Voting Advisory

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28 June 2016 ITC Limited Annual General Meeting (AGM)

Company Profile Meeting Date: 22 July 2016, 10:00 AM 14 June 2014, 3.00 PM BSE: 500875 | NSE: ITC Proxy Deadline: 20 July 2016, 10:00 AM 12 June 2014, 3:00 PM Industry: Tobacco Products E-Voting Period: www.evoting.nsdl.com 30 April 2014 Index: S&P BSE Sensex/Nifty 50 Face Value: Re.1 E-Voting Site: 18 July 2016, 9:00 AM to 21 July 2015, 5:00 PM Fiscal Year End: March Meeting Venue: Science City, Auditorium, JBS Haldane Avenue, Kolkata - 700046 Notice Date: 20 May 2016 Christ University Auditorium, Hosur Road, Bangalore - 560 029

Agenda Items IiAS # Type1 Description of resolution Recommendation See Legend 1 O Adoption of financial statements for the year ended 31 March 2016 See Analysis We believe that a comprehensive review of the financials of a company is a critical exercise which often requires first-hand information and proper due diligence. We do not provide voting recommendations on resolutions for adoption of financial statements, given the limited time between receipt of the annual report and the shareholder meeting, but provides analysis of critical ratios. 2 O To declare final dividend of Rs.6.5 per share and a special dividend of Rs.2.0 per FOR share (face value Re.1) ITC Limited (ITC) proposes a final dividend of Rs.6.5 per equity share and a special dividend of Rs.2.0 per share of face value Re.1 for the year ended 31 March 2016 (aggregate dividend

of Rs.8.5 per share). The total dividend proposed to be paid (including dividend tax) is Rs.82.3 bn in FY16. The company’s dividend payout ratio for FY16 is 83.6%. 3 O Reappoint Nakul Anand as Whole-time Director FOR Nakul Anand oversees the Hospitality, Travel, Tourism and Lifestyle Retailing businesses of the company. He retires by rotation and his reappointment is in line with all the statutory requirements. 4 O Ratification of Deloitte Haskins & Sells’ reappointment as statutory auditor and to AGAINST fix their remuneration at Rs.26.5mn for FY17 ITC proposes to ratify Deloitte Haskins & Sells’ reappointment as statutory auditors: Deloitte Haskins & Sells were first appointed as the statutory auditors for ITC in FY10, and last reappointed at the 2014 AGM for a period of five years. Prior to that, the company’s G M R S T V auditors were A.F Ferguson & Co for 12 years (part of the same Deloitte network). Hence the audit network has a tenure of 19 years. The ratification is not in line with our Voting Policy on Auditor Rotation or with the spirit of Section 139 of the Companies Act 2013. 5 O Appoint Sanjiv Puri as a Whole-time Director for a period of three years and fix his FOR remuneration. Sanjiv Puri is an alumnus from IIT Kanpur, India. He is the former President, FMCG Business- cigarettes, food, personal care, education and stationery products. Going forward he will also oversee the Paperboards, paper and packaging business. In FY16, Sanjiv Puri’s

remuneration aggregated Rs.49.6 mn (including the value of stock options). His proposed remuneration of ~Rs. 124.7 mn (including the value of stock options) is commensurate with the size and complexity of responsibilities and is comparable to peers. 6 O Appoint Rajiv Tandon as a Whole-time Director for a period of three years and fix his FOR remuneration Rajiv Tandon is the CFO of the company. He is a chartered accountant with over three decades of experience. In FY16, Rajiv Tandon’s remuneration aggregated Rs.50.0 mn (including the value of stock options). His proposed remuneration of ~Rs. 124.7 mn (including the value of stock options) is commensurate with the size and complexity of his responsibilities and is comparable to peers.

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Voting Advisory

IiAS # Type1 Description of resolution Recommendation See Legend 7 O Appoint Ms. Nirupama Rao as an Independent Director for a term of five years with FOR effect from 8 April 2016 Ms. Nirupama Rao was appointed as an Additional Director on 8 April 2016. She is a retired

IFS officer. Her appointment is in line with all the statutory requirements 8 O Appoint Yogesh Chander Deveshwar as a Non-Executive Chairperson for a term of FOR three years with effect from 5 February 2017 Yogesh Chander Deveshwar will retire from his executive position and continue as the non- executive Chairperson for a period of three years effective 5 February 2017. He will not be liable to retire by rotation. This will facilitate a smooth transition to the new leadership. 9 O To increase the remuneration of four Whole Time Directors with effect from 1 April FOR 2016 till the expiry of their respective terms The consolidated salary of the three Executive Directors (not including Y C Deveshwar) will increase from Rs. 8.6 mn to Rs. 9.6 mn and the Performance bonus cap will increase 150% to 200% of consolidated salary. This takes their individual maximum remuneration to Rs. 131.9 (including stock options). The proposed remuneration is commensurate with the size and complexity of their individual responsibilities and is comparable to peers.

The consolidated salary of the YC Deveshwar will increase from Rs. 43.2 mn to Rs. 49.2 mn and the Performance bonus cap will increase from 200% to 250% of consolidated salary. G M R S T V

This takes the aggregate remuneration to Rs. 378.3 mn (including stock options) – and will be paid till the expiry of this term as an executive director in February 2017. The proposed remuneration is commensurate with the size and complexity of the responsibilities and is comparable to peers.

