REPORT OF THE BOARD OF DIRECTORS
The Directors of your Company have pleasure in presenting their Annual Report andAccounts for the year ended 31st March, 2012.
|Financial Results || ||Rs Lakhs |
| ||2011-12 ||2010-11 |
|Revenue from Operations ||159846 ||139654 |
|Net Profit after Tax ||14251 ||9501 |
|Profit brought forward from previous year ||9070 ||8620* |
|Balance available for Appropriation ||23321 ||18121 |
|Amount transferred to General Reserves ||1450 ||975 |
|Dividend proposed ||10037 ||6949 |
|Corporate Dividend Tax ||1629 ||1127 |
|Surplus in the Statement of Profit and Loss ||10205 ||9070 |
*Including Rs242 lakhs taken over on amalgamation of its wholly owned subsidiary VSTDistribution, Storage & Leasing Company Private Limited with the Company
|KEY RATIOS || || |
|Earnings Per Share (Rs) ||92.29 ||61.53 |
|Dividend Per Share (Rs) ||65.00 ||45.00 |
3 The financial year 2011-12 recorded an improvement of 14.4% in Sales (Gross) and50% in Profit after Tax when compared to the previous year.
3 A record year with record sales, record Profit after Tax and dividend Per Share ofRs65, in the history of the Company.
3 Value creation during the decade has been Compounded Annual Growth Rate (CAGR),14.1% in Earnings Per Share (EPS) and 25.9% in Dividends Per Share (DPS).
INDUSTRY STRUCTURE & DEVELOPMENT
The Union Budget presented in February 2011, did not propose any changes in the exciserates, which was a welcome relief for the industry and your Company. The industry as aresult had a marginal growth in volumes of around 4%; however, your Company was able tobeat the general industry trend and grow volumes by 12% when compared to same period lastyear.
Financial year 2011-12 was one of the best years in terms of volume growth. Filtervolumes now cover virtually 98% of your Company's volume. The increase in VAT rates acrossstates continued with more states increasing the VAT rates during the current financialyear. Two key states e.g. West Bengal and Andhra Pradesh, where your
Company has sizeable presence, increased VAT rates to 20% each. This will impactmargins and profitability both in the current year and in the future.
During the financial year 2011-12, increase in VAT rates were affected in 17 statesranging from 0.75% to 11.5%.
Stable tobacco prices and higher foreign exchange volatility were the other highlightsfor the current financial year.
Change in graphic health warning which was to be made effective 1st November, 2010 wasdeferred to the financial year 2011-12 as the law was amended to make it compulsory forcigarette companies to change graphic health warnings every twenty-four months instead ofevery twelve months. The new graphic health warnings have come into effect from 1stDecember, 2011.
Apart from legacy taxation issues, the industry had to address fewer legal cases.
SEGMENT WISE PERFORMANCE
Your Company considers tobacco and related products as the primary segment forreporting. Geographical segments considered for disclosure mainly consist of sales withinIndia and sales outside India. The entire activity pertaining to sales outside India iscarried out from India.
Your Company's brands were stable during 2011-12, with most brands gaining volumes.
The Company's filter brands performed well with all key brands showing gains over theprevious year. Brands like SPECIAL EXTRA FILTER, MOMENTS and CHARMS VIRGINIA FILTER werethe key contributors to the growth in volume.
The growth in volume of most of the brands has to be viewed in contrast to steepincreases in VAT in different states during the year including the key states where yourCompany operates.
Your Company continued its strategic thrust of launching new brands in value-for-moneysegments in markets which provide opportunities as these continue to help grow thevolumes.
During the year under review the cigarette volumes stood at 762 mns up by 12% whencompared to 2010-11. The value realisations were higher at Rs1435 crore, up by 16.4% whencompared to Rs1230 crore during the previous year.
Competition has intensified with many brands now available at different price pointswhere your Company's brands are present. This is apart from your Company's brands havingto face the non-duty paid cigarettes which are available across markets in India.
Your Company has recorded leaf export turnover of Rs154 crore, in the year 2011-12,despite glut in the international market and volatility in exchange rate. The situationwhich was similar last year did not show any improvement and in fact it worsened duringthe current financial year. Latest statistics reveal that Indian tobacco exports are lowerwhen compared to same period last year.
The focus on developing niche varieties of tobacco continued. Besides help develop thebackward regions, it has also helped in improving the Company's profitability. Theoriental project continues with improved agronomic practices.
It is gratifying to learn that your Company's farmers continue to grow tobacco withlowest pesticide residue levels and low TSNAs (Tobacco Specific Nitrosamaines) that arewell within international standards.
