Voting Advisory

2 September 2013 United Spirits Limited Annual General Meeting (AGM) Company Profile Meeting Date: 24 September 2013, 11:00 AM BSE: 532432|NSE: MCDOWELL-N Proxy Deadline: 22 September 2013, 11:00 PM ISIN: INE854D01016 Industry: Breweries & Notice Date: 19 August 2013 Distilleries Meeting Venue: Good Shepherd Auditorium, Opposite St. Joseph’s Pre-University Index: S&P BSE 100 / CNX 100 College, Residency Road, Banglore – 560 025

Face Value: Rs. 10 Company overview Mkt Price: Rs. 2269.2 Fiscal Year End: March United Spirits Ltd (‘USL’ or ‘the company’) is one of the largest spirits company in the world with a portfolio of more than 140 brands. It exports to over 37 countries. It has established manufacturing and bottling plant in every state of . Its brands include Promoter: McDowell’s No 1, , , , Old Tavern. Whyte & Mackay and Bouvet Ladubay are wholly owned subsidiaries of USL.

United Breweries Holdings Ltd. In May 2013, Plc. through its subsidiary, Relay BV, was allotted 14.5 mn equity shares (10% of equity) on preferential basis. In July 2013, United Breweries (Holdings) Ltd. and other promoter group companies sold 14.98% in the company to Relay BV. 21% 6% 31% Shares owned by the USL Benefit Trust, representing 2.38% of USL could not be purchased by Diageo as some USL’s lenders did not release the pledged shares. Relay BV now holds ~25.0% stake in the company and will now be considered as promoters.

42% Agenda Items IIAS Indicators # Type[1] Description of resolution Recommendation See Legend Promoter DII FII Others 1 O Adoption of FY13 accounts See Analysis (As on 30 June 2013) 2 O Declaration of dividend FOR 3 O Reappointment of Vijay Mallya as director FOR Financials 4 O Appointment of BSR & Co. as statutory auditors FOR Particulars FY13 (Rs bn) 5 O Appointment of Gilbert Ghostine as director FOR Total Income 87.1 6 O Appointment of Ravi Rajagopal as director FOR Net Worth 63.9 7 O Appointment of PA Murali as director FOR Equity 1.3 8 S Appointment of PA Murali as executive director FOR G M R S T V Capital Mkt. Cap 329.8 9 O Appointment of Arunkumar Gandhi as director FOR Overview 10 O Appointment of Sudhakar Rao as director FOR 52 week H/L 2815.0/799.0 11 O Appointment of D. Sivanandhan as director FOR (Rs) 12 O Appointment of Renu Karnad as director AGAINST G M R S T V Current P/E (x) 92.6 13 O Appointment of Paul Walsh as director FOR Current P/B (x) 4.6 14 O Appointment of Vikram Singh Mehta as director FOR Source: IiAS Research Revision of terms of remuneration of Ashok 15 S FOR Capoor Previous advisory 16 S Alteration of Articles of Association FOR December 2012 Postal Ballot [1] O/S: Ordinary/Special Resolution 2012 AGM January 2012 EGM Executive Summary (click on respective category for detailed analysis) Remuneration USL proposes to amend the terms of remuneration of Ashok Capoor, by rectifying the anomaly in special allowance, increasing the personal allowance and making a one time ex-gratia payment. Consequently the Write to us remuneration for FY14 will be higher by a minimum of Rs 7.2 mn. IiAS Institutional Investor Advisory Services observes that Ashok Capoor tenure as MD ends on 1 May 2014. Assuming 15th Floor, West Wing, PJ Tower he will be reappointed, IiAS believes that company should have Dalal Street, Mumbai -400 001 considered revising the terms, except for rectification of special allowance, Email: [email protected] at the time of reappointment in 2014. www.iias.in September 2013 United Spirits Limited 1 | P a g e

Voting Advisory

Financial Performance (Standalone) (Rs bn) Revenue by Geography Particulars FY11 FY12 FY13 The Company is engaged in the business of manufacture, purchase Total Income 64.7 77.2 87.1 and sale of Beverage Alcohol (Spirits and ) including through EBITDA 10.6 11.3 12.3 tie-up manufacturing units/ brand franchise, which constitutes a EBITDA Margin (%) 16.4 14.6 14.2 single business segment. The Company is primarily organised into PBT 5.8 5.0 4.8 two main geographic segments namely India and Outside India. However, the Company’s operations outside India did not exceed PBT Margin (%) 9.0 6.5 5.6 the quantitative threshold for disclosure envisaged in AS-17 on PAT 3.9 3.4 3.2 “Segment Reporting” notified under the Companies (Accounting PAT Margin (%) 6.0 4.4 3.7 Standard) Rules 2006. In view of the above, both primary and EPS (Rs.) 29.5 26.2 24.5 secondary reporting disclosures for business/geographical ROANW (%) 7.8 6.2 5.2 segment as envisaged in AS-17 are not applicable to the Company ROACE (%) 10.4 10.3 9.3 Debt/EBITDA (x) 2.8 3.7 3.6 Source: Company Filings, IiAS Research