As multiple resolutions have been bundled together, we flag this resolution for a governance risk. 10 O To set annual commission at a maximum of Rs. 6mn for each non-executive director FOR for a period of three years ITC proposes to pay annual commission to each non-executive director between Rs.3 mn and Rs.6 mn, subject to the aggregate commission not exceeding 1% of profits. Having a cap

on the amount of commission to be paid to non-executive directors is a good governance practice. 11 O Ratify remuneration of Rs.0.4 mn (plus reimbursement of actual expenses) for P. FOR Raju Iyer, cost auditors for the ‘Paper and Paperboard’ and ‘Nicotine Gum’ products of the company for FY17 The board has approved the appointment of P. Raju Iyer as cost auditors for the year ending 31 March 2017 on a total remuneration of Rs. 0.4 mn plus reimbursement of actual expenses in respect of ‘Paper & Paperboard’ and ‘Nicotine Gum’ products. The total remuneration proposed to be paid to the cost auditors in FY17 is reasonable compared to the size and scale of operations of the company. 12 O Ratify remuneration of Rs. 0.5 mn (plus reimbursement of actual expenses) for FOR Shome & Banerjee, cost auditors for all products other than the ‘Paper and Paperboard’ and ‘Nicotine Gum’ products of the company for FY17 The board has approved the appointment of Shome & Banerjee as cost auditors for the year ending 31 March 2017 on a total remuneration of Rs.0.5 mn plus reimbursement of actual expenses in respect of all products other than the ‘Paper and Paperboard’ and ‘Nicotine Gum’ products. The total remuneration proposed to be paid to the cost auditors in FY17 is reasonable compared to the size and scale of operations of the company. [1] O/S: Ordinary/Special

IiAS comPAYre has been used for evaluating remuneration data

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Voting Advisory

Company Overview ITC was incorporated in 1910, under the name Imperial Tobacco Company of India Ltd. ITC operates in four segments: FMCG, Hotels, Agri Business, Paper and Paperboards & Packaging. In agriculture, ITC e-Choupal has empowered more than 4 million farmers in 40,000 villages. In manufacturing, ITC has created manufacturing facilities for its FMCG, Paperboards, Packaging and Printing businesses. ITC Hotels has more than 100 hotels in over 70 destinations in the country. ITC’s hotel group operates under 4 brands: ‘ITC Hotel’ at the luxury end, ‘WelcomHotel’ in the 5-star segment, ‘Fortune’ in the mid-market to upscale segment and ‘WelcomHeritage’ in the heritage leisure segment.

Promoters: Price Performance (period ended 27 June 2016) Publicly held

Market snapshot 100.0% 85.5% Mkt Price (Rs): 359.05 Mkt Cap (Rs bn): 2889.3 80.0% Networth (Rs bn): 339.6 ITC 60.0% 52-week H-L (Rs): 365.0 – 268.0 42.5% 46.5% 39.9% 43.4% S&P BSE Sensex Current P/E(x): 29.1 40.0% Current P/B (x):8.5 Nifty 50 20.0% Previous Advisory 11.2% ITC PB – 27 June 2016 - ITC AGM - 31 Jul ’15 3 YR 5 YR

Financial performance (Rs bn) Trend in Shareholding Pattern (%) For the year ended 2014 2015 2016 As on FII DII Others as on 31-Mar Total Income 362.9 400.9 409.8 31-Mar-16 35.3 20.5 44.3 EBITDA 140.2 154.6 166.0 31-Dec-15 35.3 20.8 43.9 EBITDA Margin (%) 38.6 38.6 40.5 PBT 130.5 143.6 154.3 30-Sep-15 40.7 15.1 44.2 PBT Margin (%) 36.0 35.8 37.7 30-Jun-15 40.2 15.5 44.3 PAT 88.9 96.6 99.1 31-Mar-15 34.8 20.7 44.5 PAT Margin (%) 24.5 24.1 24.2 EPS (Rs.) 11.2 12.1 12.4 31-Mar-14 34.7 19.3 46 ROANW (%) 35.3 32.8 30.2 31-Mar-13 33.4 19.7 46.9 ROACE (%) 35.1 32.7 30.2 Debt/EBITDA (x) Negligible 31-Mar-12 34.3 17.4 48.3

[1] Pledged Shares: Nil

Top Public Shareholders (as on 31 March 2016) Shares Holding No. Name of the Shareholder held (bn) as % of total 1 Tobacco Manufacturers (India) Limited 1.99 24.73 2 Life Insurance Corporation of India 1.16 14.39 3 The New India Assurance Company Limited 0.15 1.84 4 General Insurance Corporation of India 0.14 1.78 5 The Oriental Insurance Company Limited 0.12 1.50 6 Government of Singapore 0.11 1.33 7 Rothmans International Enterprises Limited 0.10 1.29 8 National Insurance Company Limited 0.01 1.22 9 Myddleton Investment Company Limited 0.00 4.04 Total 3.78 52.12

