VST Industries Director Discussions


& Management Discussion and Analysis

for the year Ended 31st March, 2023

The Directors of your Company have pleasure in presenting before you the Annual Report together with the Audited Statements of Accounts for the year ended 31st March, 2023.

FINANCIAL SUMMARY

( Lakhs)
2022-23 2021-22
Revenue from Operations 167251 156067
Profit after Tax 32698 32023
Balance available for Appropriation in Retained Earnings 103894 91764
Amount transferred to General Reserves 3000 3000
Dividend paid 21538 17599
Balance in retained earnings 79356 71165

Key Ratios

Earnings per Share () 211.75 207.38
Dividend per Share () 140.00 114.00

Value creation during the decade has been Compounded Annual Growth Rate (CAGR), 8.1% in Earnings Per Share (EPS) and 7.2% in Dividend Per Share (DPS).

DIVIDEND AND TRANSFER TO GENERAL RESERVE

The Directors are pleased to recommend a dividend of

150/- per equity share of 10/- each on the paid up equity share capital of the Company, for consideration and approval of Members at the ensuing Annual General Meeting (AGM). It is proposed to carry forward an amount of 3000 Lakhs to General Reserve. Pursuant to Regulation 43A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations), the Company adopted a Dividend Distribution Policy which sets out the principles and factors that should be considered by the Board for determining the distribution of dividend to its shareholders. The policy can be accessed on the Companys website at https://www.vsthyd.com/ mainsite/documents/Dividend-Distribution-Policy.pdf

MATERIAL CHANGES AND COMMITMENTS

Except as disclosed elsewhere in the Report, there have been no material changes and commitments which affect the financial position of the Company that have occurred between the end of the financial year to which the financial statements relate and the date of this Report. There has been no change in the nature of business of the Company during the year.

SHARE CAPITAL

The paid up Equity Share Capital as on 31st March, 2023 was 1544.19 Lakhs . The Company has neither issued shares with differential rights as to dividend, voting or sweat equity shares.

EMPLOYEE STOCK OPTION PLAN

During the year under review, there has been no change in the VST Employee Stock Option Plan-2020 (VST-ESOP 2020) of the Company and further the said VST-ESOP 2020 are in compliance with SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021. During the financial year, the Company has granted 35,060 stock options pursuant to VST Employee Stock Option Plan 2020 (VST-ESOP 2020) to eligible employees.

The necessary disclosures for the year ended 31st March, 2023 in compliance with Regulation 14 of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 is available on the website of the Company at https:// www.vsthyd.com/mainsite/Annual-Reports.html

MANAGEMENT DISCUSSION & ANALYSIS REPORT _MD&A_

Based on feedback from Members on the Annual Report and Accounts, this report includes MD&A as appropriate so that duplication and overlap between the Directors Report and a separate MD&A is avoided and the entire material with Companys state of affairs is provided in a composite and comprehensive document.

INDUSTRY PERFORMANCE

The year 2022-23 started off building on the momentum generated in the fourth quarter of the preceding year. Industry volumes grew consistently throughout the year and were higher than pre-pandemic level. This growth was driven by sustained price stability.

16% hike in National Calamity Contingent Duty (NCCD) was announced in the Union Budget on 1st February 2023. This has resulted in an increase of about 1.6% on the overall tax.

Illegal non-duty paid cigarettes remain a threat for legal players as they continue to benefit from a large price gap versus fully taxed cigarettes.

COMPANY PERFORMANCE

Industry growth was driven at higher price points, premium and mid premium, where your Company has no presence, therefore limiting growth. Despite the headwinds, your Companys refreshed brand portfolio led by TOTAL has the wherewithal to overcome these challenges.

TOTAL, your Companys flagship trademark continues to be a leader in the capsule segment. TOTALs variant with indigenous flavours launched in 2021-22 continues to gain consumer share in some large markets. TOTALs new ‘master brand architecture was successfully introduced. Similar brand initiatives were successfully executed for other key trademarks such as Charms and Editions. Your Company is strongly focused and continues to invest in strengthening its brand portfolio. Your Company remains committed to strengthening its presence across the markets by investing in sales infrastructure. Significant progress has also been made in leveraging digital platforms for market specific insights and initiatives.

Your Company remains committed in new markets such as Gujarat and Maharashtra while strengthening its foothold in existing geographies. Significant progress has also been made in leveraging digital platforms for market specific insights and initiatives.

LEAF TOBACCO

Your Companys leaf function has shown remarkable resilience and delivered a very strong performance with an elevation in quality of the wide range of products offered and achieved an excellent profit of around 41 Crores. The strong performance was made possible by team work, and special efforts with meticulous planning by senior most team members.

The functions focus was to remain agile, making smart positive changes to the business model and by adopting long term customer centric approach. Function continues its centre of attention on expanding international foot prints for enhancing growth.

Function has leveraged its expertise in all varieties of tobaccos and your Company procured highest quality tobaccos for its own manufacturing in line with the changing volumes. It continues highest focus on export sales and remains optimistic on maintaining the growth momentum in spite of adverse challenging conditions. Specific focus is directed towards the need to foster your Companys development of new varieties and high nicotine tobaccos to meet the changing requirements of tobacco in domestic and international markets. Function is committed to evolve and grow business in line with changing customer preferences, penetrate into new geographies.

In the backdrop of changing climatic conditions, where the farming community face challenges on cultivation your Company is paying attention to farmers interest to sustain the tobacco cultivation. It is satisfying to note that your Companys farmers continue to grow tobacco with the Lowest pesticide residue levels and low TSNAs (Tobacco Specific Nitrosamines) that are well within international standards. This also resulted in the development of backward regions in the leaf growing areas.