Your Company's leaf tobacco function continues to be certified by Registro ItalianoNavale, Genova, Italy for SA8000 reflecting Company's resolve to follow best internationalpractices in its operations.
Your Company is committed to encourage education to children in the tobacco growingareas by way of creating infrastructure for school buildings and spreading awareness inthe villages to curb child labour.
PRODUCTION AND PLANT MODERNISATION
In pursuance of ongoing modernisation plan of Primary and Secondary ManufacturingDepartments to improve productivity and quality, contemporary technology has been put inplace.
During the year, a total of 147 technicians (116 Mechanical & 31 Electrical) havebeen trained by reputed training institute and Original Equipment
Manufacturers as part of skills upgradation.
HUMAN RESOURCE DEVELOPMENT
Your Company's Human Resource Management focus continues to be in making available atalent pool, for meeting challenges in the competitive market place, which is increasinglybecoming complex.
Development plans have been drawn up for key managers to shoulder higherresponsibilities as well as to enhance their job effectiveness.
As on 31st March, 2012, your Company had a strength of 931 employees, with 296management staff and 635 workmen.
CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO
Information in accordance with clause (e) of sub-section (1) of Section 217 read withthe Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988is given in the Annexure to this Report.
ENVIRONMENT, HEALTH & SAFETY (EHS) AND COMMUNITY SERVICES
Your Company has been maintaining high safety performance for the last 364 days withoutany accidents.
Gold Award for the year 2011 was presented to your Company by Royal Society forPrevention of Accidents (RoSPA), U.K. for maintaining highest standards in Occupational,Health and Safety.
Accident Free Award was awarded to your Company by British American Tobacco on 5thApril, 2011 for One Year Accident Free from 21st March, 2010 to 20th March, 2011.
Safety Innovation Award was awarded to your Company by Institution of Engineers Indiaon 29th November, 2011.
Environment, Health and Safety (EHS) in day-to-day business operations is given veryhigh priority by your Company. 584 employees and 35 contractors have undergone EHStraining and 585 employees have undergone fire fighting training programme. Mock firedrills were also conducted for workers and management during the period to comply with theCompany's EHS guidelines. Involvement by workmen in quarterly EHS reviews along with staffmembers and periodical inspections have kept the performance monitoring on vigil.Quarterly and annual EHS audits of Company operations including leaf godowns was carriedout to ensure compliance of EHS requirements, and to measure the EHS progress. EHS RoadMap rating for your Company was assessed at 3.54 as against the scale of 4.0 for the year2011-12.
Your Company celebrated National Safety Day on 4th March, 2012, by conducting Safetymeetings inside the factory and all contractors attended the safety programme conducted byNational Safety Council.
Surveillance Audit of ISO 14001: 2004 & OHSAS 18001: 2007 for the year 2011-12 andrecertification audit for the year 2012-16 were conducted by Registro Italiano NavaleIndia (RINA).
On the environmental side, as a responsible corporate, your Company continues to put insustained efforts in the upkeep and improvement of existing systems like Scrubber, DRFsystems, rain water harvesting pits, ETP with soil bio-technology, and also in energyconservation installation of solar water heating panels for boiler feed water and for theworkers canteen boiler.
Water Consumption was reduced by 25 Kl/day in 2011-12.
As a social responsibility and to conserve greenery, your Company is encouraging socialforestry through afforestation and Trees for Life programme. It is also activelydiscouraging child labour involvement in tobacco growing/processing. Your Company hasinstalled water purifiers in major tobacco growing villages to improve health throughsupply of clean drinking water to the rural community.
All statutory compliances are in place.
The thrust on EHS will continue while emphasizing the focus on Best International Workpractices.
The Profit after Tax for the year at Rs142.51 crore is the highest ever recorded byyour Company in its history.
The continuous increase in taxation over the last several years has made improvement inmargins a daunting task thereby impacting profitability.
Your Company's thrust on growing volumes continued during the year with greater successthough industry growth remained moderate.
Your Company's focus on working capital management and budgetary control on expenseshas resulted in improvement of profitability. When compared to previous year, yourCompany's profits improved both in cigarettes and leaf tobacco operations.
b. Treasury Operations
Your Company follows a SLR model (Safety, Liquidity and Return) in deployment ofsurplus funds which arise periodically during the year. The Company predominantly deploysmoney in debt funds of reputed mutual funds and tax free bonds issued by governmentbodies. Such investments earned Rs16 crore during the current year.