June 2016 ITC Limited 3

Voting Advisory

Category: Accounts

Resolution 1: Adoption of Financial Statements

IiAS believes that a comprehensive review of the financials of a company is a critical exercise which often requires first-hand information and proper due diligence. IiAS does not provide voting recommendations on resolutions for adoption of financial statements, given the limited time between receipt of the annual report and the shareholder meeting, but provides analysis of critical ratios. A snapshot of the key accounting parameters is presented below:

Standalone vs Consolidated (Rs.bn) Revenue by Business Segment 100% 0.4 0.3 90% 7.1% FMCG 80% 8.0% 6.9% 70% 2.5%10.9% Hotels 60% 50% 38.5 8.9 32.7 2.4% 40% Agri 30% Business 20% 10% Paper 79.8% 0% Revenues Profits Assets 82.4%

Standalone Subsidiaries

Inner circle FY15 Inner circle FY16 Risk Indicators Leverage Profile For the year ended 31-March 2014 2015 2016 CFO/EBITDA (x) 0.5 0.6 0.6 Exceptional items/total income 0.0 0.0 0.0 (%) The company has negligible debt. Interest/average debt (%)* 3.6 26.7 31.7 Contingent liabilities/net worth 1.4 1.8 2.0 (%) Receivables days 23.0 16.5 17.1

Related Party Transactions (RPTs) (Rs. mn) Corporate Social Responsibility (CSR) As on 31-March 2015 2016 Assessment Particulars Rs.bn % (PAT) 3.1% of total Receivables 359.5 516.3 3-year average profit/(loss) 123.4 - receivables Prescribed CSR spend in 2016 2.5 2.0% 1.7% of total Payables 511.2 382.2 Actual CSR spend in 2016 2.5 2.0% payables

Liquidity Audit Integrity As on 31-Mar-16 Rs.bn Parameter Result Current investments 66.1 Name of auditor Deloitte Haskins & Sells Deloitte Touche Cash flow from operations 98.8 Audit network Tohmatsu Cash and cash equivalents 70.1 Tenure of audit network 19 Tenure of audit partner 2

*Interest/Average debt is high, given that the company has negligible amount of debt. Shareholders should engage with the company to understand the reasons for the interest costs.

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Voting Advisory

Category: Dividend IiAS Indicators # Type Description of resolution Recommendation See Legend To declare final dividend of Rs.6.5 per share and a special dividend of 2 O FOR Rs.2.0 per share (face value Re.1)

IiAS Assessment Parameters for Dividend Payout on equity shares Assessment Parameters Comment Details Is growth in dividend higher than growth in profits? Yes Refer Table 1 Does the company have a stated dividend policy? No Does the company have room to pay a higher dividend? No

Discussion The company has proposed a dividend of Rs.6.5 per equity share of face value Re.1 and a special dividend of Rs.2.0 for the year ended 31 March 2016. The total dividend aggregates to Rs.8.5 per share.

The special dividend proposed is to celebrate the company’s achievements over the last twenty years; namely - Gross revenue has grown at a CAGR of 12.2% and the creation of several Indian brands in the FMCG Space (Aashirvaad, Sunfeast, Bingo and Classmate).

The total dividend proposed to be paid (including dividend tax) is Rs.82.3 bn in FY16. The company’s dividend payout ratio for FY16 is 83.6%

Table 1: Key ratios (standalone) Particulars FY14 FY15 FY16 Profit after tax (Rs bn) 87.9 96.0 98.4 Profit growth y-o-y (%) 18.5 9.3 2.5 Dividend per equity share (Rs.) [1] 6.0 6.25 6.5 Special Dividend per equity share 0.0 0.0 2.0 Dividend per equity share (Rs) 6.0 6.25 8.5 Total dividend (including tax on dividend) (Rs bn) 55.8 60.3 82.3 Dividend growth y-o-y (%) 15.0 8.0 36.5 Payout Ratio (%) 63.5 62.7 83.6 Source: IiAS Research, Company filings

IiAS recommends voting FOR the resolution.

June 2016 ITC Limited 5

Voting Advisory

Category: Board Appointments IiAS Indicators # Type Description of resolution Recommendation See Legend 3 O Reappoint Nakul Anand as Whole-time Director FOR Appoint Ms. Nirupama Rao as an Independent Director for a term 7 O FOR of five years with effect from 8 April 2016 Appoint Yogesh Chander Deveshwar as a Non-Executive 8 O Chairperson for a term of three years with effect from 5 February FOR 2017