To further strengthen our commitment, we remain conscious for uplifting Social and Economic conditions of Companies tobacco growing areas and your Company is continuing the sponsorship of initiatives like House Hold Toilets, Solar street lighting and School infrastructure to ensure and are striving hard towards holistic growth for supporting the farming society.

PRODUCTION AND PLANT MODERNISATION

Your Company has gained a competitive edge against other products in the market, with the introduction of an innovative new category of products from your Companys end. Your Company continue to invest in upgrading its machinery which enhances both productivity as well as product quality.

The focus at the plants continues to be extended towards enhancement of capital efficiencies and cost optimisation.

RESEARCH & DEVELOPMENT ACTIVITY

To offer the differentiated products with high Product Quality, your Companys R&D has played a key role. This focus resulted in the development of Quality Blends with Innovative capsule filter/differentiated flavor variants for new category of Product Brands, which have been well appreciated in the marketplace.

The R&D lab of your Company received a "Certificate of continuation" of ISO 17025:2017, from NABL, Quality Council of India, Government of India, for the year 2022-23.

HUMAN RESOURCE DEVELOPMENT

The success of your Company is built on the longstanding belief that people make all the difference. Your Company is ambitious to become a vibrant and a well-balanced organisation, strengthened by the diversity of its employees in their thought, ideas and actions and also leverage the power of One VST. Your Company is building a culture that embraces the traits and characteristics to drive Collaboration, Empowerment and Ownership (CEOs) at all levels, this will enable your company to grow with purpose.

The post-pandemic world calls for a new set of paradigms, beliefs, and strategies for success. Hence, for businesses to grow sustainably, people paradigm needs to change in a way that reflects the realities of a new world, therefore your company has embarked on a journey to reimagine the outlook for VST. Towards this endeavour there are three key drivers that provide impetus to all internal people initiatives – Capability & Talent, Culture & Connect, Reimagine, Realign & Refresh. In the year 2022, a focused attention was put on people development and engagement initiatives. The people function reoriented itself to Business HR partnering model to bring on board solutions that impact business directly in real time and shape the business outcomes.

Your Companys goal for capability & talent development is to foster a learning culture supported by a digital ecosystem, where people have a growth mindset, have access to and feel inspired to continuously learn new skills, thereby realising their full potential and personal ambitions resulting in sustainable personal & professional growth as well as business growth for VST today & tomorrow. The learning strategy is focused on creating a continuous learning environment, upskilling our team, utilising digital tools and measuring results using data analysis. To continually develop and enhance employees skills, your Company provided employees with opportunities for effective learning and development through programs like "Personal Effectiveness Program (PEP)", Sales Capability workshops focused on building strong functional and behavioral skills. Driving a high performance culture has been the long term objective for your Company and therefore your Company practices the Management by Objectives method to drive individual performance in the organization. This year your company used data oriented approach to assess performance. Your Company has launched the VST Gold Star Recognition Program to create a culture of appreciation and recognise desired behaviors for success where there are five categories where internal permanent employees were recognised every quarter. This initiative also hosted the Board members, who gave away the awards to appreciate the winners for the quarter April- June22.

Your Company, rolled out several engagement initiatives to help employees connect better to the leadership and among themselves, one such initiative is the Flight to Future - Annual conference. All VSTians came under one roof_with this initiative, signifying one powerful VST ready to deliver. Your Company has also initiated two way communication where newly joined employees are given a platform to hear from the leadership team and also share their views with them directly.

Your Company has been focused on recruiting, retaining and developing diverse employees, creating awareness of diversity issues and embedding accountability for diversity throughout the organization.

To create a safe environment for its female employees, your Company has constituted an Internal Complaints Committee as per the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 and the Rules framed thereunder. However, no cases were filed during the year under the above Act.

As of 31st March 2023, your Companys workforce was 768 employees, with 366 Management staff and 402 Workmen.

ENVIRONMENT, HEALTH & SAFETY _EHS_ AND COMMUNITY SERVICES

339 employees and 110 contract workmen have undergone EHS training, mock drills were also conducted for workers and management during the period to comply with the Companys EHS guidelines. Half-yearly and Annual EHS audits of the Companys operations were carried out to ensure compliance of EHS requirements. ISO 14001:2015 & ISO 45001:2018 Surveillance Audit was held at Azamabad & Toopran premises which was carried out by M/s. Rina India Pvt. Ltd. and received a continuation certificate for ISO 14001:2015 & ISO 45001:2018 for both Azamabad & Toopran locations.

Your Company has received Commendation Certificate for "Safety Innovation Award 2022" from the Institution of Engineers (India), New Delhi.

Your Toopran facility is awarded "Platinum rating" in IGBC green building certification from CII, Hyderabad. It is an improvement from the current Gold standard rating.

RENEWABLE/GREEN ENERGY

Your Company has enhanced PV technology solar power plant from 1MW to 1.2MW (900 KW for Azamabad and 300KW for Toopran plants). The solar plant has been commissioned in September 2022, which is VSTs initiative on renewable energy towards the sustainable development. Your Companys focus is on accelerating the usage of renewable sources of energy and contributing to the goals of sustainability adopted by the Company. This Solar power plant generates 30% of our electricity requirement and reduces 35% of Carbon foot print. Your Company has setup EV charging stations in collaboration with M/s. Tata Power Limited for promoting the Electric Vehicles (two & four wheelers).

