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Directors Report of VST Industries Ltd.

Mar 31, 2016

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, 2016.

Financial Results Rs.Lakhs

2015-16 2014-15

Revenue from Operations 205878 171690

Net Profit after Tax 15311 15221

Profit brought forward from previous year 11758 11133

Balance available for Appropriation 27069 26354

Amount transferred to General Reserves 1525 1525

Dividend proposed 10809 10809

Corporate Dividend Tax (Net) 2140 2262

Surplus in the Statement of Profit and Loss 12595 11758

KEY RATIOS

Earnings per Share (Rs.) 99.15 98.57

Dividend per Share (Rs.) 70.00 70.00

- Value creation during the decade has been Compounded Annual Growth Rate (CAGR), 10.8% in Earnings Per Share (EPS) and 18.8% in Dividend Per Share (DPS).

DIVIDEND

The Directors are pleased to recommend a dividend of 700% on the paid up equity share capital of the Company, which amounts to Rs.70 per equity share of Rs.10 each for consideration and approval of Members at the Annual General Meeting. The total outgo amounts to Rs.130.10 crore including dividend distribution tax of Rs.22.01 crore. It is proposed to carry forward an amount of Rs.15.25 crore to General Reserve.

SHARE CAPITAL

The paid up Equity Share Capital as on 31st March, 2016 was Rs.1544.19 lakhs. The Company has neither issued shares with differential rights as to dividend, voting or otherwise nor issued shares (including sweat equity shares) to the employees or Directors of the Company, under any Scheme.

No disclosure is required under Section 67(3)(c) of Companies Act, 2013 in respect of voting rights not exercised directly by the employees of the Company as the provisions of the said Section are not applicable.

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 social activities like provision of clean water, construction of school buildings etc.

Your Company has been actively discouraging child labour involvement in tobacco growing/processing. Your Company has also facilitated installation of solar lights in the tobacco growing areas in association with the village panchayats in the tobacco growing areas.

Pursuant to the provisions of Section 135 and Schedule VII of the Companies Act, 2013, 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 CSR policy is available on the Company''s website at: www.vsthyd.com/i/CSRPolicy.pdf.

Your Company has initially decided to focus on ''Sanitation'' as a key area which requires attention as it believes improving sanitation has a direct impact on health which in turn has an impact on overall productivity and the quality of life of the common people, thereby making a positive impact on society.

The Company has with the help of Gramalaya, a non-profit organisation constructed toilets in individual homes of villages in and around Mahaboobnagar, Kurnool and Raichur villages in the states of Telangana, Andhra Pradesh and Karnataka where your Company has its leaf operations, under the ''Swachh Ghar'' programme of your Company. In addition to construction of toilets, the villages and the communities in the area are also sensitised about the importance of health & sanitation. Over 1,100 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. Your Company has also taken up the environment sustainability project of installing solar street lights in villages in the above states. The CSR Policy and the Annual Report on CSR activities is annexed herewith as ''Annexure B'' and forms part of this Report.

RELATED PARTY TRANSACTIONS

There were no related party transactions during the year except that in the ordinary course of business and on arms length basis. There were no materially significant related party transactions between your Company and the Directors, Promoters, Key Managerial Personnel and other designated persons which may have a potential conflict with the interest of your Company at large.

Form AOC-2 for disclosure of particulars of contracts/arrangements, entered into by your Company with related parties is annexed herewith as ''Annexure C'' and forms part of this Report.

BOARD EVALUATION

Pursuant to the provisions of the Companies Act, 2013 and Listing Regulations, the performance evaluation of the Board, the Committees of the Board and individual Directors has been carried out. The manner in which the evaluation has been carried out has been explained in the Corporate Governance Report.

REMUNERATION POLICY

Nomination and Remuneration Committee has formulated a policy relating to remuneration of directors, key managerial personnel and other employees which has been approved by the Board. The Remuneration Policy and the criteria for determining qualification, position attributes and independence of a director are stated in the Corporate Governance Report.

MEETING OF INDEPENDENT DIRECTORS

The performance of the Non-Executive Director, the Chairman and the Board as a whole is done by the Board and the Independent Directors in their exclusive meeting as per the policy formulated by the Board in this regard. In addition, the independent directors in such meeting also review their role, functions and duties under the Companies Act, 2013 and the flow of information from the management.

VIGIL MECHANISM

In terms of Section 177 of the Companies Act, 2013, 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 Company''s ''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 Company''s website at:

www.vsthyd.com/i/Whistle Blower Policy.pdf.

DIRECTORS AND KEY MANAGERIAL PERSONNEL

Directors retiring by rotation

Mr. Devraj Lahiri

In accordance with Article 93 of the Articles of Association of your Company, Mr. Devraj Lahiri retires from the Board and being eligible, offers himself for re-election. Your Board recommends his re-appointment.

Mr. Devraj Lahiri has been appointed a Whole-time Director of the Company for a period of five years with effect from 1st August, 2011, by the Members at their meeting held on 12th July, 2012.

Directors'' Resignation/ Appointment

Mr. Devraj Lahiri

The Board of Directors of your Company (''the Board'') at its meeting held on 20th April, 2016 on the recommendation of Nomination & Remuneration Committee approved the appointment of Mr. Devraj Lahiri as

Deputy Managing Director of the Company, with effect from 1st July, 2016 to 27th November, 2017 (both days inclusive), subject to the approval of the Members. The Deputy Managing Director shall also be a Key Managerial Personnel under Section 203 of the Companies Act, 2013.

Mr. Devraj Lahiri, aged 43 years, is a Commerce Graduate from St. Xavier''s College, Kolkata and Masters in Business Administration from Indian Institute of Social Welfare and Business Management, Kolkata. He joined the Company in the year 2001 and has made significant contributions during his association with the Company. He was elevated to the level of Marketing Head and was appointed as Whole-time Director of the Company with effect from 1st August, 2011. He is a member of the Corporate Social Responsibility Committee, Committee of Directors and Stakeholders Relationship Committee of the Company and is also a director on the board of the Tobacco Institute of India. He has been instrumental in the growth of the Company and has successfully launched various new brands. Mr. Lahiri does not hold any shares in the Company and is not related to any other director of the Company.