Table 2: Board Composition % of board Other Pay IiAS Sl. Tenure Name of director Occupation Age meetings director (Rs. Recomm No (yrs) attended ships mn) endation Executive Directors 1 Nakul Anand Whole-time director 59 5 100.0% 7 27.8 FOR Former President, FMCG 2 Sanjiv Puri1 53 <1 NA 3 3.4 FOR Business 3 Rajiv Tandon2 CFO 62 <1 NA 10 2.1 FOR 4 YC Deveshwar# Chairperson 68 32 100.0% 6 137.3 FOR Non-executive Non-Independent Directors Nominee of General Insurers 5 AV Girija Kumar 56 6 67% 1 2.3 - Association of India 6 K Vaidyanath Ex- Executive director, ITC 66 6 83% Nil 3.1 - 7 S. B. Mainak Representative, LIC of India 60 2 100% 2 2.4 - 8 P. B. Ramanujam3 Former MD, GIC, India 71 18 67% Nil 2.7 - 9 SS Rehman4 Former MD, ITC Hotels Ltd 72 4 100% Nil 2.7 - 10 S. B. Mathur3 Former Chairperson, LIC 71 11 100% 10 2.9 - Non-executive Independent Directors 11 Anil Baijal Senior advisor, IDFC 69 6 100.0% 6 2.9 - 12 Ms. Meera Shankar Retired IFS Officer 65 4 100.0% 2 2.8 - Former Secretary, Ministry of 13 S. Banerjee 67 6 100.0% Nil 2.1 - Tourism Former Chief Executive, BoA 14 Arun Duggal 69 2 100.0% 6 2.1 - India 15 Ms. Nirupama Rao5 Retired IFS Officer 65 <1 NA NA FOR Seeking reappointment Seeking appointment [1] Appointed with effect from 6 December 2015 [2] Appointed with effect from 22 January 2016 [3] Classified as independent by the company. IiAS classifies him non-independent due to his extended tenure of 10+ years in the company. [4] Classified as independent by the company. IiAS classifies him non-independent due to his association with the ITC group of around 20 years. [5] Appointed with effect from 8 April 2016 # YC Deveshwar will remain as Executive Chairperson and CEO till 4 February 2017. He will then continue to be on board as a Non- Executive Chairperson from 5 February 2017 RE Lerwill resigned from the Board with effect from 22 June 2016

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Voting Advisory

Table 3: Committee Composition [1] Name of No of % of Chairperson Compliance Remarks Committee directors independence Chairperson and 67% should be Audit 5 Non-Independent 40 Non-Compliant independent Nomination & Chairperson and 50% should be 5 NA* 40 Non-Compliant Compensation independent Securityholders Chairperson should be non- 4 Non-Executive 0 Compliant Relationship executive Minimum three directors; at CSR & Sustainability 4 Non-Independent 20 Compliant least one should be independent. Corporate 10 Non-Independent 0 - - Management Independent 8 Independent 62.5 - - Directors [1] As per IiAS Classification * The chairman of the Nomination & Compensation Committee, S H Khan passed away on 12 January 2016.

Discussion IiAS Assessment Parameters for Board Appointments Assessment Parameter Comment Regulatory Requirement Is the chairman of the board an independent director? No Is there a separation in the roles between the Chairperson and CEO? No* Recommended separate director Proportion of independent directors on the board 33% 50% Proportion of non-executive directors on the board 73% Is there at least one-woman director on the board? Yes Required, At least 1 Does the company have a policy on the retirement age of directors? No [1] As per IiAS Classification * From 5 February 2017, YC Deveshwar will continue on board as a Non-Executive Chairperson.

The board of ITC comprises of fifteen directors out of which four are executive. Eight out of eleven non-executive directors are classified as independent by the company. However, IiAS classifies P. B. Ramanujam, S.S Rehman and S. B. Mathur as non-independent. P. B. Ramanujam and S.B. Mathur have been on the Board for more than 10 years. IiAS believes that the length of tenure is inversely proportionate to the independence of a director. IiAS classifies SS Rehman as non-independent due to his association with the ITC group of around 20 years.

Based on IiAS’ classification of directors, the board is not in compliance with SEBI’s LODR, which states that 50% of the directors should be independent if the company has an executive Chairperson.

Yogesh Chander Deveshwar has been a Director of the company since the past 32 years and the Chairperson of the company for the past 20 years. He will complete his present term as Executive Chairperson and CEO on 4 February 2017 and continue on board as a non-executive Chairperson from 5 February 2017 for three years. He will not liable to retire by rotation. This will facilitate a smooth transition to the new leadership.

Box 1: IiAS policy snapshot – minimum number of independent directors Chapter IV, Regulation 17(1) of the SEBI Listing Obligations and Disclosure Requirements (LODR), 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.

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Voting Advisory

Box 2: IiAS policy snapshot – tenure for independent directors IiAS has observed that some directors are independent as per law, but not in spirit. Their proximity to the promoter/management may impede their ability to provide an independent perspective. Accordingly, IiAS will not treat the following directors as independent: i. Those who do not satisfy the eligibility criteria laid down in Section 149(6) of the Act and Chapter IV, Regulation 16(1)(b) and Regulation 25 of the SEBI Listing Obligations and Disclosure Requirements (LODR). ii. Directors who have been on the board for more than 10 consecutive years. IiAS makes two important distinctions here: a. Unlike the Act, which computes tenure beginning 1 April 2014, IiAS will compute tenure on a retrospective basis. b. IiAS will apply the 'visa rule' and classify directors, whose reappointment is within six months of completing 10 years on the board, as non-independent. iii. Directors who have been on the board of the parent/holding company for more than 10 consecutive years. iv. Directors who are simultaneously on the board of a large number of group companies, with a prolonged tenure of >10 years in any of these companies. Representatives of large shareholders (holding >2% stake) or lenders, even if they are not appointed on the board as a nominee. However, former employees of such shareholders may continue to remain on the Board even after they move on from their employment: these directors can be considered as independent. Similarly, directors who were earlier on the board as nominees can be considered independent once the investor has sold its stake.