CLEANER FUEL FOR BOILER/INCINERATOR

As a part of reducing the emissions and carbon footprint, your Company has Converted Incinerator primary fuel from High Speed Diesel (HSD) to cleaner eco-friendly fuel Piped Natural gas (PNG) in incinerator operations instead of using HSD. PNG is economical, safer and one of the cleanest burning fuel and helps improve the quality of air. Your Company has taken this conversion towards environmental benefits in order to reduce the Carbon foot print of overall 49% and fuel cost saving by 156 Lakhs per Annum for Boiler and Incinerator.

FINANCE a. Profits

The Profit after Tax of your Company for the year is

326.98 Crores.

b. Treasury Operations

Your Company follows a SLR model (Safety, Liquidity and Return) in deployment of earmarked funds. The changes (change of 25% or more) as compared to the immediately previous financial year ratios of the Company including those listed out and specified under Schedule V (B)(1)(i) read with Regulation 34(3) and 53(f) of the Listing Regulations, as amended are disclosed in Note No.32 of Notes on Financial Statements to the Accounts in the Annual Report.

PARTICULARS OF LOANS, GUARANTEES OR INVESTMENTS

The Company has not taken any loans or given guarantees or made investments in any other Company covered and provided under Section 186 of the Companies Act, 2013 during the year.

RATING

The Credit Rating Information Services India Limited (CRISIL) has re-affirmed the rating of your Company to "AA+/Stable" under their revised nomenclature for Fixed Deposit Schemes, "AA+/Stable" for Long-Term Non-Convertible Debentures and "A1+" for Non-fund based liabilities (Letter of Credit and Bank Guarantee).

FIXED DEPOSITS

Your Company has not accepted any deposits from public as per the provisions of the Companies Act, 2013 and as such no amount on account of principal or interest on deposits from public was outstanding as on the date of the balance sheet.

UNCLAIMED DIVIDENDS

Pursuant to the provisions of Sections 124 and 125 of the Companies Act, 2013, the Company has transferred on due dates, the unpaid or unclaimed dividends for the financial year ended 31st March, 2015 to the Investor Education and Protection Fund (IEPF) established by the Central Government. Further, as per the provisions of Investor Education and Protection Fund (Uploading of Information regarding unpaid and unclaimed amounts lying with Companies) Rules, 2012, the Company has uploaded the details of unpaid and unclaimed amounts lying with the Company as on 31st March, 2022 on the website of the Company (www.vsthyd.com), and also on the website of the Ministry of Corporate Affairs, Government of India. The details of the dividend due for transfer to IEPF as on 31st March, 2023 is given in the Report on Corporate Governance. The Company has completed the process of complying with the provisions of Section 124(6) of the Companies Act, 2013 read with the IEPF Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 and as amended by the Second Amendment Rules of 2017 by transferring 5216 shares on 29th September, 2022. Details of shares/dividend transferred to IEPF can also be obtained by accessinghttps://www.vsthyd.com/mainsite/ unclaimed-dividend.html

UNCLAIMED SHARE CERTIFICATES

Your Company has communicated to the Members whose share certificates have been returned undelivered to the Company that these would be transferred to the Unclaimed Suspense Account if not claimed by them, as required under Regulation 34(3) read with Schedule V[F] of the Listing Regulations as amended. The status of unclaimed shares as on 31st March, 2023 is given in the Report on Corporate Governance.

CORPORATE GOVERNANCE

In terms of Regulation 34 of the Listing Regulations, a Report on Corporate Governance along with Compliance Certificate issued by the Statutory Auditors of the Company is annexed as "Annexure A" and forms part of this Report. Your Company has taken adequate steps for strict compliance with the Corporate Governance guidelines, as amended from time to time.

MEETINGS

The Board met five times during the financial year. The Board and Committee Meetings are pre-scheduled and a tentative calendar of the Meetings finalised in consultation with the Directors are circulated to them in advance to facilitate them to plan their schedule. However, in case of special and urgent business needs, the approval is obtained by way of circular resolution. The details of the meetings held during the year are given in the Corporate Governance Report.

INTERNAL CONTROL SYSTEMS a. Your Company maintains an adequate and effective internal control system commensurate with the size and complexity. Your Company also has well documented Standard Operating Procedures (SOPs) for various processes which are periodically reviewed for changes warranted due to business needs. b. Your Company remains committed to improve effectiveness of internal financial controls and processes which would help in efficient conduct of its business operations, ensure security to its assets and timely preparation of reliable financial information. The policies and procedures laid out by your Company capture the control environment prevalent in the organisation. Over a period of three years, the business processes of your Company are reviewed through an internal audit process which reviews the systems on a continuous basis. The objective being to identify potential risk areas and come up with a comprehensive risk mitigation plan. The Audit Committee of your Board met four times during the year. Review of audit observations covering the operations, consideration of accounts on a quarterly basis and monitoring the implementation of audit recommendations were some of the key areas which were dealt with by the Committee. The Statutory Auditors/Internal Auditors were invited to attend the Audit Committee Meetings and make presentations covering their observations on adequacy of internal financial controls and the steps required to bridge gaps, if any. Chief Financial Officer is a permanent invitee to the Audit Committee and other executives of the Company are invited to address, respond or provide clarifications to relevant issues as and when required.

RISK MANAGEMENT

Your Company has constituted the Risk Management Committee as mandated by Listing Regulations to frame, implement and monitor the risk management plan for the Company. The Committee comprises of Directors and Senior Management as its Members as prescribed under Regulation 21 of the Listing Regulations as amended. The Company Secretary is the Secretary of the Committee. The Committee is responsible for monitoring and reviewing the risk management plan and ensuring its effectiveness. Pursuant to the amendments notified by SEBI in its circular dated 5th May, 2021, the Board at its meeting held on 27th July, 2021 revised the terms of reference of Risk Management Committee to include the Business Continuity Plan (BCP), sustainability and reviewing the risk management policy at least once in two years.