A suitable resolution is being put up for your approval.

British American Tobacco (BAT) Group Nominee

Mr. James H. Yamanaka, Director has resigned with effect from close of business on 16th April, 2015 and Mr. Ramakrishna V. Addanki was nominated by the Raleigh Investment Company Limited, a BAT group Company as a Director of your Company in the place of Mr. James H. Yamanaka with effect from 21st April, 2015 and his appointment as Non-Executive Director of your Company was approved by the Members in the Annual General Meeting held on 12th August, 2015.

Independent Directors

At the Annual General Meeting held on 12th August, 2014, the Members of your Company appointed Ms. Mubeen Rafat and Mr. S. Thirumalai as Independent Directors under the Companies Act, 2013 for a period of five years with effect from 12th August, 2014 and 1st October, 2014, respectively.

All Independent Directors have given declarations as required under Section 149(7) that they meet the criteria of independence as laid down under Section 149(6) of the Companies Act, 2013. None of the Independent Directors are related to any other director of the Company.

Key Managerial Personnel

The Managing Director Mr. N. Sai Sankar, the Whole-time Director Mr. Devraj Lahiri, the Chief Financial Officer Mr. Anish Gupta and the Company Secretary Mr. Nitesh Bakshi are the Key Managerial Personnel as per the provisions of the Companies Act, 2013.

DIRECTORS'' RESPONSIBILITY STATEMENT

Pursuant to Section 134 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 at the end of the financial year 2015-16 and of the profit of your Company for the 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.

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. Income Tax

Financial Services Business

Your Company had diversified into Financial Services Business and Foods Business in the early nineties. Subsequently in the year 1998-99, your Company incurred a total loss of Rs.38.67 crore in the financial services business of which Rs.29.70 crore was claimed as loss under the head ''Income from Business'' and Rs.8.97 crore was claimed as a capital loss under the provisions of the Income Tax Act.

The Income Tax Appellate Tribunal allowed the entire amount of Rs.38.67 crore as a capital loss. It may be noted that the department had treated the entire loss as a ''Speculation Loss''.

Your Company has filed an appeal before the Hon''ble High Court of Andhra Pradesh which has been admitted. The matter is yet to be heard.

Further in connection with its divestment from the Foods Business in the financial year 1999-00, your Company had incurred a total loss of Rs.53.68 crore, of which Rs.44.18 crore was claimed as a loss under the head ''Income from Business'' and Rs.9.50 crore was claimed as a capital loss under the provisions of the Income Tax Act. The Income Tax Department has disallowed the entire amount excepting Rs.5.70 crore which was allowed as a capital loss. The Commissioner of Income Tax (Appeals) further allowed Rs.11.24 crore out of the balance amount of Rs.47.98 crore, on appeal before him and the same was upheld by the Income Tax Appellate Tribunal. Your Company has preferred an appeal against the above order and the matter is now before the Hon''ble High Court of Andhra Pradesh.

Consequent to the above orders, the Income Tax Department had issued consequential orders under Section 154 of the Income Tax Act demanding Rs.28.86 crore (revised) which was paid by your Company.

ii. Luxury Tax

The Hon''ble Supreme Court by its judgement dated 20th January, 2005 set aside levy of luxury tax on tobacconists by various states. The Court had also directed the companies to pay back to the state any amount of luxury tax recovered from the customers after obtaining stay orders from the Court. The Department has alleged that your Company has failed to pay an amount of Rs.34.86 crore being the luxury tax collected from customers by your Company after passing of the interim order dated 1st June, 1999, to the State Government of Andhra Pradesh which is in violation of the said judgement dated 20th January, 2005 and filed the contempt petition against the then Managing Director of your Company. An amount of Rs.29.81 crore has also been claimed as interest thereon @ 24% per annum. The contempt charges against the then Managing Director of your Company were dismissed by the Hon''ble Supreme Court in March, 2010.

The State of Andhra Pradesh decided to continue with the legal proceedings for recovery of luxury tax from your Company by substituting the Company''s Managing Director with your Company as the Respondent. The Supreme Court appointed an independent Auditor to examine and verify the accounts of your Company for the period 1st April, 1999 to 20th January, 2005 and submit their report as to whether any sum was collected by your Company towards luxury tax during the operation of the Stay Order dated 1st April, 1999. The Auditor forwarded its report to the Supreme Court endorsing your Company''s stand. The Supreme Court, after examining the report of the Auditor, disposed off the petition with an observation that no contempt lies against your Company. However, the State Government has been given an opportunity to issue a show cause notice to your Company for refund of the luxury tax collected after obtaining interim order from the Supreme Court. Show cause notice should be backed and supported by the evidence the department wishes to rely upon in support of its case and is subject to contest by the parties as per law.

The Commercial Tax Department has issued a show cause notice and reply to the same has been filed by your Company.

iii. Entry Tax

Several High Courts in the country including those of Andhra Pradesh, Kerala, Tamilnadu and Assam have struck down the levy of entry tax on the ground that it is violative of Article 301 and not saved under Article 304(b) of the Constitution, as it is not compensatory in the manner required in terms of the Supreme Court judgement in the case of M/s. Jindal Stainless Limited. Thereafter, several states such as Uttar Pradesh, Bihar, Haryana and Assam have attempted to re-introduce entry tax by amending the original acts, sparking a fresh round of legal challenges in the high courts. Most of the appeals filed by the various states and individual companies have been clubbed together.

The Hon''ble Supreme Court in the batch of cases headed by Jai Prakash Associates vs the State of MP has referred a number of vital questions on levy of entry tax, to the Constitutional Bench in terms of Article 145(3) of the Constitution which are still pending adjudication.