ENTERPRISE RESOURCE PLANNING (ERP)
Your Company was able to successfully manage the entire ERP system by developing anin-house team. All routine business issues as well as improvements in existing systemshave been undertaken by the team. This team interacts with managers of the operating teamsand works continuously to help improve the overall business processes. Your Company hasalso developed adequate skills to manage issues arising out of facilities management andnetworking which are the other limbs of the IT infrastructure.
Your Company has stopped accepting fresh deposits for several years now.
As on 31st March, 2012, your Company does not have any deposits for the purpose of itsbusiness. Unclaimed deposits amounting to Rs8,000 are outstanding.
The Credit Rating Information Services India Limited (CRISIL) has re-affirmed therating of your Company to 'FAAA/ Stable' for Fixed Deposit Schemes, 'AA+/Stable' for LongTerm Non-convertible Debentures and P1+ for Non-fund based liabilities (Letter of Creditand Bank Guarantee).
Your Company had by its letter dated 25th October, 2001 communicated to all the Membersabout the promulgation of rules pertaining to the Investor Education and Protection Fund.Dividends which remain unpaid or unclaimed for a period of seven years would be depositedin the Investor Education and Protection Fund. The final dividend for the year ended 31stMarch, 2005 remaining unpaid would be deposited by 30th August, 2012 in accordance withSection 205C read with Investor Education and Protection Fund (Awareness and Protection ofInvestors) Rules, 2001.
UNCLAIMED SHARE CERTIFICATES
Your Company has communicated to the Members whose share certificates are returnedundelivered to the Company that these would be transferred to the Unclaimed SuspenseAccount if not claimed by them, as required under the Listing Agreement amended by SEBIvide its Circular dated 16th December, 2010.
The status of unclaimed shares as on 31st March, 2012 is given in the Report onCorporate Governance.
The Company's Report on Corporate Governance is annexed to this Report.
Certificate of the Statutory Auditors of your Company regarding compliance of theconditions of Corporate Governance as stipulated in Clause 49 of the Listing Agreementwith stock exchanges is annexed to this Report.
Your Company has taken adequate steps for strict compliance with the CorporateGovernance guidelines, as amended from time to time.
The Ministry of Corporate Affairs has released draft guidelines for voluntarycompliance covering various aspects. Your Company has already implemented most of theitems and is considering feasibility of implementation for balance provisions.
INTERNAL CONTROL SYSTEMS
Your Company remains committed to improve effectiveness of internal control systems andprocesses which would help in increasing the efficiency of operations and provide securityof its assets.
The internal audit process in your Company captures the control environment prevalentin the organization. Over a period of three years, the entire business process of yourCompany is reviewed through a systems audit process which helps review the systems on acontinuous basis. The objective is to identify potential risk areas and come up with acomprehensive mitigation plan.
The Audit Committee of your Board met four times during the year. Review of auditobservations covering the operations, consideration of accounts on a quarterly basis andmonitoring the implementation of audit recommendations were some of the key areas of focuswhich were dealt with by the Committee. The Statutory Auditors/System Auditors wereinvited to attend all the Audit Committee meetings and make presentations covering theirobservation on adequacy of internal controls and the steps required to bridge gaps, ifany.
The self-evaluation system which was put in place on internal controls is beingreviewed continuously to improve its effectiveness.
Risk Management is monitored by a Committee comprising members from various functions.The Committee meets periodically to identify the potential risks as well as to takeadequate steps for mitigating the risks which have been identified. A comprehensive notecovering various aspects is reported to the Board every quarter.
Directors retiring by rotation
In accordance with Article 93 of the Articles of Association of your Company, Mr. PeterG. Henriques and Mr. Milind A. Kharat retire from the Board and being eligible, offerthemselves, for re-election. Your Board recommends their re-appointment.
Mr. Peter G. Henriques
Mr. Peter G. Henriques was appointed at the Annual General Meeting held on 16th July,2010. He is now due to retire by rotation at the forthcoming Annual General Meeting andbeing eligible, offers himself for re-appointment.
Mr. Henriques holds Bachelor of Arts degrees in History and International Relationsfrom Syracuse University in New York, and a Master's degree in International Affairs fromColumbia University in New York City.
Mr. Henriques has been in the tobacco industry for 20 years and is currently positionedin B.A.T. Marketing (Singapore) Representative Office, Vietnam.
Mr. Henriques neither holds any shares in the Company nor is related to any otherDirector of the Company.
Mr. Milind A. Kharat
Mr. Milind A. Kharat was appointed at the Annual General Meeting held on 16th July,2009. He is now due to retire by rotation at the forthcoming Annual General Meeting andbeing eligible, offers himself for re-appointment.