Top 10 Public Shareholders Shares Holding Sl. No. Name of the Shareholder held (million) as % of total 1 Relay B V 14.6 10.0 2 Morgan Stanley Asia (Singapore) Pte. 4.9 3.4 3 Palmer Investment Group Ltd 4.4 3.0 4 USL Benefit Trust 3.5 2.4 5 CLSA (Mauritius) Ltd 3.0 2.1 6 Merrill Lynch Capital Markets ESPANA SA SV 3.0 2.1 7 The Bank Of Nova Scotia Asia Ltd 2.5 1.7 8 New World Fund Inc. 2.1 1.4 9 Oppenheimer Developing Markets Fund 1.9 1.3 Vanguard Emerging Markets Stock Index Fund A Series of Vanguard 10 1.8 1.3 Intern Total 41.7 28.7 Source: BSE

Change in Shareholding Pattern (%) Price Performance Year Promoter DII FII Others

Jun-13 21.1 6.0 42.1 30.8 63% Mar-13 22.9 6.0 41.8 30.1 42% Dec-12 27.5 5.1 45.8 20.5 24% 29% Sep-12 27.8 4.9 46.2 21.1 Mar-12 27.8 7.3 47.5 17.4 Mar-11 28.0 3.0 50.3 18.6 -4% -2% 5 Yr Mar-10 29.2 6.8 46.3 17.8 S&P BSE 100 CNX 100 USL Mar-09 36.6 7.4 30.6 25.4 Not annualized. Source: BSE Period ended 30 August 2013

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Voting Advisory

Category: Accounts Resolution 1: Adoption of FY13 financial statements

Financial Performance: The company sold 123.7 mn cases in FY13(120.2 mn cases in FY12)

Total income for FY13 has grown by 12.2% to Rs 87.1 bn (Rs 77.2 bn). EBIDTA is higher by 5.4% to Rs 12.3 bn (Rs 11.3 bn). Interest cost increased to Rs 6.6 bn (Rs 5.9 bn) and other expenses increased to Rs 18.4 bn (Rs 16.7 bn). PBT before exceptional items and tax is flat at Rs 5.1 bn. Exceptional items amounting to Rs 216.5 mn (Rs 108.2 mn) is primarily towards diminution of value investments in subsidiaries and provision for doubtful advances in a subsidiary. PAT for the year is lower by 6.4% to Rs 3.2 bn (Rs 3.4 bn).

Related party transactions include finance provided to the tune of Rs 9003.6 mn (Rs 4793.0 mn for FY12). This includes Rs 4274.1 mn (Rs 180.0 mn in FY12) to UB (Holdings) Ltd., Rs 1526.4 mn (Rs 2959.3 mn) to USL Holdings Ltd., Rs 1266.6 mn (Rs 615.9 mn) to Royal Challengers Sports Pvt. Ltd.

Net ‘guarantees and collaterals given’ outstanding at the end of the year, amounts to Rs 40.6 bn (Rs 42.4 bn). This is primarily to USL Holdings Ltd.

Receivables outstanding amounting to ~Rs 57.0 bn (Rs 46.2 bn) includes Rs 41.3 bn (Rs 39.8 bn) from USL Holdings Ltd., Rs 5.0 bn (Rs 0.3 bn) from UB Holdings Ltd. and Rs 2.2 bn (Rs 1.1 bn) from Royal Challengers Sports Pvt. Ltd. Deposits outstanding of Rs 1407.3 mn (Rs 1513.3 mn) includes Rs 1400.0 mn (Rs 1400.0 mn) deposit given to UB Holdings Ltd.

The debt/equity ratio is comfortable at 0.7x, interest coverage ratio is 1.8 x. The promoters have pledged 97.0% of their holding as on 31 March 2013 (94.4% as on 31 March 2012).

USL has made an open offer to acquire 18.42% equity in Pioneer Distilleries Ltd. at Rs 64.02 per share.

Total income on consolidated basis for FY13 is 14.3% higher at Rs 108.5 bn (Rs 95.0 bn) and net profit for the year is (Rs 1.0 bn)versus profit of Rs 1.9 bn for FY12.

Business Risk Indicators Leverage Profile Ratio Rs. Bn Parameter FY11 FY12 FY13 4.0 60.0 Cash Flow from 3.0 0.5 0.3 0.9 40.0 Operations/EBITDA (x) 2.0 Exceptional item as % of total 20.0 0.6 0.1 0.2 1.0 income 0.0 0.0 Misc. expenses as % of total income 0.5 0.3 0.3 FY11 FY12 FY13 Contingent liabilities as % of 14.0 79.8 73.8 networth Borrowings Debt/EBIDTA Debt/Equity Interest Coverage Secured loans as % of net block[1] 338.9 263.0 313.5 Percentage of pledged shares 87.5 94.4 97.0 [1] Includes loans against hypothecation of current assets, pledge of certain shares held by the company and held by UBL Benefit Trust and current investments