Director Profile Nirupama Rao (DIN No. 06954879) Qualification  Graduate in English Language; Fellow of Harvard University Work experience  Retired IFS Officer  KEC International Limited Other directorships  Network18 Media & Investments Limited  TV18 Broadcast Limited Sanjiv Puri (DIN No. 00280529) Qualification  B.tech, IIT Kharagpur, India  President, FMCG Business - Cigarettes, Food, Personal care, education and stationery Work experience products Other directorships Nil Rajiv Tandon (DIN No. 00042227) Qualification  Chartered Accountant Work experience  CFO 1. Greenacre Holdings Limited 2. Gold Flake Corporation Limited Other directorships 3. Wimco Limited 4. Landbase India Limited 5. ITC Infotech India Limited

IiAS recommends voting FOR the resolutions.

June 2016 ITC Limited 8

Voting Advisory

Category: Auditors IiAS Indicators # Type Description of resolution Recommendation See Legend Ratification of Deloitte Haskins & Sells’ reappointment as 4 O statutory auditor and to fix their remuneration at Rs.26.5mn AGAINST G M R S T V

for FY17

IiAS Assessment Parameters for Auditor Appointment Parameter Comment Details Is the tenure of the auditor firm more than 10 consecutive years? Yes Has the audit partner been rotated in the last five years? Yes Is the auditor remuneration commensurate with increase in size? Yes [1] Audit network

Discussion ITC proposes to ratify Deloitte Haskins & Sells’ reappointment as statutory auditors: Deloitte Haskins & Sells were first appointed as the statutory auditors for ITC in FY10, and last reappointed at the 2014 AGM for a period of five years. Prior to that, the company’s auditors were A.F Ferguson & Co for 12 years (part of the same Deloitte network). Hence the audit network has a tenure of 19 years.

IiAS’ Voting Policy on Auditor Rotation recommends that auditors must be rotated at least once every 10 years in order to maintain the independence of the auditor and the overall objectivity of the audit process. Moreover, under section 139 of the Companies Act 2013 (See Box below), an audit firm’s tenure may extend to a maximum of two consecutive terms of five years each (maximum 10 years).

Box 3: Regulatory snapshot: Auditor appointment under Section 139 of the Companies Act, 2013 Approval Process: Section 139 of the Companies Act 2013 states that every company shall appoint an auditor for an initial term of five years. The appointment must be ratified by shareholders at every annual general meeting of the company by passing an ordinary resolution.

Auditor Rotation: The Act requires mandatory rotation of individual auditors in every 5 years and of the audit firm in every 10 years (after two terms of 5 years each) in listed companies. A cooling-off period of five years after the stipulated threshold is required to be considered eligible for re-appointment.

Eligibility: For the purpose of rotation, the incoming auditor or audit firm shall not be eligible if they are part of the same audit network (which includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control) as the outgoing auditor or audit firm. Further, if a partner, who is in charge of an audit firm and certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years.

Applicability: In the rules notified recently by the Ministry of Corporate Affairs (MCA), it has been clarified that section 139 will be applicable on a retrospective basis - which means the existing term of the current auditors will be taken into account for computing the overall tenure.

Commencement: Companies will have to comply with the requirements within three years from the date of commencement of the Act.

IiAS recommends voting AGAINST the resolution.

June 2016 ITC Limited 9

Voting Advisory

Category: Remuneration IiAS Indicators # Type Description of resolution Recommendation See Legend Appoint Sanjiv Puri as a Whole-time Director for a period of 5 O FOR three years and fix his remuneration. Appoint Rajiv Tandon as a Whole-time Director for a period of 6 O FOR three years and fix his remuneration

Discussion IiAS Assessment Parameters for Managerial Remuneration Assessment Parameter Comment Details Is the remuneration for promoter? No Is the current remuneration higher than peers? No Refer Table 7 Is the proposed remuneration in line with industry peers? Yes Refer Table 7 Is there a significant hike in remuneration from previous term/year? No Is the remuneration commensurate with the growth in profits/operations? Yes Is the proposed resolution open-ended? No Refer Table 5 & 6 Is there a component of performance-linked pay in the proposed salary? Yes Refer Table 5 & 6

Discussion The Board of Directors appointed Sanjiv Puri as an Executive Director with effect from 6 December 2015 and Rajiv Tandon as an Executive Director with effect from 22 January 2016.

The company seeks shareholder approval for the following:  To ratify the appointment and remuneration for Sanjiv Puri & Rajiv Tandon from their respective dates of appointment up till 22 July 2016 as per the terms set out in Table 4.  Approve the appointment and remuneration for Sanjiv Puri & Rajiv Tandon from 22 July 2016 for a period of three years for the same terms as set out in Table 4.

Sanjiv Puri was appointed on board from 6 December 2015. His DIN is 00280529.The remuneration in Table 4 was paid to him for a period of 4 months as an Executive Director. He was also President of FMCG Business in FY16. In FY16, Sanjiv Puri’s remuneration aggregated Rs.49.6 mn (including the value of stock options).