Mr. Kharat is a Post Graduate in Economics, a Bachelor of Law and a Fellow of InsuranceInstitute of India (FIII). He has rich experience of more than three decades in theGeneral Insurance Industry. He was the Chief Metropolitan Magistrate appointed byGovernment of Maharashtra. He made significant contributions for revision of Fiji'sInsurance Act, 1998. He served as an Executive Member on the National Road Safety Councilof Fiji representing insurance industry. He is an Executive Member of Foreign Non-LifeInsurance Association of Japan. He is a Director of United India Insurance Company Limitedand also the Chairman cum Managing Director of Agriculture Insurance Company of IndiaLimited.
Mr. Kharat neither holds any shares in the Company nor is related to any other Directorof the Company.
Mr. Devraj Lahiri
Mr. Devraj Lahiri has been appointed as Director and Wholetime Director of the Companywith effect from 1st August, 2011, at the Board Meeting held on 14th July, 2011, to holdoffice for a period of five years with effect from 1st August, 2011 to 31st July, 2016(both days inclusive).
Mr. Devraj Lahiri is a Commerce graduate from Calcutta University and Masters inBusiness Administration from Indian Institute of Social Welfare and Business Management,Kolkata. He joined the Company in 2001 and has made significant contributions during hisassociation with the Company. He is a member of the Committee of Directors andShareholders Grievance Committee of the Company.
Mr. Devraj Lahiri neither holds any shares in the Company nor is related to any otherDirector of the Company.
Mr. Raymond S. Noronha
Mr. Raymond S. Noronha was appointed as Managing Director on the Board of your Companywith effect from 1st November, 1998 and is due to retire on 2nd September, 2012.
The Board of Directors at its meeting held on 17th April, 2012 recommended for theapproval of the Members, the appointment of Mr. Raymond S. Noronha as a Non-ExecutiveDirector of the Company with effect from 3rd September, 2012. Appropriate resolutionseeking your approval to the appointment is appearing in the Notice convening the 81stAnnual General Meeting of your Company.
Mr. Noronha is a B.A. (Hons.) from St. Stephen's College, Delhi and attended theWharton Advanced Management Program (1995) at Philadelphia, USA. He has had over 36 yearsof varied experience in the cigarette business both international and domestic and hasheld several top level positions for over a decade. He is also a director on the board ofthe Tobacco Institute of India.
Mr. Noronha neither holds any shares in the Company nor is related to any otherDirector of the Company.
DIRECTORS' RESPONSIBILITY STATEMENT
Pursuant to Section 217(2AA) of the Companies (Amendment) Act, 2000 the Directorsconfirm that:
1. in the preparation of the annual accounts, the applicable accounting standards havebeen followed;
2. appropriate accounting policies have been applied consistently.
Judgement and estimates which are reasonable and prudent have been made so as to give atrue and fair view of the state of affairs of your Company as at the end of the financialyear and of the profit of your Company for the period;
3. proper and sufficient care has been taken for the maintenance of adequate accountingrecords in accordance with the provisions of the Companies Act, 1956 for safeguarding theassets of your Company and for preventing and detecting fraud and other irregularities;
4. the annual accounts have been prepared on a going concern basis.
i. Income Tax
a. Financial Services Business
It may be recalled that your Company had diversified into Financial Services Businessand Foods Business in the early nineties. Subsequently in the year 1998-99, your
Company incurred a total loss of Rs38.67 crore in the financial services business ofwhich Rs29.70 crore was claimed as loss under the head 'Income from Business' and Rs8.97crore was claimed as a capital loss under the provisions of the Income Tax Act.
The Income Tax Appellate Tribunal allowed the entire amount of Rs38.67 crore as acapital loss. It may be noted that the department had treated the entire loss as a'Speculation Loss.'
Your Company has filed an appeal before the Hon'ble High Court of Andhra Pradesh whichhas been admitted. The matter is yet to be heard.
Further in connection with its divestment from the Foods Business in the financial year1999-00, your Company had incurred a total loss of Rs53.68 crore, of which Rs44.18 crorewas claimed as a loss under the head 'Income from Business' and Rs9.50 crore was claimedas a capital loss under the provisions of the Income Tax Act. The Income Tax Departmenthas disallowed the entire amount excepting Rs5.70 crore which was allowed as a capitalloss. The Commissioner of Income Tax (Appeals) further allowed Rs11.24 crore out of thebalance amount of Rs47.98 crore, on appeal before him and the same was upheld by theIncome Tax Appellate Tribunal. Your Company has preferred an appeal against the aboveorder and the matter is now before the Hon'ble High Court of Andhra Pradesh.