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Related Party Transactions (RPT) Annual transactions FY12 FY13 Comment (Rs.mn) Net purchases 1663.0 328.9 Income from brand franchise, interest income, other operating income, Net receipts 205.1 597.0 guarantee commission received, advertising & sales promotion exp. paid, rent paid and guarantee/security commission paid Sale/(purchase) of fixed (603.9) (48.9) Net purchase of fixed asset from related parties asset Finance includes loan and equity contribution in cash or kind. This includes Finance 4793.0 9003.6 Rs 4274.1 mn given to UB Holdings Ltd. Guarantees 38382.6 0.0 No guarantees and collaterals given in FY13, primarily to USL Holdings Ltd. Outstanding balance (Rs. FY12 FY13 Parameter Assessment bn) Guarantees received 0.6 1.5 Outstanding RPT exposure 153.3 % of networth Lease deposit 0.5 0.5 Exposure to promoter controlled entities 153.3 % of networth Deposits outstanding 1.5 1.4 Transactions with promoter entities 11.3% of total income Net amount receivable 46.2 56.9 Guarantees & collaterals 42.4 40.6 given

Liquidity Position Audit Integrity Performance relative to Industry Parameter Rs. bn Parameter Result USL Industry Parameter Marketable Head of audit committee Independent (FY13) Average[1] 1.6 securities Independent directors in ROANW (%) 5.2 6.7 100 Operating cash 3.9 audit committee (%) Debt/Networth(x) 0.7 0.9 Cash balance 2.8 Tenure of auditor (Yrs) 2 Interest cover (x) 1.8 1.8

Tenure of audit partner (Yrs) 2 PAT margin (%) 3.2 1.8 Current Ratio 0.7 0.8

[1] In absence of FY13 data, data pertains to FY12

Accounting Policies: Accounting Policy Method adopted 3-yr pattern and impact on P&L Depreciation Straight Line Method No changes in policy Inventory Weighted Average Method No changes in policy

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Voting Advisory

Category: Dividend

Resolution 2: Declare dividend on equity shares

Declare dividend of Rs. 2.5 on equity share of FV Rs 10.0 i.e. 25%.

IiAS Recommendation: FOR

IiAS Evaluation Parameters for Dividend Payout Parameters Analysis Risk Level Details Has the payout ratio decreased in the last three years? No - refer Table 1 Is growth in dividend higher than growth in profits? Yes - refer Table 1 Has the company generated enough cash to pay the proposed dividend? Yes - Does the company have a stated dividend policy? No Low IiAS Recommendation FOR

Discussion

USL proposes to pay a dividend of Rs 2.5 per share of FV Rs 10 for FY13 (Rs 2.5 per share for FY12). Profit after tax has decreased by 6.4% to Rs 3208.0 mn (Rs 3427.9 mn for FY12) and total dividend has remained flat at Rs 380.0 mn. The payout ratio for FY13 is marginally higher at 11.8% (11.1% for FY12).

Table 1: Key Dividend Data (Standalone) Particulars FY11 FY12 FY13 Profit after tax (Rs mn) 3854.7 3427.9 3208.0 Profit growth y-o-y (%) 2.5 (11.1) (6.4) Total dividend[1] (Rs mn) 381.3 380.0 380.0 Dividend growth y-o-y (%) 4.2 (0.3) 0.0 Payout Ratio (%) 9.9 11.1 11.8 Source: Company filing, IiAS Research [1] Includes tax on dividend

As per the annual report, ~14.5 mn equity shares issued to Relay BV on preferential basis, post 31 March 2013, are ranked pari passu with existing shares and therefore are eligible to receive dividend. IiAS observes that the provision for dividend does not reflect the incremental dividend to be paid on account of preferential allotment. In view of this, total dividend (including tax on dividend) will be higher by ~Rs 42.2 mn. Consequently the payout ratio will increase to 13.2%.

IiAS recommends voting FOR the resolution.

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Voting Advisory

Category: Board Appointments

Resolution 3: To reappoint Vijay Mallya as director IiAS Recommendation: FOR Resolution 5: To appoint Gilbert Ghostine as director IiAS Recommendation: FOR Resolution 6: To appoint Ravi Rajagopal as director IiAS Recommendation: FOR Resolution 7: To appoint PA Murali as director IiAS Recommendation: FOR Resolution 9: To appoint Arunkumar Gandhi as director IiAS Recommendation: FOR Resolution 10: To appoint Sudhakar Rao as director IiAS Recommendation: FOR Resolution 11: To appoint Sivanandhan Dhanushkodi as director IiAS Recommendation: FOR Resolution 12: To appoint Renu Karnad as director IiAS Recommendation: AGAINST Resolution 13: To appoint Paul Walsh director IiAS Recommendation: FOR Resolution 14: To appoint Vikram Singh Mehta as director IiAS Recommendation: FOR

IiAS Evaluation Parameters for Board Appointments Parameter Analysis Risk Level Details Is the chairman of the board an independent director? No Moderate Is there a separation in the roles between the Chairman and Yes - CEO/MD? Proportion of independent directors on the board 50% Low Proportion of non-executive directors on the board 83% Low Is there atleast one woman director on the board? Yes - Does the company have a policy on the retirement age of directors? No Low Does the company have a policy on the tenure of independent No Low directors? Do all the board committees have at least one independent director? Yes - Is there any whistleblower policy for the independent directors? Yes - Proportion of promoter representatives on board 42% Moderate Overall Low