Rajiv Tandon was appointed on board from 22 January 2016. The remuneration in Table 4 was paid to him for a period of 2.3 Months as an Executive Director. He was also the CFO of the company in FY16. In FY16, Rajiv Tandon’s remuneration aggregated Rs.50.0 mn (including the value of stock options).

Both of them received 56,250 stock options during FY16 before they were appointed on board.

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Voting Advisory

Table 4: Remuneration Paid and Proposed in Executive capacity till July 2019; in Rs. mn Remuneration Remuneration Proposed paid to Sanjiv Puri paid to Rajiv Particular Maximum Remarks/Assumptions in from 6 Dec Tandon in from

Remuneration 2015 to 31 Mar 22 Jan 2016 to 31 2016 Mar 2016 Consolidated 8.6 2.8 (8.3) 1.7 (8.6) Salary Capped at 150% of Performance Bonus 13.0 Consolidated Salary, assuming 0.6 (1.8) 0.4(2.1) maximum Perquisites 1.0 Capped at Rs.1 mn per annum Nil Nil Total 22.6 3.4 (10.1) 2.1 (10.7) Assuming same value as Nakul ESOP Value 102.1* 42.5# 42.5# Anand for FY16 Aggregate 124.7 45.9 44.6 Remuneration Annualized figures in brackets #Both of them received 56,250 stock options during FY16 before they were appointed on board.

Perquisites include gas, electricity, water, furnishings, leave travel concession for self and family, club fees, personal accident insurance, sampling of the company’s products and services.

In addition, they will be entitled to rent free accommodation or housing allowance as per rules of the company, contributions to PF and Superannuation Fund, perquisite value upon exercise of options, medical expenses, chauffer driven company car and telecommunication facilities.

The proposed remuneration for Sanjiv Puri and Rajiv Tandon is commensurate with the size and complexity of the responsibilities and is comparable to peers. (Peer comparison in Table 9). IiAS recommends voting FOR the resolutions.

Shareholders must note that the company proposes to revise the two executive directors’ terms of remuneration from 1 April 2016. (See Resolution #9, Table 5). The proposed revision will increase the maximum remuneration payable to each of them from Rs.124.7 mn to Rs.131.9mn.

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Voting Advisory

Category: Remuneration IiAS Indicators # Type Description of resolution Recommendation See Legend To increase the remuneration of four Whole Time Directors 9 O with effect from 1 April 2016 till the expiry of their respective FOR G M R S T V

terms

Discussion The Board, at its meetings held on 20 May 2016, approved the variation in the terms of remuneration paid or payable to the whole time Directors of the Company, with effect from 1 April, 2016, for their residual term. The other existing terms of remuneration of the whole time Directors, including and monetary limits on perquisites, as approved by the shareholders earlier, remain unchanged.

ITC proposes to bring the executive director compensation at par and proposes to remunerate Sanjiv Puri, Rajiv Tandon and Nakul Anand on the same terms.

Table 5: Variations in Terms and its impact on maximum remuneration Particulars Earlier Terms for Proposed Terms for Earlier Terms for YC Proposed Terms for EDs EDs Deveshwar YC Deveshwar Consolidated Salary Rs. 8.6 mn Rs. 9.6 mn Rs. 43.2 Rs. 49.2 Per annum Performance Bonus Capped at 150% of Capped at 200% of Capped at 200% of Capped at 250% of Consolidated Salary Consolidated Salary Consolidated Salary Consolidated Salary Aggregate remuneration Rs.124.7 mn Rs.131.9mn Rs. 333.7mn Rs.378.3 mn (including ESOPs)

Table 6: Paid and Proposed maximum remuneration in Rs. mn Particulars Proposed Sanjiv Puri, Paid to Nakul Proposed Nakul Remarks/Assump Rajiv Tandon Anand in FY16 Anand tions Consolidated Salary 9.6 8.6 9.6 Capped at 200% of Performance Bonus 19.2 12.9 19.2 Consolidated Salary Perquisites and other Capped at Rs. 1 mn 1.0 1.0 benefits 6.2 per annum Other benefits As per company policy As per company policy Total 29.8 27.8 29.8 Assuming same ESOP Value 102.1 102.1* 102.1 value as Nakul Anand for FY16 Aggregate 131.9 129.9 131.9 Remuneration * Number of options granted in FY16 into fair value of options

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Voting Advisory

Table 7: Paid and Proposed maximum remuneration in Rs. mn Particulars Remuneration Paid to Proposed Maximum Remarks/Assumptions YC Deveshwar in FY16 Remuneration for YC Deveshwar Consolidated Salary 43.2 49.2 Performance Bonus 86.4 123.0 Capped at 250% of Consolidated Salary Perquisites and other 2.0 Capped at Rs. 2 mn per annum benefits 7.7 Other benefits As per company policy Total 137.3 174.2 ESOP Value 204.1* 204.1 Assuming same value as last year Aggregate 341.4 378.3 Remuneration * Number of options granted in FY16 into fair value of options