Consequent to the above orders, the Income Tax Department had issued consequentialorders under Section 154 of the Income Tax Act demanding Rs28.86 crore (revised) which waspaid by your Company.
b. North East
You would recall that pursuant to the withdrawal of exemption notification formanufacture of cigarettes in the North Eastern region in terms of Supreme Court judgementof 19th September, 2005, your Company had paid an amount of Rs31.20 crore towardsprincipal and provided an amount of Rs12.69 crore towards interest.
In the income tax return filed by your Company for the relevant year, this amount wasconsidered as an allowable expenditure in the assessment for the year 2006-07. However,subsequently the Income Tax department has sent a demand notice seeking payment of Rs19.3crore being tax payable along with interest which was paid by your Company. Your Companywill contest the same.
c. Subsidiary Company
During the financial year 1998-99, your Company's erstwhile subsidiary had receivedfinancial assets worth of Rs1200 lakhs against a future liability of Rs5200 lakhs. Thiswas settled on 31st March, 1999 for an immediate payment of Rs1250 lakhs. The settlementwas not accepted during the assessment proceedings and accordingly disallowed by theIncome Tax authorities. On appeal before the Commissioner of Income Tax (Appeals), thematter was held in favour of your Company's subsidiary. However, the Income Tax Tribunalwhile holding the matter against your Company's subsidiary held that the ratification ofthe said settlement agreement by the Board did not relate to 31st March, 1999 andconsequently the liability to pay Rs1250 lakhs did not arise in the financial year 1998-99and therefore not allowable as a deduction for the year. The tax liability on this isRs420 lakhs apart from interest.
Your Company's subsidiary preferred an appeal against the above order before theHon'ble High Court of Andhra Pradesh, which was pleased to pass a judgement in yourCompany's favour. A Caveat has however been filed by your Company in Supreme Court by wayof abundant caution.
ii. Luxury Tax
As mentioned in last year's Report, a Contempt Petition has been filed in the Hon'bleSupreme Court by the Commercial Tax Officer, on behalf of the Government of Andhra Pradeshagainst the Managing Director of your Company alleging contempt of the Hon'ble SupremeCourt's judgement dated 20th January, 2005 which had set aside levy of Luxury Tax. TheDepartment has alleged that your Company has failed to pay an amount of Rs34.86 crorebeing the Luxury Tax collected from customers by your Company after passing of the interimorder dated 1st June,1999 but not paid to the State Government of Andhra Pradesh which isin violation of the said judgement dated 20th January, 2005. An amount of Rs29.81 crorehas also been claimed as interest thereon @ 24% per annum. Your Company and the ManagingDirector have both filed separate counter affidavits strenuously denying that there hasbeen any contempt on their part of the said judgement of the Hon'ble Supreme Court. Thecontempt case charges against the Managing Director of your Company were dismissed byHon'ble Supreme Court. As far as the case against the Company is concerned, there havebeen no further developments during the year, though the case was listed a couple oftimes. The case is likely to be posted for final hearing in July, 2012.
iii. Entry Tax
As mentioned in last year's Report, several High Courts in the country including thoseof Andhra Pradesh, Kerala, Tamilnadu and Assam have struck down the levy of Entry Tax onthe ground that it is violative of Article 301 and not saved under Article 304(b) of theConstitution, as it is not compensatory in the manner required in terms of the SupremeCourt judgement in the case of M/s. Jindal Stainless Limited. Thereafter, several statessuch as Uttar Pradesh, Bihar and Haryana have attempted to reintroduce Entry Tax byamending the original Acts, sparking a fresh round of legal challenges in the High Courts.Most of the appeals filed by the various states, and individual companies have beenclubbed together.
The Hon'ble Supreme Court by its Order dated 18th December, 2008 in the batch of casesheaded by Jai Prakash Associates vs the State of MP has referred a number of vitalquestions on levy of Entry Tax, to the Constitutional Bench in terms of Article 145(3) ofthe Constitution which are still pending adjudication. The Hon'ble High Court of Allahabadhas passed a judgement upholding the constitutional validity of Entry Tax in Uttar Pradeshwith retrospective effect, against which your Company filed an affidavit in the SupremeCourt. In terms of the interim orders of the Supreme Court, your Company had to pay Rs6.15crore as deposit pending disposal of the batch of appeals. The case has now been referredto the Supreme Court along with other cases.
a. Wrapping Materials
As mentioned in last year's Report, the Customs, Excise and Service Tax AppellateTribunal, Bangalore by its Order dated 8th October, 2004 had allowed your Company's appealand set aside the demand of the Excise Department for an amount of Rs3.62 crore (includingpenalty and interest @ 24%) on the ground that Gay Wrappers (printed paper used forwrapping cigarette packets) had been manufactured and consumed by your Company withoutpayment of duty during the period April 1996 to March 2002. An appeal against the saidOrder has been filed by the Excise Department and is presently pending in the Hon'bleSupreme Court.