Table 2: Board composition Sl. Tenure Attendance at Other Compensation Name of director Occupation Age No (yrs.) board meetings Directorships (Rs.mn)

Executive 1 Ashok Capoor Managing Director 60 2 100% 2 46.5 2 PA Murali (N)[2] Whole Time Director - <1 NA 3 NA Non-Executive Non-independent 3 Vijay Mallya (P) Chairman 58 13 100% 7 0.1[1] 4 Paul Walsh (N) [4] Fmr. CEO, Diageo Plc. - <1 NA 0 NA President, Diageo Asia 5 Gilbert Ghostine (N) [3] - <1 NA 0 NA Pacific Global Head Business 6 Ravi Rajagopal (N)[2] - <1 NA 0 NA Dev., Diageo Plc.

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Voting Advisory

Non-Executive Independent 7 GN Bajpai Ex-Chairman, SEBI 70 1 100% 11 0.2[1] Former ED, Tata Sons 8 Arunkumar Gandhi[2] 70 <1 NA 2 NA Ltd. Former Chief <1 9 Sudhakar Rao[2] 63 NA 6 NA Secretary, Former DGP, <1 10 D Sivanandhan[2] - NA 5 NA Maharashtra 11 Ms. Renu Karnad[2] MD, HDFC Ltd. 60 <1 NA 12 NA Fmr. Chairman, Shell 12 Vikram Mehta[4] - <1 NA 6 NA group, India Source: Company filings, IiAS research, Indian Boards (P) Denotes Promoter (N) Nominee of Diageo Plc. NA: Not Applicable [1] Excludes commission, non-executive directors will be paid commission amounting to Rs 56.0 mn. This will be paid after adoption of accounts in a proportion as deemed fit. [2] Appointed as additional director effective 4 July 2013 Seeking re-appointment Seeking appointment [3] Appointed as additional director effective 27 May 2013 [4] Appointed as additional director on 19 August 2013

Table 3: Proposed Appointments – IiAS Checklist IiAS Director Checklist Vijay Mallya Gilbert Ghostine Ravi Rajagopal PA Murali Category of Appointment Non-Independent Non-Independent Non-Independent Executive IiAS Director Classification Non-Independent Non-Independent Non-Independent Executive Independence NA NA NA NA Tenure NA NA NA NA Attendance  NA NA NA Other Affiliations     Shares Held 12,510 Nil Nil Nil ESOPS - - - - Qualification     IiAS Recommendation FOR FOR FOR FOR NA: Not Applicable

IiAS Director Checklist Arunkumar Gandhi Sudhakar Rao D. Sivanandhan Category of Appointment Independent Independent Independent IiAS Director Classification Independent Independent Independent Independence    Tenure    Attendance NA NA NA Other Affiliations    Shares Held Nil Nil Nil ESOPS - - - Qualification    IiAS Recommendation FOR FOR FOR NA: Not Applicable

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IiAS Director Checklist Renu Karnad Paul Walsh Vikram Mehta Category of Appointment Independent Non-Independent Independent IiAS Director Classification Independent Non-Independent Independent Independence  NA  Tenure  NA  Attendance NA NA NA Other Affiliations X   Shares Held Nil Nil Nil ESOPS - - - Qualification    IiAS Recommendation AGAINST FOR FOR NA: Not Applicable

Director Profiles Vijay Mallya

Qualification  P.G.D.B.A.  Ph.D. in Business Management, University of Southern California, USA  Chairman, UB group Work experience  Over 32 years of experience 1. Airlines Ltd. (L) 2. Bayer Crop Science Ltd. (L) 3. Mangalore Chemicals & Fertilizers Ltd. (L) Other directorships[1]: 4. India Ltd. (L) 5. United Breweries Ltd. (L) 6. United Breweries (Holdings) Ltd. (L) 7. United Racing Bloodstock Breeders Ltd. Gilbert Ghostine Qualification  MBA , Saint Joseph University, Lebanon  President, Diageo Asia Pacific Work experience  Over 25 years of experience, including 20 years at Diageo in various leadership roles Ravi Rajagopal  Chartered Accountant Qualification  Cost Accountant  Advanced Management Programme, Harvard Business School  Global business head of Diageo Plc. Work experience  Over 30 years of experience, including 16 years at Diageo Plc.  Had various roles covering regional finance and group controller PA Murali  Chartered Accountant Qualification  B.Com.  Former Joint President and CFO  Over 32 years of experience including over two decades in UB group and was Work experience instrumental in creation of United Spirits Ltd. by consolidation of and merger of all spirits businesses of UB group 1. Ltd. Other directorships: 2. Pioneer Distilleries Ltd. (L) 3. Sovereign Distilleries Ltd.