Chart: Pay vs Performance 180

160

140

120

100

80

60

40

20

0 FY12 FY13 FY14 FY15 FY16

YC Deveshwar' pay Nakul Anand's pay Total income net profit

* Includes value of options

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Voting Advisory

Table 8: Pay vs Performance Particulars FY12 FY13 FY14 FY15 FY16 YC Deveshwar's pay 98.4 99.3 112.8 138.5 137.3 (Rs.mn) ESOP Value (Rs. mn) 143.0 174.9 208.0 241.5 204.1 Total YC Deveshwar's 241.4 274.2 320.8 380.0 341.4 pay (Rs. mn) Nakul Anand's pay 12.7 20.2 23.7 27.7 27.8 (Rs. mn) ESOP Value (Rs. mn) 71.5 87.5 104.0 120.8 102.1 Total Nakul Anand's 84.2 107.6 127.7 148.5 129.9 pay (Rs. mn) Total income (Rs. bn) 273.1 325.1 362.9 400.9 409.8 Net profit (Rs. bn) 62.6 76.1 88.9 96.6 99.1 Source: Company filings, IiAS ComPAYre

Table 9: Remuneration of peers Remuneration as a Total Pay PAT Pay % of Company Name of income including Designation (Rs Name Director ESOPs/RSU (Rs mn) PAT Employ (Rs bn) s (Rs. mn) bn) ee Cost VST Devraj Lahiri ED 12.5 12.5 0.83% 1.79% 8.5 1.5 Industries N Sai Sankar MD 34.1 34.1 2.27% 4.87% P.D. Narang ED 88.8 88.8 0.71% 1.12% Dabur 86.7 12.5 Sunil Duggal CEO 82.7 82.7 0.66% 1.04% Godrej Vivek Gambhir MD 83.7 9.1 128.8 141.5 1.55% 1.82% Consumer Britannia Varun Berry MD 79.46 6.9 47.2 57.5 0.84% 2.05% Sanjiv Puri, Nakul Anand, ED 29.8 131.9 0.13% 0.45% ITC 409.8 99.11 Rajiv Tandon YC Deveshwar Chairperson & CEO 174.2 378.3* 0.38% 1.28% Similar Sized peers Sanjiv Mehta MD & CEO 104.9 138.7 0.34% 0.80% HUL 335.9 40.8 PB Balaji ED - Finance & IT 63.3 68.4 0.39% N. TCS Chandrasekara MD & CEO 1117.0 243.7 256.6 256.6 0.11% 0.06% n Infosys Vishal Sikka CEO 655.7 136.8 487.3 621.5 0.46% 0.18% Hero Late Brijmohan Chairperson 280.3 23.6 791.6 791.6 3.35% 6.72% Motocorp Lall Munjal Sanjiv Puri, Nakul Anand, ED 29.8 131.9* 0.13% 0.45% ITC 409.8 99.1 Rajiv Tandon YC Deveshwar Chairperson & CEO 174.2 378.3* 0.38% 1.28% Source: Company filings, IiAS ComPAYre * Proposed remuneration

Yogesh Chander Deveshwar’s remuneration in FY16 was Rs. 137.3 mn which was 427x the median employee remuneration. Nakul Anand’s remuneration of Rs. 27.8 mn was 76x the median employee remuneration.

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Voting Advisory

The proposed remuneration for Sanjiv Puri, Nakul Anand and Rajiv Tandon is commensurate with the size and complexity of their individual responsibilities and is comparable to peers. Further variable pay accounts for ~90% of the total remuneration.

Yogesh Chander Deveshwar has been the Executive Chairperson of the company for the past 20 years. He has been responsible for the company’s growth over the past two decades. The proposed remuneration is commensurate with the size and complexity of the responsibilities and comparable to peers. His past remuneration has been aligned to company performance, and a large proportion (86%) of this remuneration is variable, and dependent upon achieving pre-defined targets.

IiAS recommends voting FOR the resolution.

As a good governance practice, companies must avoid bundling of resolutions. This resolution carries the remuneration revision for four executive directors. Therefore, we flag this resolution for a governance risk.

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Voting Advisory

Category: Commission to Non-Executive directors IiAS Indicators # Type Description of resolution Recommendation See Legend To set annual commission at a maximum of Rs. 6 mn for each 10 O FOR non-executive director for a period of three years

Discussion At the 2013 AGM, the shareholders had approved payment of commission to each of the independent directors for a period of three years, up to 1% of the net profits of the company. The approved range was Rs.1.2-Rs. 20 mn.

ITC proposes to pay commission up to 1% of net profit to each non-executive directors in the range of Rs. 3.0-6.0 mn The commission will be in addition to the sitting fees paid for attending board and committee meetings.

Table 9: Details of commission paid to the Non-Executive Directors For the year ended 31-March 2014 2015 2016 Net profit (standalone) Rs. bn 87.9 96.1 98.4 Commission paid to independent directors Rs. mn 7.3 18.0 20.6 Commission as % of reported PAT 0.01% 0.02% 0.02%

The company has been paying 0.01-0.02% of the net profits as commission to the independent directors in the last three years (FY14-16).

In FY16, commission to independent directors aggregated Rs. 20.6 mn (0.02% of FY16 net profit). The company paid an average of 1.8 mn as commission to each non-executive director. PAT computed as per Section 198 of the Companies Act, 2013 is generally higher than reported PAT.

As the commission is capped in absolute terms and is reasonable, IiAS recommends voting FOR the resolution.