In the meantime, the Hon'ble Supreme Court by its Order dated 27th November, 2008 hasremanded various other similar appeals pertaining to other manufacturers back to theirrespective Tribunals for re-adjudication in the light of individual facts of each case.Notices for subsequent periods have also been received by your Company which have beenkept pending awaiting the decision of the Hon'ble Supreme Court.
b. Cigarette manufacture in North Eastern states
As mentioned in last year's Report, the Excise Department had demanded a sum of Rs5.85crore from two of your Company's former contract manufacturers, by way of interest on theprincipal amount of Rs31.20 crore repaid to the Excise Department, consequent upon thejudgement of the Hon'ble Supreme Court dated 19th September, 2005. The two contractmanufacturers had filed Writ Petitions challenging the said demands in the Hon'bleGuwahati High Court and obtained Interim Orders staying partial recovery until finaldisposal. Against the said Interim Orders, the Department had filed appeals in the Hon'bleSupreme Court. By its Order dated 15th April, 2009 the Hon'ble Supreme Court has requestedthe Hon'ble High Court to dispose off the Writ Petitions within a period of two monthsfrom the date of communication of the
Order. A Single Member Bench disallowed the writ petitions and upheld levy of interest.Against the judgement, the contract manufacturers filed appeals before the Division Bench,which passed interim orders staying the judgement of the Single Bench. Final hearing hasbeen completed and the appeals were reserved for judgement. The matter was again listedfor hearing on 27th March, 2012 for further final hearing and adjourned to the last weekof April 2012.
c. Tobacco Refuse
Your Company has received show cause notices demanding recovery of duty on cut tobaccoused in the manufacture of tobacco refuse together with interest and penalty from January2005 to November 2009.
Your Company has now received a demand for Rs10.22 crore being excise duty and penaltyfor the period up to 30th November, 2009. Interest is payable separately till the date ofpayment. Your Company's appeal before CESAT was heard favourably and a stay with completewaiver of pre-deposit has been granted in the interim as prayed for by your Company. YourCompany continues to receive show cause notices for subsequent periods.
v. Service Tax
Your Company has received show cause notices from the Excise Department seeking to denyCENVAT credit availed on service tax paid by various service providers on the ground thatthe same are not in relation to the manufacture of final products. They are pendingadjudication at various levels. Total amount involved is approximately Rs3.9 crore withequivalent penalty and interest thereon.
PUBLIC INTEREST LITIGATION (PIL)
i. A PIL was filed in the Hon'ble Supreme Court by an NGO 'Health for Millions' seekingimmediate implementation of various provisions of COTPA including the pictorial warnings,is still pending.
ii. A PIL has been filed by Mr. A. Sherfuddin in the Hon'ble Madras High Court againstthe Health Ministry and tobacco companies (including your Company) seeking various reliefsincluding printing of ingredients contained in cigarettes on packets and their ill effectsso as to inform the public of the dangers of smoking, removal of all hoardings and othervisible representations of the brands which is still pending.
iii. A PIL has been filed in the Hon'ble High Court of Andhra Pradesh by the OldStudents' Association, PG
College, Secunderabad against the Central Government and the tobacco companies(including your Company) seeking introduction of stronger pictorial warnings on both sidesof the packets. Your Company has entered appearance in the Court.
A suit for infringement and passing off was filed by ITC Limited against the Company inthe Original Side of Calcutta High Court alleging that the Company had violated ITCLimited's 'Gold Flake' trade mark by using a deceptively similar get up and trade dressconsisting of a combination of red and gold colors, on its 'Special' brand of cigarettes.A single judge of the Calcutta High Court by his Order dated 4th March, 2011 has dismissedITC Limited application for interim injunction. The main suit is now posted for trial. ITCLimited has filed an appeal before the Division Bench of the Calcutta High Court againstthe interim Order of the Single Bench. By this Order dated 16th May, 2011 the DivisionBench has declined to stay the Order, while admitting the appeal.
FINANCIAL SERVICES BUSINESS
As mentioned in last year's Report the Company Petition filed by the OfficialLiquidator in the Hon'ble High Court of Andhra Pradesh seeking directions to some of theEx-Directors of ITC Agro Tech Finance and Investments Limited (ITCATF) to file a Statementof Affairs is still pending.