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Arunkumar Gandhi  Chartered Accountant, ICAI Qualification  Chartered Accountant, England & Wales  Associate member of Chartered Institute of Taxation, London  Former Executive Director, Tata Sons Ltd. Work experience  Worked with NM Raiji & Co, CA  44 years of experience  Chairman, Audit Committee Committee memberships  Chairman, Compensation Committee  Shareholders’/Investors’ Grievance Committee 1. Paper Products Ltd. (L) Other directorships: 2. Walchandnagar Industries Ltd. (L) Sudhakar Rao  Masters’ degree in Economics, Delhi School of Economics Qualification  Masters’ degree in Public Administration, Kennedy School of Government  Retired IAS Officer Work experience  Former Chief Secretary, Karnataka  Audit Committee Committee memberships  Compensation Committee  Shareholders/Investors Grievance Committee 1. Ltd. (L) 2. BSE Ltd. 3. CMC Ltd. (L) Other directorships: 4. Binani Industries Ltd. (L) 5. L&T Infrastructure Development Projects Ltd. 6. BSE Institute Ltd. D. Sivanandhan  Retired IPS officer  Over 35 years of experience including as Director General of Police, Work experience  Security Advisor to the Reserve  Member of special task force in national Security Council Secretariat  Audit Committee Committee memberships  Compensation Committee  Chairman, Shareholders/Investors Grievance Committee 1. SD Fine Chem Ltd. 2. Forbes & Company Ltd. Other directorships: 3. Aquamall Water Solutions Ltd. 4. Eureka Forbes Ltd. 5. The Ratnakar Bank Ltd. Renu Karnad  Post graduate in Economics, University of Delhi Qualification  Degree in law, university of Mumbai  Managing Director, HDFC Ltd. Work experience  Over 35 years of experience with HDFC Ltd.  Audit Committee Committee memberships  Compensation Committee  Shareholders/Investors Grievance Committee

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1. Bosch Ltd. (L) 2. Credit Information Bureau (India) Ltd. 3. Gruh Finance Ltd. (L) 4. Housing Development Finance Corporation Ltd. (L) 5. HDFC Bank Ltd. (L) 6. HDFC Asset Management Company Ltd. Other directorships: 7. HDFC Ergo General Insurance Company Ltd. 8. HDFC Property Ventures Ltd. 9. HDFC Standard Life Insurance Company Ltd. 10. Akzo Nobel India Ltd. (L) 11. Indraprastha Medical Corporation Ltd. (L) 12. EIH Ltd. (L) Paul Walsh  Former Chief executive, Diageo Plc.  Advisor to Chairman and CEO, Diageo Plc. Work experience  Former CEO, The Pillsbury Company  31 years of experience Vikram Mehta  B.A. in Mathematics, St. Stephen’s College, Delhi University Qualification  M.A. in Economics, Magdalene College, Oxford University  MA, Fletcher School of Law and Diplomacy, Tufts University  Former IAS Officer  Former Senior Economist, Philips Petroleum Work experience  Former Advisor (Strategic Planning), Ltd.  Former, Managing Director, Shell markets and Chemicals, Egypt  Former, Chairman, Shell Group, India 1. Colgate Palmolive (India) Ltd. (L) 2. Mahindra & Mahindra Ltd. (L) Other directorships: 3. Larsen & Toubro Ltd. (L) 4. Vodafone India Ltd. 5. Ltd. (L) Source: Company filings, IiAS research

Discussion

The board comprises 12 directors including two executive directors. Of the 10 non-executive directors, six are independent. Vijay Mallya is the non-executive chairman and represents the promoter of the company. The following directors SR Gupta, Doraiswamy Iyengar, BM Labroo, Sreedhara Menon and Sudhindar Krishan Khanna resigned from the board effective 4 July 2013.

It is observed 50% of the board is independent and therefore the company is in compliance with clause 49 of the Listing Agreement (which requires that if the chairman is promoter, then at atleast 50% of the directors need to be independent).

Box 1: IiAS policy snapshot – minimum number of independent directors

Clause 49 of the listing agreement states that for a company with an executive chairman; at least 50% of the board should comprise independent directors. In the case of a company with a non-executive chairman, at least one-third of the board should be independent. However, if non-executive chairman is a promoter, 50% of the directors have to be independent.

Clause 149 (3), Companies Act, 2013, which has been passed in the parliament, - Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

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IiAS notes that Renu Karnad is on the board of 12 other public limited companies of which seven are listed. IiAS believes that the number of board directorships is inversely related to the amount of time that can be devoted to the issues of a single company, thereby restricting their contribution to the board proceedings and the company

Box 2: IiAS policy snapshot – maximum number of other directorships for independent directors.

The MCA Corporate Governance Guidelines, 2009 stipulate that maximum number of public companies in which an individual may serve as an independent director should be restricted to seven.

The Companies Act 2013 sets a maximum limit on total number of directorships at 20 companies including a sub limit of 10 for public companies.

IiAS believes that in order to carry out their fiduciary responsibility with the necessary due diligence, a director should not be on the board of more than ten public companies, of which a maximum of seven can be listed. If the director is appointed in an executive capacity in any of the companies, the number of directorships should be restricted to four listed companies. The director can be on the board of any number of public and private companies, so long as the total number of directorships does not exceed 10.