The Single Bench of Hon''ble High Court of Calcutta struck down the levy of entry tax imposed by the State Government of West Bengal in the case of Bharti Airtel and others and aggrieved by the same, the State Government has preferred an appeal before the Division Bench. On identical grounds, the Single Bench of Hon''ble High Court of Calcutta allowed the Writ Petition in favour of your Company with a direction to file implead petition and an early hearing petition before the division bench.

Your Company, as directed, has filed an implead petition and an early hearing application which is pending before the Division Bench of High Court of Calcutta.

iv. Excise

a. Wrapping Materials

The Excise Department claimed a sum of Rs.3.62 crore (including penalty and interest @ 24%) 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 March 2002. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore had allowed your Company''s appeal against the said demand and set aside the demand of the Excise Department. An appeal against the said Order was filed by the Excise Department and the Hon''ble Supreme Court was pleased to allow the appeal by way of remand to CESTAT to decide the matter afresh and pass an order on merits. The Hon''ble CESTAT heard the matter and allowed the appeal in favour of your Company.

b. Cigarette manufacture in North Eastern states

The Excise Department had demanded a sum of Rs.31.20 crore along with interest of Rs.12.69 crore from the Company''s former contract manufacturers consequent upon the judgement of the Hon''ble Supreme Court upholding the withdrawal of exemptions granted in the North Eastern states. Thereafter, a total sum of Rs.39.06 crore was paid to the Department. A Division Bench of the Gauhati High Court confirmed the judgement of the single judge and held that interest was also payable for the period 1st August, 2003 to 7th February, 2006 on the principal amount already repaid. Appeals have been filed in the Supreme Court against the said judgements of the Gauhati High Court which were admitted but no stay of the said judgements was granted.

c. Tobacco Refuse

Your Company has been receiving periodical show cause notices demanding recovery of duty on cut tobacco used in the manufacture of tobacco refuse together with interest and penalty thereon from January 2005 to October 2013, amounting to Rs.15.92 crore. All the pending appeals before CESTAT in this matter until October 2013 were allowed in favour of your Company. Against the said orders, the department preferred an appeal before the Hon''ble Supreme Court on which hearing is pending. Show cause notices for subsequent period have been received and same are pending before original authority.

d. Service Tax

Your Company has received show cause notices from the Excise Department seeking to deny CENVAT credit availed on service tax paid by various service providers on the ground that the same are not in relation to the manufacture of final products. Upon adjudication, credit on most of the services were allowed in favour of your Company, however some of them are contested by the department before CESTAT. Cross appeal has to be filed by your Company before CESTAT. One of the appeals filed by your Company for the period April 2008 was heard and allowed by CESTAT by way of remand to the original authority to be decided in light of earlier judicial pronouncements.

PUBLIC INTEREST LITIGATION (PIL)

i. The two PILs filed in the Madras High Court and the Andhra Pradesh High Court against the Central Government and the cigarette manufacturers including your Company, seeking strict implementation of Cigarettes and Other Tobacco Products (Prohibition of Advertisement And Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 (COTP Act) and Rules are pending.

ii. 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.

iii. A PIL was filed before the Uttarakhand High Court in India relating to printing of Tar-Nic contents on cigarette packets. The High Court passed an Order allowing the petition and directing ban on sale of loose cigarettes without printing health warning. The Court has also ordered ban on sale of cigarettes in the state of Uttarakhand if the union does not prescribe safe or maximum permissible limit of nicotine & tar contents in each cigarettes or label or package.

A review petition has been filed by your Company along with others against the order and is pending before the High Court of Uttarakhand.

Petitions have also been filed in other courts such as High Court of Jabalpur, National Green Tribunal, Delhi seeking ban on sale of cigarettes.

INTELLECTUAL PROPERTY

The suit for infringement and passing off filed by ITC Limited against your Company alleging that your Company had violated ITC Limited''s ''Gold Flake'' trade mark by using a deceptively similar get up and trade dress consisting of a combination of red and gold colors, on its ''Special'' brand of cigarettes is still pending in the Hon''ble Calcutta High Court and the trial is yet to begin. ITC''s application for temporary injunction was refused by the single bench of the Hon''ble Calcutta High Court. Appeal was filed by ITC and the Division Bench, without allowing the appeal, directed the hearing of the suit to be expedited. Your Company, however, has been directed to submit the sales figures of the ''Special'' brand of cigarettes every month to the Court.

FINANCIAL SERVICES BUSINESS

The Company Petition filed by the Official Liquidator in the Hon''ble High Court of Andhra Pradesh 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, to file a Statement of Affairs is still pending.

In terms of the Order dated 10th July, 2007 the Division Bench of the Hon''ble High Court of Andhra Pradesh had directed the Regional Director, Department of Corporate Affairs, Chennai to conduct an investigation and submit a report showing the persons who promoted ITCATF and the persons who were responsible in conducting its affairs until its winding up. A comprehensive report was prepared and filed in the Court of by the Regional Director in July 2008. Further, the Division bench, against the appeal filed by one of the Ex-Directors of ITCATF, remanded the matter to the Company Judge to decide afresh keeping in view the report submitted by the Regional Director. All the 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 and visual media, ban on outdoor advertising, 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, which came into effect from 31st May, 2009 were further revised with effect from 1st December, 2011. A new set of pictorial warnings were notified to come into force with effect from 1st April, 2013. In October, 2014 the Government notified a new set of pictorial warning covering 85% of the front and back principle display area of the packets with effect from 1st April, 2015. However, after extension, the same have now been implemented from 1st April, 2016.

ii. Some tobacco manufacturers have challenged various provisions of COTPA and Rules made there under in different high courts across the country. The Union Government filed transfer petitions in the Hon''ble Supreme Court seeking to transfer 31 pending writ petitions from various high courts to the Hon''ble Supreme Court. All the transfer petitions were allowed and the writ petitions have thus been moved to the Hon''ble Supreme Court, for final adjudication.

iii. Your Company had also filed a writ petition in the Hon''ble High Court of Andhra Pradesh challenging the Cigarettes and Other Tobacco Products (Packaging & Labelling) Rules, 2006 and the Amendment Rules 2008, on the grounds inter alia 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 Hon''ble Court.

iv. The Government of India, Ministry of Health and Family Welfare on 13th January, 2015 as part of pre- legislative consultation invited views and comments from the stakeholders and the public on the proposed Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Amendment Bill, 2015 which proposes further restrictions on the industry and more stringent penalty provisions.

