Note C:

The Company has defaulted on payment of matured Non-convertible debentures of '2,250 lakhs due on 30th September, 2017 and ' 2,250 lakhs due on 30th September, 2016 and the Company did not invest the required 15% of the amount of debentures so matured during the financial year in any of the prescribed mode by the Ministry of Corporate Affairs Circular No.04/2013 dated 11.02.2013.

1 These are the Company’s first financial statements prepared in accordance with Ind AS.

The Company has adopted Indian Accounting Standards (Ind AS) notified by the Ministry of Corporate Affairs with effect from 1st April, 2017 with a transition date of 1st April, 2016. Consequently, in preparing these Ind AS financial statements, the Company has availed certain exemptions and complied with the mandatory exceptions provided in Ind AS 101 “First-time Adoption of Indian Accounting Standards”, as explained below. The resulting difference in the carrying values of the assets and liabilities as at the transition date between the Ind AS and Previous GAAP have been recognized directly in equity (retained earnings or other appropriate category of equity).

2 Exemptions and exceptions availed:

A Optional Exemptions:

a Deemed Cost

The Company has opted paragraph D7 AA and accordingly considered the carrying value of property, plant and equipment, investment property and intangible assets as deemed cost as at the transition date.

b Investments in subsidiary

The Company has opted para D14 and D15 and accordingly considered the Previous GAAP carrying amount of Investments as deemed cost subject to their impairment requirements under Ind AS 36 as at the transition date.

c Foreign currency monetary item translation difference account:

Till the date of transition to Ind AS, as per para 46 A of AS11 “The Effects of Changes in Foreign Exchange rates” the exchange differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to acquisition of a depreciable capital asset, are added to or deducted from the cost of the asset and depreciated over the balance life of the asset, and in other cases are accumulated in “Foreign Currency Monetary Item Translation Difference Account” and amortized over the balance period of such long-term asset/liability but not beyond 31st March, 2020, by recognizing income or expense in each of the periods except the exchange differences which are regarded as adjustment to interest costs in terms of paragraph 4(e) of Accounting Standard AS (16) Borrowing costs.

The Company has charged off unamortized foreign currency translation account as on the date of transition to retained earnings as per the option given in paragraph D13AA of IND AS 101 “First-time Adoption of Indian Accounting Standards”

B Ind AS mandatory exceptions:

a An entity’s estimates in accordance with Ind AS at the date of transition to Ind AS shall be consistent with estimates made for the same date in accordance with previous GAAP

b Fair value measurement of financial assets and financial liabilities at the initial recognition.

The fair value of the financial assets and the liabilities at the initial recognition is normally the transaction price i.e the fair value of the consideration given or received except for the following:

(i) Defined benefit plan

(ii) Security deposits under lease contracts

3 Revaluation reserves

On transition to Ind AS, the Company has elected to adopt the carrying value of the property, plant and equipment on the date of transition as its deemed cost. Hence revaluation reserve accounted under previous GAAP outstanding as on the date of transition to Ind AS amounting to '41,281.96 lakhs is transferred to retained earnings.

Note 35 Reconciliation between previous GAAP and Ind AS : a Reconciliation of total equity as at 31 March, 2017 and 1 April, 2016

Note:

1 Foreign currency transactions

Under previous GAAP, the exchange differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to acquisition of a depreciable capital asset, are added to or deducted from the cost of the asset and are depreciated over the balance life of the asset, and in other cases are accumulated in “Foreign Currency Monetary Item Translation Difference account” and amortized over the balance period of such long-term asset / liability but not beyond 31st March, 2020, by recognizing income or expense in each of the periods except the exchange differences which are regarded as adjustment to interest costs in terms of paragraph 4(e) of Accounting Standard AS (16) Borrowing costs.

On transition to Ind AS, the Company has charged off unamortized foreign currency translation account as on the date of transition to retained earnings as per the option given in paragraph D13AA of IND AS 101 “First- time Adoption of Indian Accounting”.

2 Fair valuation of Financial Assets

Under the previous GAAP, interest free lease security deposit assets (that are refundable in cash on completion of the contract term) are recorded at their transaction value. Under Ind AS, all financial assets are required to be recognized at fair value at initial recognition and subsequently at amortized cost. Accordingly, the Company has fair valued these security deposits under Ind AS. Difference between the fair value and transaction value of the security deposit has been recognized as prepaid rent. Prepaid rent is amortized over the tenure of the deposits, which is partially set off by the notional interest income recognized on such deposit.