Your Company has always endeavoured to bring together elements of best practices for risk management in relation to existing and emerging risks faced by it at both strategic and operating level. The Company faces a variety of risks from external and internal sources. However, the objective is to be aware of different kinds of risks affecting the business. Rather than eliminating these risks, the decision making process at your Company considers sensible risk taking, and thereby proactive steps are taken to ensure that business is undertaken in an environment which encourages a reasonable amount of risk taking and enables the Company to leverage market opportunities effectively. The Board is responsible for determining the nature and extent of the principal risks that your Company is willing to take to achieve its strategic objectives and for maintaining sound risk management system. With the support of the Audit Committee, it carries out a review of the effectiveness of your Companys risk management process covering all material risks including strategic, financial, operational and also compliance levels. Your Company has substantial operations all over the country and competes on the basis of brand appeal, loyalty, price value connotations and strong trade relationships. The Companys position is influenced by the economic, regulatory and political situations both nationally and at a state level and of the competitors. The principal risks impacting your Companys business and steps undertaken to mitigate them are as under:

i. Regulatory restrictions could have an impact on long

term revenue growth of the Company.

The Company operates under increasingly stringent regulatory regime (COTPA guidelines on packaging and labeling, advertising and promotion). This further gets complicated with adoption of differing regulatory regimes in different states and/or lack of consensus on interpretation/application. Such restrictive regulations which are subjected to interpretation could result in not only penalties being imposed/ loss of reputation, but also impair the Companys ability to communicate with adult smokers and/ or to meet consumer expectations through new/ innovative brand launches or geographic expansion. The Company addresses this risk by engaging in continuous social dialogue with stakeholders and regulatory community through industry bodies. At the same time, it works on developing strategies and capabilities to effectively launch competitive and consumer acceptable brands within the changing regulatory environment.

ii. Taxation changes could have an impact on short-term revenue growth of the Company.

The Companys business is subjected to GST, excise and other cesses as may be made applicable, which could require the Company to take up product prices and in absence of such action, impact its business. The impact increases when due to changes in economic situation, consumers disposal income reduces, resulting in down-trading to cheaper cigarettes including non-duty paid illicit cigarettes or alternative tobacco products. Such risks are addressed by the company through: (a) engagement with tax authorities at levels where appropriate; (b) regular management review to build a well laddered brand portfolio across new segments including new brand creation; and (c) capability buildup through investments in distribution infrastructure to increase geographical spread.

iii. Geopolitical tension could have a short-term impact on companys revenue growth and profitability. The Companys supply chain and normal business processes are exposed to the risk of disruption. Such disruption could be caused through geopolitical tension, civil unrest, economic policy changes, health crisis, violent weather conditions or other natural disasters, This could result in potential loss of assets and increased costs due to more complex supply chain arrangements and/or maintaining inefficient facilities. Such risks are mitigated through a robust business continuity planning process and having multiple sourcing / delivery (supply chain) strategy.

iv. Illicit Trade could have a risk to Companys long term revenue growth and profitability.

Non-Duty Paid (NDP) Cigarettes in the form of counterfeit product, contraband (genuine smuggled product) and locally manufactured products on which applicable taxes are evaded, represents a significant and growing threat to the legitimate cigarette industry. Factors such as increased product prices (either for retailer or consumer) and economic downturn among others encourage consumers shift to cheaper cigarettes which results in commoditisation of the Product and erosion of brand value resulting in undermining companys investment in trade marketing and distribution. As part of its mitigation plan the company both directly as well as through trade bodies engages with key external stakeholders including periodical interaction with law enforcement agencies in pursuit of priority targets.

v. Infringement of Intellectual property could have a short term impact on revenue growth and profitability. The Company relies on its registered designs, trademarks and copyrights under which it sells its products to get competitive advantage. Risk of Infringement happens due to delay in identification and action taken including limitation of judicial protection.Inaddition,asthird-partyrights(registered trademarks) are not always identifiable, there may be claims against the company for infringement of their intellectual property rights. Such infringement of trademarks results in reputational impact due to inability to protect its trade marks, disruption to normal business processes resulting in potential loss of revenue, unnecessary protracted litigation. Such risks are mitigated through constant training to all team members to recognise misuse of Companys trademarks and report to take legal protection, Further, process is in place to ensure new trademarks do not infringe with trademarks belonging to others.

vi. Cyber Security – the companys operations place high reliance on its digital data. Loss or misuse of any such sensitive information, or its disclosure to outsiders, including competitors and trading partners could potentially have a significant adverse impact on the Companys business operations and/or give rise to legal liability. For this purpose, the Company has put in place cyber security policies and procedures which are reviewed regularly. In addition, for continuity of the operations we perform periodic assessment of information technology controls implemented like data back-up mechanism, Disaster recovery centre, authorisation verification, firewalls, etc.

CORPORATE SOCIAL RESPONSIBILITY INITIATIVES

Your Company has formulated a Corporate Social Responsibility Policy with the objective to promote inclusive growth and equitable development of identified areas by contributing back to the society. Over the years, your Company has been involved in various social activities focusing on Rural Development, Health & Sanitation like construction of toilets under Swachh Ghar mission, Education and Environment sustainability.

The Company has with the help of Gramalaya, a non-profit organization, was involved in creating awareness among women on menstrual hygiene and usage of cloth sanitary pads under project Naari Shakti as part of our Rural development initiative. Towards this initiative women were mobilised and self-help groups were formed for better execution of the project and made this project a self-sustaining one. Your organization also supported women entrepreneurs and aspiring entrepreneurs in skill development programs conducted by the FTCCI, Hyderabad.