REAL ESTATE

The 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 had filed a writ petition in the Hon''ble 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 Hon''ble 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 has taken all the necessary steps for disposal of the above writ petitions which are pending before the Court.

PARTICULARS OF EMPLOYEES

The information required pursuant to Section 197 of the Companies Act, 2013 read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 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 Annual General Meeting. 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.

You may be pleased to note that your Company was presented the Best Management Award-2015 by the Telangana Government.

Your Directors take this opportunity to record their deep appreciation of the continuous support and contribution from all employees of your Company.

EXTRACT OF ANNUAL RETURN

As required under Section 92(3) of Companies Act, 2013 and Rule 12(1) of Companies (Management and Administration) Rules, 2014, an extract of Annual Return in Form MGT-9 is annexed as ''Annexure E'' and forms part of this report.

AUDITORS

Statutory Auditors

The Report given by the Auditors, Messrs. Lovelock & Lewes, Chartered Accountants on the financial statement of the Company is part of the Annual Report. There has been no qualification, reservation or adverse remark or disclaimer in their Report. During the year under review, the Auditors had not reported any matter under Section 143(12) of the Companies Act, 2013 and hence, no detail is required to be disclosed under Section 134(3)(ca) of the Companies Act, 2013.

The current Statutory Auditors retire at the ensuing Annual General Meeting.

In compliance with Section 139 of the Companies Act, 2013, the Board, on the recommendation of the Audit Committee and subject to approval of the Members, has proposed appointment of Messrs. BSR & Associates LLP, Chartered Accountants as statutory auditor of your Company for a period of five years commencing from the conclusion of 85th Annual General Meeting till the conclusion of 90th Annual General Meeting subject to ratification by the Members at every Annual General Meeting. The Company has received their written consent that the appointment, if made, will be in accordance with the applicable provisions of the Act and rules framed there under.

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 had appointed Dr. K.R. Chandratre, Company Secretary in Whole-time Practice, as Secretarial Auditor of the Company for the financial year 2015-16. The Secretarial Audit Report is annexed herewith as ''Annexure F'' and forms part of this Annual Report.

There are no qualifications, reservations or adverse remarks in the Secretarial Audit Report.

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 G'' forming part of this Report.

DEPOSITS

Your Company has stopped accepting fresh deposits for several years now. As on 31st March, 2016, your Company does not have any deposits for the purpose of its business.

THE FUTURE

Despite adverse market conditions, your Company is well placed to exploit opportunities through innovative new brand launches, coupled with expansion of operational areas.

MATERIAL CHANGES AND COMMITMENTS

There have been no material changes and commitments made between the end of the financial year of this Company and the date of this Report.

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,

RAYMOND S. NORONHA

Chairman

DIN: 00012620

Dated this 20th day of April, 2016.

Azamabad, Hyderabad - 500 020


Mar 31, 2014

The Directors of your Company have pleasure in presenting their Annual Report and Accounts for the year ended 31st March, 2014.

Financial Results Rs. Lakhs

2013-14 2012-13

Revenue from Operations 162672 162109

Net Profit after Tax 15015 12625

Profit brought forward from previous year 10274 10205

Balance available for Appropriation 25289 22830

Amount transferred to General Reserves 1510 1265

Dividend proposed 10809 9651

Corporate Dividend Tax 1837 1640

Surplus in the Statement of Profit and Loss 11133 10274

KEY RATIOS

Earnings per Share (Rs.) 97.24 81.76

Dividend per Share (Rs.) 70.00 62.50

- Value creation during the decade has been Compounded Annual Growth Rate (CAGR), 10.8% in Earnings Per Share (EPS) and 26.4% in Dividend Per Share (DPS).

INDUSTRY STRUCTURE & DEVELOPMENT

In the Union Budget presented in March 2013, the industry witnessed another round of steep hike in excise duty of 18% on all segments except 64mm. This successive increase in excise has adversely impacted consumption levels resulting in year-on-year volume decline. Industry volumes have been under pressure during the year 2013-14.

The industry continues to face significant taxation challenges. Most states revised the tax rates again in 2013-14. Significant hikes that impacted your Company were in Bengal and Bihar where the rates increased from 20% to 35% and 34.5% respectively. The overall tax rate for your Company has increased from 22% to 26% in 2013-14.

The trend of steep tax hikes is likely to continue and will be a challenge moving forward.

The recently introduced 64mm filter segment has helped in mitigating overall industry volume losses. The segment now contributes 14% to industry volumes. However, the mid segment which largely comprises 69mm filter cigarettes is under significant pressure.

SEGMENT WISE PERFORMANCE

Your Company considers tobacco and related products as the primary segment for reporting. Geographical segments considered for disclosure primarily consist of sales within and outside India. The entire activity pertaining to sales outside India is carried out from India.

Your Company has leveraged the opportunities arising from the introduction of 64mm cigarettes in 2012-13 by launching 64mm variants of key brands. Your Company''s key brands Moments, Special & Charms have registered growth in volumes when compared to last year in Uttar Pradesh, North Bengal and Bihar respectively. This has helped your Company to compensate volumes in a declining industry.

Market Scenario

Cigarette volumes of your Company during 2013-14 stood at 8100 mns, marginally higher than 2012-13. This was primarily due to superior performance in the 64mm segment.

Your Company strives to strengthen its position further through a combination of geographic expansion and introduction of new brands.