Director category Executive position in IiAS Maximum Number of directorships IiASin recommends company[1] voting otherAGAINST company(s)? the reappointment of Surender Tuteja and FOR the reappointmentrecommendation of Adarsh Kishore. Executive/non - No 7 Listed and not more than 10 public in total Not a voting criteria independent/non- executive Yes 4 Listed and not more than 10 public in total Not a voting criteria No 7 Listed and not more than 10 public in total AGAINST - if exceeds Independent Yes 4 Listed and not more than 10 public in total AGAINST - if exceeds [1] As per company

IiAS recommends voting FOR the reappointment/appointment of all directors except Renu Karnad.

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Category: Auditors Resolution 4: To appoint BSR & Co. as statutory auditors of the company

Appoint BSR & Co. as statutory auditors of the company and authorise the board to fix their remuneration

IiAS Recommendation: FOR

Parameter Result Risk Level Details Is the tenure of the auditor firm more than 10 consecutive years? NA - Has the audit partner been rotated in the last five years? NA - Does the company have an auditor rotation policy in place? No Low Are the non-audit to total fees within acceptable limits? Yes - Have the audit fees increased consistently? Yes - IiAS Recommendation FOR NA: Not applicable

Discussion

USL proposes to appoint BSR & Co. as the statutory auditors of the company. Previously Walker, Chandiok & Co were the auditors (two years), prior to whom Price Waterhouse were the auditors.

Table 4: Auditor’s remuneration Particulars (Rs. mn) FY11 FY12 FY13 100% Audit fees 80% Statutory Audit 10.0 10.0 10.0 14.7 13.4 17.0 Other services 60% (including limited 4.7 3.4 7.0 40% Threshold reviews) 20% Total audit fees (a) 14.7 13.4 17.0 Non-audit fees 0% Total non-audit fees (b) - - FY11 FY12 FY13 Total fees (a+b)* 14.7 13.4 17.0 Audit fees (Rs. mn) Non-audit fees (Rs. mn) Non-audit to total - - - fees (%) *Excludes out of pocket expense

IiAS recommends voting FOR the resolution.

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Category: Remuneration

Resolution 8: Appointment of PA Murali as executive director

To appoint PA Murali as executive director and fix the terms of remuneration

IiAS Recommendation: FOR

IiAS Evaluation Parameters for Managerial Remuneration Parameters Result Risk Level Details Is the remuneration for promoter? No Low Is the current remuneration higher than peers? NA - Higher than Is the proposed remuneration in line with industry peers? No Moderate peers Is there a significant hike in remuneration from previous term/year? NA - Is the remuneration commensurate with the growth in NA - profits/operations? Is the proposed resolution open-ended? Yes Moderate Is there a component of performance-linked pay in the proposed Yes Moderate salary? Does the person have the requisite qualifications? Yes - Has the company disclosed a clear remuneration policy to the No Moderate shareholders? Overall Moderate Source: Company Filings, IiAS Research NA: Not Applicable

Discussion

USL proposes to appoint PA Murali, as an executive director for a period of five years effective 4 July 2013. He will be responsible in the areas of finance, accounts, taxation and strategy. Prior to been elevated to the board, he was the joint president and chief financial officer of the company. He will not be subject to retirement by rotation as long he continues to as an executive director.

Table 5: Proposed remuneration per annum for PA Murali (Rs mn.) Sl Terms & Conditions Proposed No. Remuneration 1. Salary 12.9 2. Special Allowance 6.5 3. Personal Allowance 4.6 4. Performance Evaluation Payment * 5. Contribution Improvement Incentive Scheme (CRIIS) # 6. Long Term Incentive Payment (LTIP) # 7. Perquisites a. Housing (upto 60% of salary) 7.8 b. Flexible Compensation Package (FCP) i. FCP 1 - LTA 0.2 ii. FCP 2 - Car lease and lunch vouchers 2.8 iii. FCP 3 - Driver’s salary 0.2 c. National Pension Contribution (10% of basic) 1.3 d. Others Medical reimbursement, club fees, group mediclaim, term life, personal accident insurance, #

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provident funds, superannuation/annuity fund, gratuity, encashment of leave, provision of cars, cell phone and telephone Total 36.3 Source: Company filings, IiAS Research * Percentage of basis salary plus special allowance per annum # As per the rules framed

The total proposed remuneration is Rs 36.3 mn per annum excluding performance evaluation payment, CRIIS, LTIP and perquisites and retirement benefits.

The overall remuneration in any financial year shall not exceed the limits prescribed by Section 198, 309, Schedule XIII of the Companies Act, 1956.

In event of loss or inadequate profit in any given financial year, PA Murali will paid remuneration by way of salary, special allowance, personal allowance, performance evaluation payment, CRIIS, LTIP, perquisites, benefits, amenities as ‘minimum remuneration’, subject to approval of the central government.