3 Remeasurement of post-employment benefit obligations (net of Tax)

Under Ind AS, all items of income and expense recognized in a period should be included in profit or loss for the period, unless a standard requires or permits otherwise. Items of income and expense that are not recognized in profit or loss but are shown in the statement of profit and loss as ‘other comprehensive income’ includes remeasurements of defined benefit plans. The concept of other comprehensive income did not exist under previous GAAP. Accordingly, loss on remeasurements of post-employment benefit obligation has been reclassified to the Other Comprehensive Income for the period.

Additional information to the Financial Statements 36.1 Debt Restructuring

(a) The Corporate Debt Restructuring (CDR) Empowered Group, in their meeting held on 28th June, 2014 declared that the account of the Company stands exited from CDR system on account of failure. Pursuant thereto, on 30th June, 2014, 14 of the erstwhile CDR lenders with exposure of about 95.6 % of the CDR debt assigned their debt to JM Financial Asset Reconstruction Company Limited (JMFARC) (formerly JM Financial Asset Reconstruction Company Private Limited) and 1 lender with exposure of about 1% of the CDR debt, to Phoenix ARC Private Limited.

(b) The total amount assigned by the erstwhile CDR lenders to Asset Reconstruction Companies (ARCs) was Rs, 4,15,014 lakhs, which included Sacrifice amount of Rs, 26,315 lakhs. The Company has not accounted the Sacrifice amount, as it reflects the difference in the NPV between the cash flows as per the contracted terms and the cash flows agreed by the lenders as per the CDR Package, for the duration of the loan.

(c) The ARCs have notified the Company that (i) interest and penal interest are applicable as per the rates contracted prior to admission to CDR; (ii) the finance cost on the debt for the year is Rs, 78,873 lakhs and till 31st March, 2018 is Rs, 3,03,145 lakhs; and (iii) the debt amount is Rs, 5,60,015 lakhs as against Rs, 2,56,870 lakhs accounted by the Company. The Company has been evaluating various options for a viable restructuring, including sale / monetization of non-core assets, sale of hotels, equity infusion and debt refinancing by investors, etc. The Company expects the restructuring to include certain waiver/concessions in interest and repayment terms. Pending this, the Company has classified the debt as non-current liabilities in the Balance Sheet and has not provided for interest at rates notified by ARCs. If interest provision was made in accordance with the intimation received from the ARCs, the finance cost and the loss for the year would have been higher by Rs, 78,873 lakhs (previous year Rs, 73,327 lakhs) and the interest liability till 31st March, 2018 would have been higher by Rs, 3,03,145 lakhs (previous year Rs, 2,24,272 lakhs).

36.2 Disputes with Airports Authority of India (AAI)

(a) The lease agreement with AAI relating to the Mumbai hotel was valid till 11th July, 2012 and vide letter dated 31st March, 2011, AAI had offered to extend the lease by another 30 years, subject to revised terms, which the Company had accepted. Pending execution of the lease agreement, AAI had been provisionally extending the lease for 3 to 6 months at a time and the latest extension was till 11th January, 2016. AAI has arbitrarily increased the lease rental payable for the Mumbai hotel, effective from 1st October, 2014 which increases the rental by Rs, 3,877 lakhs for the period upto 31st March, 2018 (upto 31st March, 2017 Rs, 2,659 lakhs). The Company has objected to this increase and has not provided for the same. AAI has unilaterally terminated the lease and commenced eviction proceedings and the Company is legally contesting the same. Depreciation on Mumbai hotel building is provided at the applicable rate, on the assumption that the lease will be renewed.

(b) The Company had entered into a lease agreement on 7th February, 1996 with the Airports Authority of India (AAI) in respect of a land admeasuring 11,000 sqm intended for the construction of a 150-room Hotel at Mumbai based on terms stipulated in it of Royalty on turnover with minimum guaranteed amounts (MG) to be mutually agreed and annual ground rent between the parties. The percentage of Royalty and MG was stipulated in the Supplemental Agreement dated 7th February, 1996. The MG was arrived at based on certain revenue projections.