In terms of the Order dated 10th July, 2007 the Division Bench of the Hon'ble HighCourt of Andhra Pradesh had directed the Regional Director, Department of CorporateAffairs,
Chennai to conduct an investigation and submit a report showing the persons whopromoted ITCATF and the persons who were responsible in conducting its affairs until itswinding up. A comprehensive report dated 19th May, 2008 was prepared and filed in theHon'ble High Court of Andhra Pradesh by the Regional Director in July 2008. All thematters are still pending final adjudication.
THE CIGARETTES AND OTHER TOBACCO PRODUCTS (PROHIBITION OF ADVERTISEMENT AND REGULATIONOF TRADE AND COMMERCE, PRODUCTION, SUPPLY AND DISTRIBUTION) ACT, 2003 (COTPA)
i. Some of the provisions of COTPA have come into force with effect from 1st May, 2004.These include ban on advertising in print and visual media, ban on outdoor advertising,regulation of in-store advertising, prohibition of sale of cigarettes to persons below theage of 18 years.
ii. The tobacco industry has been told to print the prescribed graphic health warningson all its product packing. The Cigarettes and Other Tobacco Products (Packaging &Labelling) Rules, 2006 (COTPR) had originally prescribed pictorial warnings along withhealth messages and sign of skull and cross bones. However, due to vociferous objectionsfrom various sections of the industry and public, a Committee of a Group of Ministers(GoM) was constituted to relook at the warnings. Based on their recommendations, a new setof labelling requirements has been prescribed under the COTP Rules which were published on16th March, 2008. However, these have again been modified based on representations made.The revised implementation date as originally envisaged from 30th November, 2008 has beendeferred and the pictorial warnings fully came into effect from 31st May, 2009 and werefurther revised with effect from 1st December, 2011.
iii. In the meantime, some Tobacco manufacturers had challenged various provisions ofCOTPA and Rules made thereunder in different High Courts across the country. The UnionGovernment filed Transfer Petitions in the Hon'ble Supreme Court seeking to transfer 31pending Writ Petitions from various High Courts to the Hon'ble Supreme Court. On 18thNovember, 2008 all the Transfer Petitions were allowed and the Writ Petitions have thusbeen moved to the Hon'ble Supreme Court, for final adjudication.
iv. Your Company had also filed a Writ Petition in the Hon'ble High Court of AndhraPradesh challenging COTPR and the Amendment Rules 2008, on the grounds inter alia thatthey are ultra vires of COTPA and therefore the Notifications issued thereunder (includingthose seeking implementation of graphic health warnings) should be quashed. The said WritPetition was admitted on 17th October, 2008 but no interim orders were passed by theHon'ble Court.
v. A ban on smoking in public places as envisaged under COTPA, came into effect on 2ndOctober, 2008, under which smoking has been banned in virtually all public placesincluding courts, public buildings, restaurants, bars, cinema halls etc.
A batch of writ petitions challenging this was filed in the Hon'ble Delhi High Courtand transferred to the Hon'ble Supreme Court, which came up for admission on 29thSeptember, 2008. While the Hon'ble Supreme Court admitted the Transfer Petitions itdeclined to grant interim relief prayed for by the petitioners seeking to postponeimplementation of the ban on smoking in public places.
Under the provisions of Section 217(2A) of the Companies Act, 1956 read with Companies(Particulars of Employees) Rules, 1975 as amended, the particulars of employees are setout in annexure to the Directors Report.
However, as per the provisions of Section 219(1)(b)(iv) of the Act, the Report andAccounts are being sent to all the shareholders of the Company excluding the aforesaidinformation. Any shareholder interested in obtaining such particulars may write to theCompany Secretary.
Your Directors take this opportunity to record their deep appreciation of thecontinuous support and contribution from all employees of your Company.
The Auditors, Messrs. Lovelock & Lewes, Chartered Accountants, retire at theensuing Annual General Meeting and being eligible, offer themselves for reappointment.
In the current year's Union Budget, the Government has after several decades introducedad-valorem as an additional levy apart from specific duty based on lengths whichcigarettes are subject to. The impact of the above increase amounts to 11% on excise foryour Company.
The focus of your Company will continue to remain on cigarettes and tobacco. Thestrategy of offering 'value for money' brands in both existing and new geographies whichprovide opportunities will continue as it has improved the performance of your Company forthe last several years.
Your Company is also exploring opportunities of launching branded non-smoke tobaccos asit expects this segment to provide opportunities in future.
The challenge to cope with increased bout of taxation across various states wouldcontinue.
Leaf tobacco exports have been growing over the last several years and your Company'sthrust on this area will continue.
On behalf of the Board,
Dated this 17th day of April, 2012.