Your Company has also in collaboration with Gramalaya constructed toilets in individual homes (of farmers living) in and around Jogulamba-Gadwal district of Telangana where your Company has its operations, under the ‘Swachh Ghar programme of your Company. These villages and the communities in the area were also sensitised regarding the importance of health & sanitation. Over 850 household toilets have already been constructed during the financial year, and your Company has plans to extend it further to other houses in the same area and thereafter extend it to other areas. In addition to toilets under Health, your Company has supported Chitranjan Cancer Hospital, Kolkata in treatment of the cancer patients and also supported in procuring a Pediatric Ambulance in KIMS Hospital, Hyderabad.

In the field of Education your Company supported purchase of Braille printing machines for education of the blind children at Devnar School for Blind, Hyderabad and also supported construction of school infrastructure at Hindi Mahavidyala School, Hyderabad and a Government School at Toopran.

Your Company had provided Mid-day meals for more than 8,500 Government school children & 15,165 Anganwadis in Medak district, Hyderabad this financial year.

Your Company has taken up an initiative of supporting environment sustainability by installing 100 solar street lights in Mupireddypalli village of Medak district in Telangana.

Pursuant to the provisions of Section 135 read with Schedule VII of the Companies Act, 2013 as amended by the Companies Amendment Act of 2019 & 2020, the Corporate

Social Responsibility (CSR) Committee of the Board of Directors was formed to recommend the policy on Corporate Social Responsibility and monitor its implementation. The composition of the CSR Committee is given in the Corporate Governance Report forming part of this Annual Report. The CSR policy and the projects approved by the Board are available on the Companys website at: https://www.vsthyd. com/mainsite/documents/corporate-social-responsibility-policy.pdf The CSR Policy and the Annual Report on CSR activities is annexed herewith as "Annexure B" and forms part of this Report.

BUSINESS RESPONSIBILITY AND SUSTAINABILITY REPORT

In terms of Regulation 34(2)(f) of the Listing Regulations, a report on Business Responsibility and Sustainability Report (BRSR) in the prescribed format forms part of this Report.

RELATED PARTY TRANSACTIONS

The related party transactions entered into by the Company during the year are in its ordinary course of business and on arms length basis. There were no materially significant related party transactions between your Company and the Directors, Promoters or Promoter group, Key Managerial Personnel and other designated persons which may have a potential conflict with the interest of your Company at large. During the year, the Company has not entered into any transactions with any person or entity belonging to the promoter or promoter group which holds 10% or more shareholding in the listed entity other than the corporate actions applicable uniformly to all the shareholders. Prior approval for all the related party transactions is obtained from the Audit Committee.

Form AOC-2 pursuant to Section 134(3)(h) of the Companies Act, 2013 read with Rule 8(2) of the Companies (Accounts) Rules, 2014 for disclosure of particulars of contracts/ arrangements, entered into by your Company with related parties for the year ended 31st March, 2023 is annexed herewith as "Annexure C" and forms part of this Report.

BOARD EVALUATION

Pursuant to the provisions of the Companies Act, 2013 as amended and Listing Regulations, the performance evaluation of the Board, the committees of the Board and individual Directors [including Independent Directors and Chairperson] has been carried out. The manner in which the evaluation has been carried out has been explained in the Corporate Governance Report. The performance evaluation of the Chairman and the Non-independent Directors was carried out by the Independent Directors. The Board of Directors expressed their satisfaction with the evaluation process.

REMUNERATION POLICY

Nomination and Remuneration Committee has formulated a policy relating to remuneration of directors, key managerial personnel and other employees which has been revised and approved by the Board. The Remuneration Policy and the criteria for determining qualification, position, attributes and independence of a Director as required under Section 178(3) of Companies Act, 2013 are stated in the Corporate Governance Report. The policy is also placed on the website of the Company and can be viewed at https://www.vsthyd.com/mainsite/documents/ remuneration-policy.pdf

MEETING OF INDEPENDENT DIRECTORS

During the financial year under review, all the Independent Directors of the Company met on 26th April, 2022 through video conference, inter alia, to discuss:

EvaluationoftheperformanceoftheNon-Independent Directors and the Board as a whole.

Evaluation of the performance of the Chairman of the Company, Chairman of the Committees considering the views of the Executive and Non-Executive Directors.

Evaluation of the quality, content and timelines of flow of information between the Management and the Board that is necessary for the Board to perform its duties effectively and reasonably.

VIGIL MECHANISM

In terms of Section 177 of the Companies Act, 2013, and Regulation 22 of Listing Regulations, the Company has formulated a Whistle-Blower Policy as a vigil mechanism to encourage all employees and Directors to report any unethical behavior, actual or suspected fraud or violation of the Companys ‘Code of Conduct and Ethics Policy which also provides for adequate safeguard against victimisation of person who use such mechanism and there is a provision for direct access to the chairman of the Audit Committee in appropriate/exceptional cases. The details of the Whistle Blower Policy is given in the Corporate Governance Report and also posted on the Companys website at: https:// www.vsthyd.com/mainsite/documents/whistle-blower-policy-2022.pdf

DIRECTORS AND KEY MANAGERIAL PERSONNEL

Directors retiring by rotation Mr. S. Thirumalai

Mr. S. Thirumalai (DIN: 00011899) was reclassified as a Non-Executive Non-Independent Director of the Company in compliance with Section 152(6) of the Companies Act, 2013 as amended, at a Meeting of the Board held on 26th July 2019, which was subsequently approved by the Members at their AGM held on 28th August, 2019 whose office is subject to retirement by rotation.