The terms and stipulations specified in the supplemental agreement became impossible of performance for various reasons. Aggrieved by this, the Company opted arbitration proceedings. The sole Arbitrator appointed by AAI by his award dated 29th August, 2012 declared that the MG stipulated in the supplemental agreement has become impossible of performance with effect from 1st June, 2008. AAI challenged the award before the single judge of the Delhi High Court which set aside the award. On appeal by the Company, the Division Bench also affirmed the setting aside of the award. The Special Leave Petition filed by the Company before the Supreme Court was dismissed and the Review Petition has been filed by the Company but not yet heard. According to AAI the amount outstanding is Rs, 31,119 lakhs upto 31st July, 2017 (Previous year Rs, 28,538 lakhs upto 31st December, 2016), the Company has disputed their claim. Further, the Company vide letter dated 6th April, 2017 requested AAI to take over immediate physical possession of the land pending restoration of FSI by the Company. No Provision has been made for the cost of FSI as it is not ascertainable.

The Company has now received expert legal opinion from eminent councils that, without prejudice to its contention that the matter is pending before the Supreme Court, the entire proceedings before the Ld. Arbitrator is a “nullity” in law and void ab initio, as disputes arising from a Lease Deed relating to property are not subject to arbitration; but the resolution of such disputes must be confined to the adjudication either of a Civil Court alone or, in case of any of the 2 parties drawing any special right under any special Act, before the judicial forum specially designated under such special Act and therefore the proceedings before the Ld. Arbitrator were “without jurisdiction” and that consequently, the Company is not liable to pay the demand raised by AAI. The Company is considering filing appropriate proceedings before the City Civil Court, Mumbai. Based on the opinion, no provision has been made because the dispute is still pending.

36.3 For reasons explained in 36.1 and 36.2, the financial statements of the Company have been prepared on a going concern basis.

36.6 Employee benefit plans

Defined contribution plans

(i) The Company makes Provident Fund contributions to defined contribution plans for qualifying employees. Under the plan, the Company is required to contribute a specified percentage of the payroll costs to fund the benefits. The contributions payable under these plans by the Company are at rates specified in the rules of the schemes.

Defined benefit plans

The Company offers the following employee benefit schemes to its employees:

Gratuity

The Company has a tie-up under Employees’ Trust Deed Group Gratuity- cum-Life Assurance Scheme of the Life Insurance Corporation of India, and has partly funded the defined benefit plan for eligible employees. The scheme provides for lump sum payment to eligible employees on retirement, death while in employment or on termination of employment, of an amount equivalent to 15 days’ salary payable for each completed year of service or part thereof in excess of six months subject to a limit of ' 20 lakhs. The unfunded portion as well as the amounts in excess of the limit are to be borne by the Company, as per policy. Eligibility occurs upon completion of five years of service.

The present value of the defined benefit obligation and current service cost are measured using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date.

(ii) Compensated absence liabilities

Present value of compensated absence liabilities (unfunded) recognized in Balance Sheet as per actuarial valuation under Projected Unit Credit Method is Rs, 962.28 lakhs (Previous year Rs,1,089.93 lakhs), of which long term liability is Rs, 767.22 lakhs (Previous year Rs, 794.90 lakhs) and short term liability is Rs, 195.06 lakhs (Previous year Rs, 295.03 lakhs).

36.7 Related party transactions

(i) Details of related parties:

Subsidiary:

Leela Palaces and Resorts Ltd.

Associates:

Leela Lace Holdings Pvt. Ltd. Fransisco Hospitality Pvt. Ltd. LM Realtors Pvt. Ltd.

Leela Lace Software Solutions Pvt. Ltd. Leela Capital and Finance Ltd. LMV Associates Ltd.

Leela Fashions Pvt. Ltd. Leela Housing Pvt. Ltd. Genuine Hotels Facilities & Services Pvt. Ltd.

Rockfort Estate Developers Pvt. Ltd. Leela IT Projects Pvt. Ltd. Leela Palace (Bangalore) Pvt. Ltd.

Leela Hospitality Pvt. Ltd. Leela Lace Builders Pvt. Ltd. Leela Palace Chennai Pvt. Ltd.

Elegant Eateries Pvt. Ltd. Leela Lace Estates Pvt. Ltd. Leela Palace New Delhi Pvt. Ltd.