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Voting Advisory

Category: Cost Auditors IiAS Indicators # Type Description of resolution Recommendation See Legend 11 O Ratify remuneration of Rs. 0.4 mn (plus reimbursement of actual expenses) for P. Raju Iyer, cost auditors for the ‘Paper and FOR Paperboard’ and ‘Nicotine Gum’ products of the company for FY17 12 O Ratify remuneration of Rs. 0.5 mn (plus reimbursement of actual expenses) for Shome & Banerjee, cost auditors for all products other FOR than the ‘Paper and Paperboard’ and ‘Nicotine Gum’ products of the company for FY17

Discussion For FY17, the Board approved the appointment and remuneration of P. Raju Iyer to conduct audit of Cost Records at Rs.0.4 mn (plus service tax and reimbursement of out-of-pocket expenses) in respect of ‘Paper & Paperboard’ and and ‘Nicotine Gum’ products and Shome & Banerjee to conduct audit of Cost Records maintained in respect of the other applicable products of the Company at Rs.0.5 mn (plus service tax and reimbursement of out-of-pocket expenses).

As per Section 148 of the Companies Act, the remuneration has to be ratified by shareholders of the company. Accordingly, consent of shareholders is sought through ordinary resolution in order to ensure compliance with the section.

IiAS recommends voting FOR the resolutions.

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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.

Common Indicator Meaning Description Examples This symbol is used for resolutions which indicate poor corporate Managerial governance practices or non-compliance with the regulatory provisions. Governance remuneration, Consequently, they are usually accompanied with an AGAINST Auditor G Issue recommendation. IiAS may also include measures/best practices which appointments the company can adopt to improve its governance record. This symbol is used for resolutions which negatively affect the minority Minority Preferential shareholders of the company. IiAS usually recommends voting AGAINST shareholder warrants, Differential M such resolutions as they benefit the controlling or a class of shareholders rights impact 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 Any resolution R 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). The information contained herein is solely from publicly available data, 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 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 referred to in this document (including the merits and risks involved). The discussions or views expressed may not be suitable for all investors. 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.

Confidentiality 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 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.

IiAS Voting Policy IiAS' voting recommendations are based on a set of guiding principles, which incorporate the basic tenets of the legal framework along with the best practices followed by some of the better governed companies. These policies clearly list out the rationale and evaluation parameters which are taken into consideration while finalizing the recommendations. The detailed IiAS Voting Guidelines are available at www.iias.in/IiAS-voting-guidelines.aspx. The draft report prepared by the analyst is referred to an internal Review and Oversight Committee (ROC), which is responsible for ensuring consistency in voting recommendations, alignment of recommendations to the IiAS’ voting criteria and setting and maintaining quality standards of IiAS’ proxy reports. Details regarding the functioning and composition of the ROC committee are available at www.iias.in/IiAS-ROC.In undertaking its activities, IiAS relies on information available in the public domain i.e. information that is available to public shareholders. However, in order to provide a more meaningful analysis, IiAS, generally seeks clarifications from the subject company. IiAS reserves the right to share the information provided by the subject company in its reports. Further details on IiAS policy on communication with subject companies are available at www.iias.in.

Analyst Certification The research analyst(s) for this report certify/ies that no part of his/her/their compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. IiAS’ internal policies and control procedures governing the dealing and trading in securities by employees are available at www.iias.in.

Conflict Management IiAS and its research analysts may hold a nominal number of shares in the companies IiAS covers (including the subject company), as on the date of this report. A list of IiAS’s shareholding in companies is available at www.iias.in. However, IiAS, the research analyst(s) responsible for this report, and their associates or relatives, do not have actual/beneficial ownership of one percent or more securities of the subject company, at the end of the month immediately preceding the date of publication of this report. A list of shareholders of IiAS as of the date of this report is available at www.iias.in. However, the preparation of this report is monitored by an internal Review and Oversight Committee (ROC) of IiAS and is not subject to the control of any company to which such report may relate and which may be a shareholder of IiAS.

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Voting Advisory

Other Disclosures IiAS further confirms that, save as otherwise set out above or disclosed on IiAS’ website (www.iias.in):

 IiAS, the research analyst(s) responsible for this report, and their associates or relatives, do not have any financial interest in the subject company.  IiAS, the research analyst(s) responsible for this report, and their associates or relatives, do not have any other material conflict of interest at the time of publication of this report.  As a proxy advisory firm, IiAS provides subscription, databased and other related services to various Indian and international customers (which could include the subject company). IiAS generally receives between INR 10,000 and INR 25,00,000 for such services from its customers. Other than compensation that it may have received for providing such services to the subject company in the ordinary course, none of IiAS, the research analyst(s) responsible for this report, and their associates or relatives, has received any compensation from the subject company or any third party for this report.  None of IiAS, the research analyst(s) responsible for this report, and their associates or relatives, has received any compensation from the subject company or any third party in the past 12 months in connection with the provision of services of products (including investment banking or merchant banking or brokerage services or any other products and services), or managed or co-managed public offering of securities of the subject company.  The research analyst(s) responsible for this report has not served as an officer, director or employee of the subject company.  None of IiAS or the research analyst(s) responsible for this report has been engaged in market making activity for the subject company.

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