Leaf Tobacco

Your Company has recorded leaf sales turnover of Rs.241 crore, in the year 2013-14 leveraging its expertise in all varieties of tobacco. Your Company is concentrating on domestic sales by utilizing its image with the local trade in addition to exports for maximizing turnover and profits.

The focus on developing niche varieties of tobacco continued. Besides helping develop the backward regions, it has also helped in improving the Company''s profitability. The oriental project continues with improved agronomic practices.

It is satisfying to note that your Company''s farmers continue to grow tobacco with the lowest pesticide residue levels and low TSNAs (Tobacco Specific Nitrosamaines) that are well within international standards.

Your Company''s leaf tobacco function continues to be certified by Registro Italiano Navale, Genova, Italy for SA8000 reflecting Company''s resolve to follow best international practices in its operations.

PRODUCTION AND PLANT MODERNISATION

In view of rapid growth in the value filter segments (64mm), during the year 2013-14, your Company has successfully converted the cigarette making and packing machines by deploying in-house expertise.

In continuance with its tradition, 143 workmen were trained during the year to improve their technical skills.

World class high speed makers and packers were inducted in the shop floor as part of your Company''s upgradation plan.

HUMAN RESOURCE DEVELOPMENT

Your Company''s Human Resource Management focus continue to attract and retain the best talent, in an increasingly competitive market place.

Development plans have been drawn up for key managers to assume higher responsibilities as well as to enhance their job effectiveness.

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 there under. No cases were filed during last year under the above Act.

As on 31st March, 2014, your Company had a strength of 885 employees, with 291 management staff and 594 workmen.

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

Information in accordance with clause (e) of sub-section (1) of Section 217 of the Companies Act, 1956 read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 is given in the Annexure to this Report.

ENVIRONMENT, HEALTH & SAFETY (EHS) AND COMMUNITY SERVICES

Your Company has been maintaining high safety performance.

President Award for the year 2013 was presented to your Company by Royal Society for Prevention of Accidents (RoSPA), U.K. for maintaining highest standards in Occupational, Health and Safety.

Safety Innovation Award for the year 2013 was awarded to your Company by Institution of Engineers India, New Delhi.

Environment, Health and Safety (EHS) in day-to-day business operations is given very high priority by your Company. 504 employees and 20 contractors have undergone EHS training and 570 employees have undergone fire fighting training programme. Mock fire drills were also conducted for workers and management during the period to comply with the Company''s EHS guidelines. Involvement by workmen in quarterly EHS reviews along with staff members and periodical inspections have kept the performance standards at high level. Quarterly and annual EHS audits of Company operations were carried out to ensure compliance of EHS requirements, and to measure the performance of EHS. EHS Road Map rating for your Company was assessed at 3.54 as against the scale of 4.0 for the year 2013-14.

Surveillance Audit of ISO 14001: 2004 & OHSAS 18001: 2007 for the year 2013-14 were conducted by Registro Italiano Navale India (RINA).

As a social responsibility your Company has been actively discouraging child labor involvement in tobacco growing/ processing. Your Company has also facilitated installation of solar lights in the tobacco growing areas in association with the village panchayats.

All statutory compliances are in place.

The thrust on EHS will continue while emphasizing the focus on Best International Work practices.

FINANCE

a. Profits

The Profit after Tax of your Company for the year is Rs.150 crore.

The continuous increase in taxation over the last several years has brought about increased pressure on margins.

b. Treasury Operations

Your Company follows a SLR model (Safety, Liquidity and Return) in deployment of surplus funds which arise periodically during the year. The Company predominantly deploys monies in debt funds of reputed mutual funds and tax free bonds issued by Government bodies. Such investments earned Rs.15 crore during the current year.

ENTERPRISE RESOURCE PLANNING (ERP)

Your Company was able to successfully manage the entire ERP system by developing an in-house team. All routine business issues as well as improvements in existing systems have been undertaken by the team. This team interacts with managers of the operating teams and works continuously to help improve the business processes. Your Company has also developed adequate skills to manage issues arising out of facilities management and networking which are the other components of the IT infrastructure.

RATING

The Credit Rating Information Services India Limited (CRISIL) has re-affirmed the rating of your Company to ''FAAA/ Stable'' 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). Your Company has stopped accepting fresh deposits for the past several years.

UNCLAIMED DIVIDENDS

Pursuant to the provisions of Section 205A(5) of the Companies Act, 1956, the declared dividends, which remained unpaid or unclaimed for a period of seven years, are transferred by the Company to Investor Education and Protection Fund (IEPF) established by the Central Government pursuant to Section 205C of the said Act. The final dividend for the year ended 31st March, 2007 remaining unpaid would be deposited by 23rd August, 2014 to IEPF in accordance with Section 205C of the Companies Act, 1956.

The details of the dividend due for transfer to IEPF as on 31st March, 2014 is given in the Report on Corporate Governance.

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 the Listing Agreement amended by SEBI vide its Circular dated 16th December, 2010.

The status of unclaimed shares as on 31st March, 2014 is given in the Report on Corporate Governance.

CORPORATE GOVERNANCE

The Company''s Report on Corporate Governance is annexed to this Report.

Certificate of the Statutory Auditors of your Company regarding compliance of the conditions of Corporate Governance as stipulated in Clause 49 of the Listing Agreement with stock exchanges is annexed to this Report.

Your Company has taken adequate steps for strict compliance with the Corporate Governance guidelines, as amended from time to time.

The Ministry of Corporate Affairs has released draft guidelines for voluntary compliance covering various aspects. Your Company has already implemented most of the items and is considering feasibility of implementation of the balance items.

INTERNAL FINANCIAL CONTROLS

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 organization. Over a period of three years, the business processes of your Company is 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 five 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 observation on adequacy of internal financial controls and the steps required to bridge gaps, if any.

Risk Management

Risk Management is monitored by a Committee comprising of members from various functions. The Committee meets periodically to identify the potential risks as well as to take adequate steps for mitigating the risks. A comprehensive note covering various aspects is placed before the Board every quarter.