Emmel Real Estate Development Pvt. Ltd. Leela Realty Ltd. Season Apparels Pvt. Ltd.

Esteem Constructions Pvt. Ltd. Leela Villas Pvt. Ltd. Vibgyor Leasing Pvt. Ltd.

Key Management Personnel (KMP)

Mr. Vivek Nair Mr. Dinesh Nair Relative of KMP

Mrs. Madhu Nair (wife of Mr. Dinesh Nair)

1 The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing

parties, other than in a forced or liquidation sale.

2 The following methods and assumptions were used to estimate the fair values:

a The fair value of trade receivables, trade payables and other current financial assets and liabilities are considered to be equal to the carrying amounts of these items due to their short-term nature. Where such items are non-current in nature, the same has been classified as Level 3.

b Company has invested in certain power generating Companies pursuant to the contract for procuring electricity supply at the hotel units. Investment in said Companies are not usually traded in the market. Considering the terms of the electricity supply contract and best information available, cost of investment is considered as fair value of these investments.

c The fair value of security deposits are calculated using effective interest rate. They are classified as level 3 fair values in the fair value hierarchy due to the use of unobservable inputs.

d The Company has been in evaluating various options for a viable restructuring, including sale / monetisation of non-core assets, sale of hotels, equity infusion and debt refinancing by an investor, etc. The restructuring would involve concessions in interest and repayment terms. Pending this, Company has not provided for interest on debt assigned by erstwhile CDR lenders and have therefore not computed the fair value of these borrowings in its financial statements. (Also refer Note 36.1)

e Considering the contracted rate of interest, the carrying amounts of all other term borrowings that are measured at fair value are reasonable approximation of fair value .

f For financial assets and liabilities that are measured at fair value, the carrying amounts are equal to their fair values.

3 Analysis of fair value measurement:

a The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.

Level 3: techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data.

b During the period under review, level 3 hierarchy is considered for determination of fair value for all the financial assets and liabilities which are measured at fair value.

Financial risk management objectives and policies:

The activities of the Company expose it to market risk, credit risk and liquidity risk.

The Company’s principal financial liabilities comprise interest bearing loans including loans taken over by Asset Reconstruction Companies (ARCs), long term security deposits received, trade and other payables. The main purpose of these financial liabilities is for funding its expansion and also to finance operations. The group has trade and other receivables and cash and short term deposits that arrive directly from its operations. The Company has also paid long term lease deposits.

Risk management is carried out by the finance department under the policies approved by the Board of Directors. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarized below:

A Market Risk:

Market risk is the risk of loss of future earnings, fair values or future cash flows that may result from a change in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates and other market changes that affect market risk sensitive instruments. Market risk is attributable to all market risk sensitive financial instruments including investments and deposits, foreign currency, payables and loans and borrowings.

The Company manages market

market risks through finance department, which evaluates and exercises independent control over the entire process of market risk management. The finance department recommends risk management objectives and policies which are approved by the finance committee and Audit Committee. The activities of the department includes management of cash resources, borrowing strategies and ensuring compliance with market risk limits and policies.

- Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of the financial instruments will fluctuate because of changes in market interest rates. The Company’s exposure to the risk changes in the market interest rates relates primarily to the Company’s long-term debt obligation. As detailed in note 36.1, the Company is pursuing with ARC for a viable restructuring package, with lower interest rate and longer repayment terms.

The Company has also availed foreign currency term loans with variable interest rates linked to LIBOR.

- Foreign currency risk

Foreign currency risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate due to the changes in the foreign exchange rates. The company is exposed to the effect of foreign exchange rate fluctuations because of its foreign currency linked revenue, foreign currency denominated expenses and other financial instruments. Due to this any volatility in foreign currency exchange rates will have an impact to the Company.

C Liquidity risk :

The Company’s principal sources of liquidity are cash and cash equivalents and the cash flow that is generated from operations. Competitive intensity has adversely impacted revenue and consequent cash accruals during the year. This, coupled with current level of debt and imminent repayment obligations, has led to stress on liquidity profile. The Company closely monitors its liquidity position in consultation with its lenders to ensure that the operations of the Company are not affected adversely due to liquidity and is attempting to enhance its sources of funding by increasing cash flow generated from its operations and realizations from other proposed measures.

The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual obligations.