Pursuant to Article 93 of the Articles of Association of your Company, Mr. S. Thirumalai is liable to retire from the Board and being eligible, offers himself for re-election. Your Board recommends his re-appointment. Further, in terms of Regulation 17(1A) of the Listing Regulations, the Board recommends continuation of his directorship on attaining the age of 75 years on 2nd September, 2023. A suitable Resolution for continuation of his directorship pursuant to Regulation 17(1A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, is being put up for your approval.

Mr. Thirumalai (74 years) is a Fellow Member of Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Certified Associate of Indian Institute of Bankers and also a law graduate. He has also attended the Advanced Management Program at Harvard Business School, Boston, USA. He has diversified experience of over four decades including a major portion in the tobacco sector and specialises in Finance, Taxation, Legal and General Management. The Board feels that the vast and diversified experience of Mr. Thirumalai will prove to be an asset to the Company.

Mr. Thirumalai is not a Director in any other Company in India. He is a Member of the Audit Committee, CSR Committee, Stakeholders Relationship Committee and Risk Management Committee. He has attended all the Board and Committee meetings held during the year. Mr. Thirumalai holds 25 shares in the Company and is not related to any other Director of the Company.

INDEPENDENT DIRECTORS

At the Annual General Meeting of the Company held on 28th August, 2019, the Members have approved the appointment of Ms. Rama Bijapurkar, Mr. Sudip Bandyopadhyay and Mr. Rajiv Gulati as Independent Directors of the Company in accordance with Section 149 of the Companies Act, 2013, with effect from 1st April, 2019, 1st June, 2019 and 26th July, 2019 respectively to hold the office for a term of five consecutive years from their respective dates.

All the Independent Directors have given a declaration in terms of Section 149(6) of the Companies Act, 2013 as amended and Regulation 25 and 16(1)(b) of the Listing Regulations as amended for the financial year ended 31st March, 2023, that they meet the criteria of independence. They also declared that they are not aware of any circumstance or situation, which exist or may be reasonably anticipated, that could impair or impact their ability to discharge their duties as an Independent Director with an objective independent judgement and without any external influence. The Board carried out an assessment of the declarations and took the same on record. None of the Independent Directors are related to any other director of the Company.

KEY MANAGERIAL PERSONNEL

The Managing Director & CEO Mr. Aditya Deb Gooptu, the Chief Financial Officer Mr. Anish Gupta and the Company Secretary Mr. Phani K. Mangipudi are the Key Managerial Personnel as per the provisions of Section 203 of the Companies Act, 2013.

DIRECTORS RESPONSIBILITY STATEMENT

Pursuant to Section 134

(5) of the Companies Act, 2013 your Directors confirm that: 1. in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures, if any; 2. appropriate accounting policies have been selected and applied consistently. Judgement and estimates which are reasonable and prudent have been made so as to give a true and fair view of the state of affairs of your Company as on 31st March, 2023 and of the profits of the Company for that period; 3. proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of your Company and for preventing and detecting fraud and other irregularities; 4. the annual accounts have been prepared on a going concern basis; 5. proper internal financial controls have been laid down to be followed by your Company and such internal financial controls are adequate and were operating effectively; and 6. proper systems to ensure compliance with the provisions of all applicable laws have been devised, and such systems were adequate and operating effectively.

CRITERIA FOR SELECTION AND APPOINTMENT OF DIRECTORS

The Nomination and Remuneration Committee is responsible for identifying, screening, recommending to the Board a candidate for appointment as Director. Based on the recommendation of the Committee, the Board identifies the candidate for the position of Director. While identifying the candidate, inter alia the following are taken into consideration:

Qualification, experience and expertise;

Skills, abilities and personal contribution;

Commitment to spare time to attend Board/ Committee and other Meetings as may be necessary;

Diversity of perspectives brought to the existing Board;

Existing composition of the Board.

The qualification of the candidate is scrutinised by the Committee considering educational degree, college/ institution, professional qualification if any, etc. In addition, there is also a criteria regarding minimum work experience and the positive attributes such as leadership quality, level of maturity, management capabilities, strategic vision, problem solving abilities, etc., on which the candidate is judicially scrutinised. In case of an internal candidate, the senior management employee is also evaluated on the above criteria before being recommended for promotion as a Director. While considering re-appointment of the Directors, their performance evaluation report is considered. In case of Independent Director, the independence, integrity, expertise, experience and interest pecuniary or otherwise as per the statutory provisions are also assessed before appointment.

SIGNIFICANT & MATERIAL ORDERS PASSED BY THE REGULATORS OR COURTS OR TRIBUNALS

There are no significant or material orders passed by the Regulators, Courts or Tribunals which impact the going concern status of the Company and its future operations. However, Members attention is drawn to the following:

TAXATION i. Luxury Tax

The then Government of Andhra Pradesh introduced a levy of luxury tax on cigarettes and its virus was challenged before the then High Court of Andhra Pradesh and before the Supreme Court which was struck down. The Commercial Tax department claimed that during pendency of the matter before the courts between 1999-2005, your Company had collected luxury tax amounting to 34.86 Crores but not paid to the Government. Your Company denied collecting luxury tax and the litigation on the same was pending before the appellate authority of the department and the High Court of Telangana. During the year, the Company has settled its Luxury Tax matter under amensty scheme by paying 50% of the disputed tax amount.

ii. Entry Tax

Entry Tax levy by the States of West Bengal, Jharkhand and Assam has been challenged before the respective State High Courts by your Company, basis the directions of the Honble Supreme Court. Demand of interest on entry tax was challenged before the High Court of Allahabad and is pending adjudication. In the State of West Bengal, the High Court remanded the matter to Taxation Tribunal and the said Tribunal was pleased to allow the Petitions filed by your Company and it is likely the State may prefer an appeal before the High Court of Kolkata.