DIRECTORS

Directors retiring by rotation

In accordance with Article 93 of the Articles of Association of your Company, Mr. Raymond S. Noronha retires from the Board and being eligible, offers himself, for re-election. Your Board recommends his re-appointment.

Mr. Raymond S. Noronha

At the Annual General Meeting held on 12th July, 2012, Mr. Raymond S. Noronha was appointed as Non- Executive Director of your Company with effect from 3rd September, 2012. Mr. Noronha was elected as Chairman of your Company and of its Board of Directors with effect from 1st October, 2012.

Mr. Noronha is a B.A. (Hons.) from St. Stephen''s College, Delhi and attended the Wharton Advanced Management Program (1995) at Philadelphia, USA. He has had over 39 years of varied experience in the cigarette business both international and domestic and has held several top level positions for over a decade. Mr. Noronha retired as Managing Director of your Company and was appointed as Non-Executive Director with effect from 3rd September, 2012. He is the Chairman of Committee of Directors and a Member of the Audit Committee, Shareholders Grievance Committee and Nomination & Remuneration Committee of your Company. Mr. Noronha neither holds any shares in the Company nor is related to any other Director of the Company.

Directors'' Resignation/ Appointment

Mr. T. Lakshmanan

The Board of Directors place on record with deep regret the sad demise of Mr. T. Lakshmanan, the Non-Executive Director of your Company on 24th September, 2013. The Board of Directors place on record their deep appreciation of the contribution made to your Company by Late Mr.Lakshmanan.

Mr. Peter G. Henriques

Mr. Peter G. Henriques ceased to be a Director of your Company with effect from close of business on 31st December, 2013. The Board of Directors place on record their deep appreciation of the contribution made to your Company by Mr. Peter G. Henriques.

Mr. James Yamanaka

Mr. James Yamanaka was nominated by the Raleigh Investment Company Limited, a British American Tobacco group company as a Director of your Company with effect from 1st January, 2014 in place of Mr. Peter G. Henriques.

Mr. James Yamanaka is B.A. in Political Science & Economics from University of California, San Diego, MS in Foreign Service from Georgetown University, USA and M.B.A. from London Business School, U.K. He has 20 years of experience in the area of Strategy and Planning. He is currently the Group Head of Strategy and Planning of British American Tobacco Plc. Mr.Yamanaka neither holds any shares in the Company nor is related to any other Director of the Company.

A suitable resolution is being put up for your approval.

Prof. Mubeen Rafat

Prof. Mubeen Rafat was appointed as Additional Director of your Company with effect from 1st January, 2014.

Prof. Mubeen Rafat is B.Sc.(Statistics) from Elphinstone College, Mumbai and M.M.S. (Finance) from Jamnalal Bajaj Institute of Management Studies, Mumbai. She has over 25 years of experience in the area of Finance as a manager and as faculty. She is currently the Professor in Administrative Staff College of India (ASCI). She is a Member of the Audit Committee, Committee of Directors and Nomination & Remuneration Committee and is the Chairperson of Shareholders Grievance Committee of your Company. Prof. Rafat neither holds any shares in the Company nor is related to any other Director of the Company.

A suitable resolution for appointment of Prof. Mubeen Rafat as an Independent Director as per the provisions of Companies Act, 2013 is being put up for your approval.

Mr. S. Thirumalai

Mr. S. Thirumalai was re-appointed at the Annual General Meeting held on 30th July, 2013.

Mr. S. Thirumalai is a Commerce and Law Graduate and is a Fellow Member of Institute of Chartered Accountants of India and Institute of Company Secretaries of India. He is also a Certified Associate of the Indian Institute of Bankers. He attended the Advanced Management Program at Harvard Business School, Boston, M.A. (USA) in 1992. He has over 31 years of experience in manufacturing industry covering all aspects of Finance, Taxation and General Management (including three years with Reserve Bank of India/Unit Trust of India as an Officer). He is now the Senior Advisor to the consulting firm Deloitte Touche Tohmatsu India Private Limited. He is the Chairman of the Audit Committee and Nomination & Remuneration Committee and a Member of Shareholders Grievance Committee and Committee of Directors of your Company. Mr. Thirumalai holds 25 shares in the Company and is not related to any other Director of the Company.

A suitable resolution for appointment of Mr. S. Thirumalai as an Independent Director as per the provisions of Companies Act, 2013 is being put up for your approval.

DIRECTORS'' RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies Act, 1956 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 at the end of the financial year and of the profit of your Company for the 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, 1956 for safeguarding the assets of your Company and for preventing and detecting fraud and other irregularities; and

4. the annual accounts have been prepared on a going concern basis.

TAXATION

i. Income Tax

a. Financial Services

Business

Your Company had diversified into Financial Services Business and Foods Business in the early nineties. Subsequently in the year 1998-99, your Company incurred a total loss of Rs.38.67 crore in the financial services business of which Rs.29.70 crore was claimed as loss under the head ''Income from Business'' and Rs.8.97 crore was claimed as a capital loss under the provisions of the Income Tax Act.

The Income Tax Appellate Tribunal allowed the entire amount of Rs.38.67 crore as a capital loss. It may be noted that the department had treated the entire loss as a ''Speculation Loss''.

Your Company has filed an appeal before the Hon''ble High Court of Andhra Pradesh which has been admitted. The matter is yet to be heard.

Further in connection with its divestment from the Foods Business in the financial year 1999-00, your Company had incurred a total loss of Rs.53.68 crore, of which Rs.44.18 crore was claimed as a loss under the head ''Income from Business'' and Rs.9.50 crore was claimed as a capital loss under the provisions of the Income Tax Act. The Income Tax Department has disallowed the entire amount excepting Rs.5.70 crore which was allowed as a capital loss. The Commissioner of Income Tax (Appeals) further allowed Rs.11.24 crore out of the balance amount of Rs.47.98 crore, on appeal before him and the same was upheld by the Income Tax Appellate Tribunal. Your Company has preferred an appeal against the above order and the matter is now before the Hon''ble High Court of Andhra Pradesh.