Table 6: Remuneration for Peers Sr. Company Name of Remuneration (Rs. Total income (Rs. PAT Designation No Name director mn) bn) (Rs bn) 1 USL PA Murali WTD 36.3[1] 87.1 3.2 WTD Nestle India Shobhinder 2 (Finance & 25.6 83.3 10.7 Ltd. Duggal Control) Hindustan Sridhar 3 WTD (CFO) 59.6 264.2 38.0 Unilever Ltd. Ramamurthy India 4 Sunil Duggal WTD 55.4 44.4 5.9 Ltd. United 5 HPV Zon WTD (CFO) 38.9[2] 39.4 1.7 Breweries Ltd. Source: Company filings, IiAS Research [1] Proposed but excludes CRIIS, LTIP, performance evaluation payment, perquisites and retirement benefits [2] Proposed for FY14

The proposed remuneration for PA Murali, is comparable to the remuneration paid to his peers (see Table 6), and commensurate with the size of the company.

IiAS observes that many components like performance evaluation payment, CRIIS, LTIP, perquisites and retirement benefits, of the remuneration structure have not been adequately disclosed. IiAS believes that the company should make adequate disclosure while seeking shareholders’ approval on the terms of remuneration.

IiAS recommends voting FOR the resolution.

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Voting Advisory

Resolution 15: Revision in the terms of remuneration of Ashok Capoor as managing director

IiAS Recommendation: FOR

IiAS Evaluation Parameters for Managerial Remuneration Parameters Result Risk Level Details Is the remuneration for promoter? No Low Is the current remuneration higher than peers? Yes Moderate Higher than Is the proposed remuneration in line with industry peers? No Moderate peers Is there a significant hike in remuneration from previous term/year? Yes Moderate Is the remuneration commensurate with the growth in No Moderate profits/operations? Is the proposed resolution open-ended? No Low Is there a component of performance-linked pay in the proposed Yes Moderate salary? Does the person have the requisite qualifications? Yes - Has the company disclosed a clear remuneration policy to the No Moderate shareholders? Overall Moderate Source: Company Filings, IiAS Research

Discussion

In 2011 AGM, shareholders had approved the appointment of Ashok Capoor as Managing Director for three years effective 2 May 2011 and fixed the terms of remuneration. The basic salary approved was Rs 0.85 mn per month in the salary range of Rs 0.8 mn to Rs 1.2 mn per month and special allowance of Rs 0.3 mn per month.

Table 7: Remuneration paid in FY13 (Rs mn) Sl No. Terms & Conditions Paid/Payable for FY13 1. Salary and allowances 20.9 2. Performance linked incentive 13.3 3. Perquisites 7.2 4. Retirement benefits 5.1 Total 46.5 Source: Company filings

Ashok Capoor, was promoted as ‘President’ effective 2 May 2011 and is entitled to special allowance of 50% of basic salary, as applicable to the employees in the grade of president, as per company rules. Therefore the company proposes to rectify the anomaly and increase the special allowance from Rs 3.6 mn per annum to 50% of basic salary with proportionate increase in all benefits linked to the special allowance w.e.f 2 May 2011 till the end of his tenure as managing director. In addition, USL proposes on increase the personal allowance and make one time ex- gratia payment to Ashok Capoor.

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Voting Advisory

Table 8: Proposed amendments in the terms of remuneration for Ashok Capoor (Rs mn) Sl No. Terms & Conditions Approved in 2011 Proposed Incremental 1. Special Allowance [1] 3.6 50% of basic 1.5 2. Personal Allowance 1.6 5.0 3.4 3. One time Ex -gratia - 2.3 2.3 Total 7.2[1] Source: Company filings, IiAS Research [1] Excludes propionate increase in benefits linked to special allowance

Assuming basic salary for FY14 of Rs 0.85 mn per month, same as approved for FY12, USL proposes to pay Ashok Capoor special allowance of Rs 5.1 mn per annum i.e. an increase of Rs 1.5 mn per annum. In addition he will be paid differential special allowance for FY12 and FY13.

It is observed that USL proposes to pay Ashook Capoor incremental remuneration amounting to minimum of Rs 7.2 mn for FY14. This excludes the payment in arrears of special allowance and benefits linked to special allowance for FY12 and FY13.

As per the revised terms, for FY14 the company proposes to pay Ashok Capoor a remuneration of ~Rs 53.7 mn (Rs 46.5 mn plus Rs 7.2 mn). This is on the assumption that performance linked incentive for FY14 will be same as paid in FY13. However this excludes incremental benefits linked to special allowance.

Table 9: Remuneration for Peers Sr. Company Name of Remuneration (Rs. Total income (Rs. PAT Designation No Name director mn) bn) (Rs bn) Managing 1 USL Ashok Capoor 53.7[1] 87.1 3.2 Director United Managing 2 Kalyan Ganguly 49.2 39.4 1.7 Breweries Ltd. Director Dabur India 3 PD Narang WTD 55.5 44.4 5.9 Ltd. Akzo Nobel Managing 4 A Jain 50.5 23.7 2.2 Ltd. Director Britannia Managing 5 Vinita Bali 40.9 56.7 2.3 Industries Ltd. Director Source: Company filings, IiAS Research [1] Proposed for FY14

It is observed that the proposed remuneration of Ashok Capoor is comparable to the remuneration paid his peers (see Table 9).