iii. Excise

a. Wrapping Materials

The Excise department has issued show cause notices demanding payment of duty of 4.51 crores on the ground that Gay Wrappers (printed paper used for wrapping cigarette packets) had been manufactured and consumed by your Company without payment of duty during the period April 1996 to July 2015. Demand for the period till March 2002 has been adjudicated and the CESTAT decided in favour of your Company. Department preferred an appeal before the Supreme Court which is pending. Demands for period after March, 2002 till July, 2015 are yet to be adjudicated by the original authority.

b. Tobacco Refuse

Your Company has received show cause notices demanding recovery of duty on cut tobacco used in the manufacture of tobacco refuse since January 2005 till June 2017 amounting to 14.52 crores. Demand for the period till October, 2013 has been adjudicated and the CESTAT decided in favour of your Company. Department preferred an appeal before Supreme Court which is pending. Demands for period after October, 2013 till June, 2017 are yet to be adjudicated by the original authority

. c. Service Tax

Your Company has received show cause notices from the Excise Department seeking to deny CENVAT credit availed on various input services on the ground that the same are not in relation to the manufacture of final products. Upon adjudication, credit on most of the services was allowed in favour of your Company. Some of them have been disputed. Since 2005 till 2017, the matters are pending before various adjudicating authorities and before the CESTAT and are being effectively contested.

PUBLIC INTEREST LITIGATION _PIL_

i. Your Company has been impleaded in the petition

filed in the Supreme Court by an NGO called ‘Centre for Transforming India against the Union of India along with other cigarette manufacturers, Tobacco Institute of India, Bidi Manufacturers and Bidi Manufacturers Association, seeking prohibition/ban of the manufacture, storage and sale of all forms of tobacco within the territory of India. This is being contested.

ii. Petitions have also been filed in other courts such as High Court of Madhya Pradesh - Jabalpur, National Green Tribunal, Delhi seeking ban on sale of cigarettes and before High Court of Madhya Pradesh – Indore Bench seeking directions to mention tar and nicotine content on cigarette packs by the manufacturers. All of the above are being effectively contested by your Company.

FINANCIAL SERVICES BUSINESS

The Company petition filed by the Official Liquidator before the High Court of Andhra Pradesh (now Telangana High Court) seeking directions against some of the Ex-Directors of ITC Agro Tech Finance and Investments Limited (ITCATF), the Company in liquidation, into which one of the subsidiaries of your Company, viz. VST Investments Limited was amalgamated, and its related matters are still pending final adjudication.

THE CIGARETTES AND OTHER TOBACCO PRODUCTS _PROHIBITION OF ADVERTISEMENT AND REGULATION OF TRADE AND COMMERCE, PRODUCTION, SUPPLY AND DISTRIBUTION_ ACT, 2003 _COTPA_ i. In view of the provisions of COTPA, various restrictions such as ban on advertising in print, visual media and outdoors, regulation of in-store advertising, prohibition of sale of cigarettes to persons below the age of 18 years, etc. have been in force. Printing of pictorial warnings on cigarette packets, came into effect from 31st May 2009 were further revised and the pictorial warning covering 85% of the front and back side of the packets was implemented w.e.f. 1st April 2016 and is being duly complied with by your Company. ii. Your Company also filed a writ petition in the Honble High Court of Andhra Pradesh (now Telangana High Court) challenging The Cigarettes and Other Tobacco

Products (Packaging & Labelling) Rules, 2006 and the Amendment Rules 2008, on the grounds interalia that they are ultra vires of COTPA and therefore the notifications issued there under (including those seeking implementation of graphic health warnings) should be quashed. The said writ petition has been admitted but no interim orders were passed by the Honble Court. ii

i. Before the High Court of Karnataka, a Writ Petition was filed by Tobacco Institute of India (TII) on behalf of your Company and other manufacturers against the proposed notification dated 15th October 2014 by Health Ministry to print health warning on both sides of the pack occupying 85% of space. The 85% health warning came into effect from 1st April 2016. Your Company also filed a Writ Petition before the High Court bench at Dharwad against the implementation of 85% health warning. The Honble Supreme Court on hearing a PIL filed by Health for Millions, constituted a Bench before the Karnataka High Court to hear all the matters relating to graphical health warning. The Writ Petitions filed by TII and your Company were heard before the Bangalore Bench and it was held on 15th December 2017 that the amendment made to the Packaging Rules imposing 85% graphic health warning is ultra vires the Constitution. Against the said Judgement, an appeal was filed by the Ministry of Health before the Supreme Court. A stay has been granted on the said judgement and the case is pending before the Supreme Court.

REAL ESTATE i. During the year, your Company, pursuant to the in-principal approval granted by the Board of Directors for availing conversion of the factory cum registered office premises from a leasehold to freehold property in the Azamabad Industrial Area, has purchased the said property from the Government of Telangana for a consideration of 324.10 crores excluding stamp and other duties. ii. The then Government of Andhra Pradesh had filed a land grabbing case against your Company in 1991 in relation to a piece and parcel of vacant land which has been under possession and occupation by your Company for over four decades. By its judgement dated 28th July 2010, the Special Court had held that your Company is not a land grabber but had given the State Government the right to initiate proceedings to recover possession of the land at some future date. Against this part of the judgement, your Company

filed a writ petition before the then Honble High Court of Andhra Pradesh to expunge that part of the Order giving such liberty to the Department despite the fact that your Company has already been declared not to be a land grabber. The writ petition is still pending. The State Government has also filed a writ petition in the Honble High Court of Andhra Pradesh seeking to set aside the said judgement of the Land Grabbing Court. An interim Order was passed restraining your Company from changing the status of the land or creating any third party interest therein. Your Company is taking all the necessary steps for speedy disposal of the above writ petitions which are pending before the Court.

