) of the Order, are not applicable to the Company.

xv. According to the information and explanations given to us, the Company has not given any Corporate Guarantee for loans taken by others from financial institution.

xvi In our opinion and according to the information & explanation given to us, the term loans were applied for

the purpose for which the loans were obtained.

xvii. According to the information and explanations given to us and on an overall examination of the Balance Sheet of the Company, we are of the opinion that, prima facie short term funds have not been used for long term investment.

xviii. The Company has not made any preferential allotment of shares to parties and companies covered in the register maintained under section 301 of the Companies Act, 1956.

xix. According to the information and explanations given to us the Company has not issued any debenture during the year. Therefore, the provision of clause 4 (xix) of the order, are not applicable to the company.

xx. According to the information and explanations given to us, the Company has not raised money by way of public issue during the year.

xxi. According to the information and explanations given to us and to the best of our knowledge and belief ,no fraud on or by the company ,has been noticed or reported by the company during the year.

For R .Chadha & Associates

Chartered Accountants

Place: - New Delhi Rakesh Chadha

Date: - 04/09/2010 (Partner)

M.No. 83135