IiAS is in favour of correcting the anomaly in special allowance however IiAS observes that Ashok Capoor’s tenure as managing director ends on 1 May 2014 and assuming he will reappointed, the terms of appointment will be revised. IiAS believes that the company should have considered waiting for a year to revise the other terms of remuneration.

IiAS recommends voting FOR the resolution.

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Voting Advisory

Category: Alteration of Articles of Association Resolution 16: To alter the Articles of Association of the company

IiAS Recommendation: FOR

Discussion

Pursuant to the completion of transfer of shares of the company held by United Breweries (Holdings) Ltd., Kingfisher Finvest India Ltd, SWEW Benefit Company, Palmer Investment Group Ltd. and UB Sports Management Overseas Ltd. (‘the sellers’) in terms of the share purchase agreement dated 9 November 2012 between the sellers, Vijay Mallya and AKR Nedungadi (as Trustees of USL Benefit Trust and Diageo Plc and Relay B.V. ( ‘the purchaser”), the shareholders’ agreement became effective and the company executed a deed of adherence on 4 July 2013 and became a party to the shareholders’ agreement.

In order to reflect certain provisions of the agreement, the company proposes to alter the existing Articles of Association by substituting with a new set of Articles of Association of the Company.

IiAS understands that the followings are the some of the significant amendments proposed in the AoA: 1. Non-compete clause of business by UB group for four years. 2. Diageo has the right to appoint the chief executive officer (CEO) and the chief financial officer (CFO) at United Spirits. 3. If Diageo fails to acquire a majority stake in the company then UBHL would vote its remaining shareholding in USL as per Diageo discretion for a four year period; UBHL will also vote its USL shares to enable Diageo to ensure that its nominees are appointed to the USL board. 4. Vijay Mallya would continue to remain Chairman of USL & UBHL but Diageo would appoint directors to the board as well as its CEO& CFO.

IiAS observes that none of these clauses will significantly affect the minority shareholders.

IiAS recommends voting FOR the resolution.

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Voting Advisory

Legend

IiAS publishes voting recommendations on shareholder resolutions. These recommendations are non-binding in nature. Investors may have their own voting parameters which may, on aspects, differ from those of IiAS. On such occasions, investors should use these recommendations as a guiding tool.

The data and regulations reviewed while arriving at a recommendation are disclosed to the investors. This gives the investor clarity regarding the basis for our recommendations.

Please note that voting recommendations do not constitute advice to buy, sell or hold securities.

Indicator Meaning Description Common Examples This symbol is used for resolutions which indicate poor corporate governance practices or non-compliance with the regulatory Managerial Governance provisions. Consequently, they are usually accompanied with an remuneration, G Issue AGAINST recommendation. IIAS may also include measures/best Auditor practices which the company can adopt to improve its governance appointments record.

This symbol is used for resolutions which negatively affect the minority Minority Preferential shareholders of the company. IIAS usually recommends voting shareholder warrants, M AGAINST such resolutions as they benefit the controlling or a class of Differential rights impact shareholders at the expense of others.

This symbol is used for operating decisions taken by the company management and IIAS will usually recommend voting FOR such Moderate - resolutions. However, they carry an element of risk which may R Any resolution High Risk subsequently have a negative impact on the financials. Investors are therefore advised to review the risk factors highlighted by IIAS in its analysis before voting.

Indicates a strategic decision of the company, the long term impact of which cannot be accurately ascertained at the time of proposal. These may be accompanied with a FOR or AGAINST recommendation based Mergers, on a preliminary review of data provided to investors. IIAS Amalgamations, Strategic S recommendations on such strategic decisions are dependent primarily Hive-offs, Entering on short-term indicators like market reaction, analyst opinions, new lines of business valuation impact, etc. Investors may choose to support a resolution in expectation of higher returns.

Indicates lack of adequate information. Even though IIAS provides both Transparency FOR and AGAINST recommendations on such resolutions (based on T available data), investors are advised to seek further clarifications from Any resolution Issue the company. Investors should take into account any additional information received from the company before voting.

Refers to a valuation impact on the company’s financials. These resolutions are likely to impact the company’s margins and long term Increase in profitability. IIAS typically will recommend voting AGAINST such a borrowings. Related Valuation V resolution. Investors are advised to critically review the company’s party transactions, proposal in such cases. However, they may choose to support a Excessive dilution resolution in expectation of higher returns.

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Voting Advisory

Disclaimer

This document has been prepared by Institutional Investor Advisory Services India Limited (IIAS). IIAS is a full service Institutional Shareholder Advisory Service Company. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. IIAS shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any Voting or investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of the individual resolutions which may affect their investment in the securities of companies referred to in this document (including the merits and risks involved). The discussions or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject IIAS to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. IIAS reserves the right to make modifications and alterations to this statement as may be required from time to time. However, IIAS is under no obligation to update or keep the information current. Nevertheless, IIAS is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither IIAS nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. . The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The information provided in these reports remains, unless otherwise stated, the copyright of IIAS. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of IIAS and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.

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