Consequent to the above orders, the Income Tax Department had issued consequential orders under Section 154 of the Income Tax Act demanding Rs.28.86 crore (revised) which was paid by your Company.

b. North East

Pursuant to the withdrawal of exemption notification for manufacture of cigarettes in the North Eastern region in terms of Supreme Court judgement of 19th September, 2005, your Company had paid an amount of Rs.31.20 crore towards principal and provided an amount of Rs.12.69 crore towards interest.

In the income tax return filed by your Company for the relevant year, this amount was considered as an allowable expenditure in the assessment for the year 2006-07. However, subsequently the Income Tax Department has sent a demand notice seeking payment of Rs.19.30 crore being tax payable along with interest which was paid by your Company. Your Company has contested the same.

ii. Luxury Tax

The Hon''ble Supreme Court by its judgement dated 20th January, 2005 set aside levy of Luxury Tax on tobacconists by various States. The Court had also directed the companies to pay back to the State any amount of luxury tax recovered from the customers after obtaining Stay orders from the Court. The Department has alleged that your Company has failed to pay an amount of Rs.34.86 crore being the Luxury Tax collected from customers by your Company after passing of the interim order dated

1st June, 1999, but not paid to the State Government of Andhra Pradesh which is in violation of the said judgement dated 20th January, 2005 and filed the contempt petition against the Managing Director of your Company. An amount of Rs.29.81 crore has also been claimed as interest thereon @ 24% per annum. The contempt charges against the Managing Director of your Company were dismissed by the Hon''ble Supreme Court on 19th March, 2010.

The State of Andhra Pradesh decided to continue with the legal proceedings for recovery of Luxury Tax from your Company by substituting the Company''s Managing Director with your Company as the Respondent. The Supreme Court by its Order dated 9th November, 2012 appointed an independent auditor to examine and verify the accounts of your Company for the period 1st April, 1999 to 20th January, 2005 and submit their report as to whether any sum was collected by your Company towards luxury tax during the operation of the Stay Order dated 1st April, 1999. The auditor forwarded its report to the Supreme Court giving a clean chit to your Company. The Supreme Court, after examining the report of the auditor, disposed off the petition with an observation that no contempt lies against your Company. However, the State

Government has been given an opportunity to issue a show cause notice to your Company for refund of the luxury tax collected after obtaining interim order from the Supreme Court. The show cause notice should be backed and supported by the evidence the department wishes to rely upon in support of its case and is subject to contest by the parties as per the law.

iii. Entry Tax

As mentioned in last year''s Report, several High Courts in the country including those of Andhra Pradesh, Kerala, Tamilnadu and Assam have struck down the levy of Entry Tax on the ground that it is volatile of Article 301 and not saved under Article 304(b) of the Constitution, as it is not compensatory in the manner required in terms of the Supreme Court judgement in the case of M/s. Jindal Stainless Limited. Thereafter, several states such as Uttar Pradesh, Bihar, Haryana and Assam have attempted to re-introduce Entry Tax by amending the original Acts, sparking a fresh round of legal challenges in the High Courts. Most of the appeals filed by the various states, and individual companies have been clubbed together.

The Hon''ble Supreme Court in the batch of cases headed by Jai Prakash Associates vs the State of MP has referred a number of vital questions on levy of Entry Tax, to the Constitutional Bench in terms of Article 145(3) of the Constitution which are still pending adjudication.

iv. Excise

a. Wrapping Materials

The Excise Department claimed a sum of Rs.3.62 crore (including penalty and interest @ 24%) 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 March 2002. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore had allowed your Company''s appeal against the said demand and set aside the demand of the Excise Department. An appeal against the said Order has been filed by the Excise Department and is presently pending in the Hon''ble Supreme Court.

b. Cigarette manufacture in North Eastern states

The Excise Department had demanded a sum of Rs.31.20 crore along with interest of Rs.12.69 crore from the Company''s former contract manufacturers consequent upon the judgement of the

Hon''ble Supreme Court upholding the withdrawal of exemptions granted in the North Eastern states. Thereafter, a total sum of Rs.33.22 crore was paid to the Department. A Division Bench of the Gauhati High Court confirmed the judgement of the single judge and held that interest was also payable for the period 1st August, 2003 to 7th February, 2006 on the principal amount already repaid. Appeals have been filed in the Supreme Court against the said judgements of the Gauhati High Court which were admitted but no stay of the said judgements was granted. A sum of Rs.2.92 crore was paid to the department during the current financial year.

c. Tobacco Refuse

Your Company has been receiving periodical show cause notices demanding recovery of duty on cut tobacco used in the manufacture of tobacco refuse together with interest and penalty from January 2005 to October 2013, amounting to Rs.15.80 crore, five of which were confirmed by the Orders of the Commissioner of Central Excise. Your Company''s Stay applications in the appeals before CESTAT were heard favourably and stay with complete waiver of pre-deposit has been granted in the interim pending final hearing of the appeals by the Appellate Tribunal.

d. Service Tax

Your Company has received show cause notices from the Excise Department seeking to deny CENVAT credit availed on service tax paid by various service providers on the ground that the same are not in relation to the manufacture of final products. They are all pending adjudication at various levels. Total amount involved is approximately Rs.7.28 crore together with interest and penalty.

e. Enhancement of duties - Budget 2012

Your Company has received a show cause notice from the Excise Department seeking payment of differential duty amounting to Rs.15.60 crore together with interest and penalty for the period 17th March, 2012 to 27th May, 2012 on the ground that the proposed excise duty increase which was further enhanced during the pendency of the Finance Bill, 2012 in Parliament was saved by the declaration under the Provisional Collection of Taxes Act, 1931 and would therefore, come into effect from 17th March, 2012 i.e. the date when the Finance Bill was introduced in the Lok Sabha and not from 27th May, 2012 when the Bill received the assent of the President. Similar demands have also been raised on the other major cigarette manufacturers in the country. Circular No.981/5/2014-CX dated 11th February, 2014 was issued by the Ministry of Finance clarifying that the date of enhancement shall be from 28th May, 2012 and not from 17th March, 2012. Your Company having provided the amount of Rs.15.60 crore during the previous financial year has written back the same in the book. Your Company has written to the Department seeking to drop further proceedings in the matter.