Azamabad, Hyderabad - 500 020,
ANNEXURE TO THE REPORT OF THE BOARD OF DIRECTORS
Information under Section 217(1)(e) of the Companies Act, 1956 read with the Companies(Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, and formingpart of the Directors' Report for the year ended 31st March, 2012.
A. CONSERVATION OF
1. Energy conservation measures taken:
i. UPS for Packers ii. UPS for compressor iii. Compressor air audit
iv. Modification in pneumatic feed system
v. Closed loop control for DRF of making m/c
vi. Energy conservation awareness programme conducted for employees
2. Additional investments and proposals, if any, being implemented for reduction ofconsumption of energy:
i. UPS for Makers
ii. Third party detailed energy audit at the plant
iii. Effective monitoring of the energy consumption area wise and m/c wise
iv. VFD's for Doffers of tobacco bulking bins
v. Energy conservation awareness programme for employees
3. Impact of the measures at (1) and (2) above for reduction of energy consumption andconsequent impact on the cost of production of goods
Achieved on account of the above:
i. Reduction of electrical energy consumption/m by 2%
B. TECHNOLOGY ABSORPTION
Research & Development (R&D)
1. Specific areas in which R&D carried out by the Company:
i. Developed new blends as per domestic and export requirements
ii. Developed new brands in various segments as per market requirements/generalconsumer survey feedback
iii. Worked closely with international suppliers of tobacco flavors and developed newflavors for new blends/products
iv. Conducted Product Space Mapping (PSM) for RSFT & KSFT brands, utilized findingsin development of new blends
v. Conducted audits and experiments in PMD and improved cut tobacco quality by furthermodernising/ modifying technology
vi. Introduced new technology at SMD to improve finished product quality consistencyvii. Tracked Retail Quality Index (RQI) and machine on line data and carried out qualitybased maintenance
viii. Trained 555 workmen and gave inputs with respect to technical skills developmentand product quality awareness, evaluation and improvement
ix. Trained 94 key workmen of various production lines on SQC techniques, for betterunderstanding of statistical quality data generated online
2. Benefits derived as a result of the above R&D:
i. Launched new brands/ variants in domestic market
ii. Met export requirements from time to time
iii. Received 'Certificate of continuance' - ISO 17025 from National AccreditationBoard for Testing & Calibration Laboratories (NABL), Department of Science &Technology, Government of India, New Delhi
3. Future plan of action:
i. Development of new blends & brands as per domestic and export marketrequirements
ii. Conduct PSM for KSFT & RSFT segments of brands and use findings for productdevelopment
iii. Track RQI data and improve on quality parameters
iv. To give further technical inputs to technical staff and workmen to improve productquality, utilization of tobacco and non-tobacco material
4. Expenditure on R&D: Rs Lakhs
|a. Capital ||4.26 |
|b. Recurring ||376.06 |
|TOTAL ||380.32 |
|c. Total R&D expenditure as a percentage of: || |
|Gross Turnover ||0.24% |
|Net Turnover ||0.56% |
C. FOREIGN EXCHANGE EARNINGS AND OUTGO
1. Activities relating to exports:
i. Your Company is exporting Cut Tobacco & Finished Product to various exportmarkets
ii. Your Company is marketing Dark Fire Cured, Light Soil Burley, Oriental, Flue Curedtobacco and other Sun/Air Cured tobacco
iii. Improved leaf growing technology for quality/farm yield improvement and minimizingTSNA levels.
Creating awareness to minimize/eliminate NTRM (Non-tobacco related material)
iv. To increase the exports further, tie up with merchant companies and production oflow pesticide residue
v. Upgradation of processing & manufacturing technology for better yield andreduction in NTRM
2. Initiatives taken to increase exports and development of new export markets forproducts & services and export plans:
i. Selection of tobacco, smoke analysis, on-line testing of cigarettes produced
ii. Modernisation of process and technology to upgrade quality
3. Total Foreign Exchange:
|Used: ||Rs Lakhs |
|Raw Materials ||845.9 |
|Spare Parts ||58.8 |
|Capital Goods ||2613.1 |
|Overseas Travel, Advertisement & Subscriptions, etc. ||167.7 |
|Dividends ||2234.7 |
| ||5920.2 |
|Earned: ||Rs Lakhs |
|Cigarettes || |
|(CIF, C&F & FOB) || |
|Tobacco || |
|(CIF, C&F & FOB) ||15414.6 |
|Cut Tobacco || |
|(CIF, C&F & FOB) ||268.8 |
| ||15683.4 |
On behalf of the Board,
Dated this 17th day of April, 2012. Azamabad,
Hyderabad - 500 020, Andhra Pradesh.