One more case of land grabbing was filed by the then Government of Andhra Pradesh against your Company in the year 1989 on a piece of land along with building called ‘Lal-e-Zar, before the Special Court. In the year 2010, the Special Court passed a judgement stating that your Company is not a land grabber. After 7 years, the Government of Telangana filed an appeal before the Honble High Court of Telangana and Andhra Pradesh seeking a direction from the court that the nature of the land is not to be altered and no third party interest to be created. Your Company filed a counter and vacate stay application seeking permission to construct on the said land. Judgement was pronounced on the vacate stay petition allowing your Company to construct but with certain conditions. The State Government preferred an appeal before the Supreme Court which was dismissed.

PARTICULARS OF EMPLOYEES AND RELATED DISCLOSURES

The information required pursuant to Section 197(12) of the Companies Act, 2013 read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 as amended in respect of employees of the Company, are annexed herewith as "Annexure D" and forms part of this Report. The statement containing particulars of employees as required under Section 197 of the Act read with Rule 5(2) of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is provided in a separate annexure forming part of this Report. However, in terms of Section 136 of the Act, the Report and Accounts are being sent to the Members and others entitled thereto, excluding the information on employees particulars which is available for inspection by the Members at the Registered Office of the Company during business hours on working days of the Company up to the date of the ensuing AGM. In case any Member is interested in obtaining a copy thereof, such Member may write to the Company Secretary of the Company.

The Nomination and Remuneration Committee of the Company has affirmed that the remuneration is as per the Remuneration Policy of the Company. Your Directors take this opportunity to record their deep appreciation of the continuous support and contribution from all employees of your Company.

The Company has complied with provisions relating to the constitution of Internal Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. The information as regards the number of cases filed and their disposal under this Act is given in the Business Responsibility and Sustainability Report.

ANNUAL RETURN

As required under Section 92(3) of Companies Act, 2013 and Rule 12(1) of Companies (Management and Administration) Amendment Rules, 2020, Annual Return is available on the Companys website at https://www.vsthyd.com/mainsite/Annual-Returns.html

AUDITORS

Statutory Auditors

In compliance with the provisions of Sections 139 and 141 of the Companies Act, 2013 as amended and Companies (Audit and Audit Rules), 2014, including any statutory modification(s), re-enactments and amendments thereof, for the time being in force, M/s. BSR & Associates, LLP, Chartered Accountants, were re-appointed as the Statutory Auditors of the Company to hold office for a second term of five years from the conclusion of the 90th AGM to the conclusion of the 95th AGM. The Report given by the Auditors on the financial statements of the Company is part of the Annual Report. There has been no qualification, reservation or adverse remark in their Report. During the year under review, the Auditors have not reported any matter under Section 143(12) of the Companies Act, 2013 and hence, no details is required to be disclosed under Section 134(3)(ca) of the Companies Act, 2013.

Secretarial Auditor

Pursuant to the provisions of Section 204 of the Companies Act, 2013 and Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the Company appointed M/s. Tumuluru and Company Firm as Secretarial Auditor of the Company for the FY 2022-23. The Secretarial Audit Report is annexed herewith as

"Annexure E" and forms part of this Annual Report. There are no qualifications, reservations or adverse remarks in the Secretarial Audit Report.

COMPLIANCE WITH SECRETARIAL STANDARDS

Your Company has complied with applicable Secretarial standards, i.e. on Meetings of the Board of Directors [SS-1] and on General Meetings [SS-2] issued by The Institute of Company Secretaries of India (ICSI) and approved by the Central Government under Section 118(10) of the Companies Act, 2013.

COST ACCOUNTS AND RECORDS

The maintenance of cost accounts and records as specified by the Central Government under Section 148(1) of the Companies Act, 2013 are not applicable for the business activities carried out by the Company.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO

Information in accordance with clause (m) of sub-section (3) of Section 134 of the Companies Act, 2013 read with Rule 8 of Companies (Accounts) Rules, 2014 is given in the "Annexure F" forming part of this Report.

SUBSIDIARY / ASSOCIATES / JOINT VENTURES

Addition or cessation of subsidiaries, associates or joint ventures is not applicable to the Company as the Company does not have any subsidiary company, associates and joint ventures.

INSOLVENCY AND BANKRUPTCY CODE 2016

There was no application made or any proceedings pending under the Insolvency and Bankruptcy Code 2016 (31 of 2016) during the financial year.

UTILISATION OF FUNDS

Your Company has not raised any funds during the year through preferential allotment or Qualified Institutional Placement, as a result question of providing details of utilisation of such funds does not arise. Further, during the year, there were no transaction relating to difference between amount of valuation done at the time of one-time settlement and the valuation done while taking loan from the Banks or Financial Institutions.

DEBENTURE TRUSTEES

Your Company does not have any debentures and as a result the requirement to appoint debenture trustees does not arise.

WAY FORWARD

A vibrant and consumer centric brand portfolio remains a top priority for your Company. This will be fuelled by actionable consumer insights, robust product pipeline, best-in-class quality and a fully functional digital ecosystem.

ACKNOWLEDGEMENTS

The Directors are grateful to all valuable stakeholders of the Company viz. customers, shareholders, dealers, vendors, banks and other business associates for their excellent support rendered during the year. The Directors also acknowledge the unstinted commitment and valued contribution of all employees of the Company.

On behalf of the Board,
Naresh Kumar Sethi
Dated this 25th day of April, 2023 Chairman
New Delhi DIN: 08296486