PUBLIC INTEREST LITIGATION (PIL)

i. The two PILs filed in the Madras High Court and the Andhra Pradesh High Court against the Central Government and the cigarette manufacturers including your Company, seeking strict implementation of Cigarettes and Other Tobacco Products (Prohibition of Advertisement And Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 (COTP Act) and Rules are still pending.

ii. A PIL was filed in the Karnataka High Court by Mr. Ravishankar, an advocate/activist against various ministries of the central government, state government, Advertising Standards Council of India, your Company and other cigarette manufacturing companies seeking several reliefs on various aspects and issues relating to COTPA and its implementation. The Bench disposed off the matter with directions to the State Government to take steps to enforce the provisions of COTPA through the mechanism already provided under the Act and direct the authorities specified to take steps accordingly. The Bench also observed that it is not proper for an individual to invoke the extraordinary jurisdiction of the High Court under Article 226 in matters such as these where there is no individual complaint and a mechanism has already been provided to deal with the question of violation.

iii. 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.

INTELLECTUAL PROPERTY

The suit for infringement and passing off filed by ITC Limited against your Company alleging that your Company had violated ITC Limited''s ''Gold Flake'' trade mark by using a deceptively similar get up and trade dress consisting of a combination of red and gold colors, on its ''Special'' brand of cigarettes is still pending in the Hon''ble Calcutta High Court and the trial is yet to begin. ITC''s application for temporary injunction was refused by a single judge of the Hon''ble Calcutta High Court. Appeal was filed by ITC and the Division Bench without allowing the Appeal directed the hearing of the suit to be expedited. Your Company, however, has been directed to submit the sales figures of the ''Special'' brand of cigarettes every month to the Court.

FINANCIAL SERVICES BUSINESS

The Company Petition filed by the Official Liquidator in the Hon''ble High Court of Andhra Pradesh seeking directions to some of the Ex-Directors of ITC Agro Tech Finance and Investments Limited (ITCATF) into which one of the subsidiaries of your Company, viz. VST Investments Limited was amalgamated, to file a Statement of Affairs is still pending.

In terms of the Order dated 10th July, 2007 the Division Bench of the Hon''ble High Court of Andhra Pradesh had directed the Regional Director, Department of Corporate Affairs, Chennai to conduct an investigation and submit a report showing the persons who promoted ITCATF and the persons who were responsible in conducting its affairs until its winding up. A comprehensive report was prepared and filed in the Hon''ble High Court of Andhra Pradesh by the Regional Director in July 2008. All the 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. Some of the provisions of COTPA have come into force with effect from 1st May, 2004. These include ban on advertising in print and visual media, ban on outdoor advertising, regulation of in-store advertising, prohibition of sale of cigarettes to persons below the age of 18 years and printing of pictorial warnings on cigarette packets, which came into effect from 31st May, 2009 and were further revised with effect from 1st December, 2011. A new set of pictorial warnings have been notified to come into force with effect from 1st April, 2013. All cigarette packets manufactured after that date bear the new warning.

ii. Some Tobacco manufacturers have challenged various provisions of COTPA and Rules made there under in different High Courts across the country. The Union Government filed transfer petitions in the Hon''ble Supreme Court seeking to transfer 31 pending writ petitions from various high courts to the Hon''ble Supreme Court. All the transfer petitions were allowed and the writ petitions have thus been moved to the Hon''ble Supreme Court, for final adjudication.

iii. Your Company had also filed a writ petition in the Hon''ble High Court of Andhra Pradesh challenging the Cigarettes and Other Tobacco Products (Packaging & Labelling) Rules, 2006 and the Amendment Rules 2008, on the grounds inter alia 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 Hon''ble Court.

iv. A ban on smoking in public places as envisaged under COTPA, came into effect on 2nd October, 2008, under which smoking has been banned in virtually all public places including courts, public buildings, restaurants, bars, cinema halls etc. A batch of writ petitions challenging this was filed in the Hon''ble Delhi High Court and transferred to the Hon''ble Supreme Court, which was admitted by the Hon''ble Supreme Court in 2008. However, interim relief prayed for by the petitioners seeking to postpone implementation of the ban on smoking in public places was declined.

REAL ESTATE

The 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 45 years. By its judgement in July, 2010, the Land Grabbing Court had held that your Company was not a land grabber but had given the State Government the right to initiate proceedings against your Company to recover possession of the land at some future date. Against this part of the judgement, your Company had filed a writ petition in the Hon''ble 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. In the meantime, after a lapse of over 3 years, the State Government has also filed a writ petition in the Hon''ble High Court of Andhra

Pradesh seeking to set aside the said judgement of the Land Grabbing Court. An interim Order was passed without the Company being present, restraining your Company from changing the status of the land or creating any third party interest therein. Your Company is taking steps to consolidate all the pending matters, get the interim orders vacated and seek speedy disposal so that the property becomes available for development.

COMPANY EMPLOYEES

Under the provisions of Section 217(2A) of the Companies Act, 1956, read with Companies (Particulars of Employees) Rules, 1975 as amended, the particulars of employees are set out in annexure to the Directors'' Report.

However, as per the provisions of Section 219(1)(b)(iv) of the Act, the Report and Accounts are being sent to all the shareholders of the Company excluding the aforesaid information. Any shareholder interested in obtaining such particulars may write to the Company Secretary.

Your Directors take this opportunity to record their deep appreciation of the continuous support and contribution from all employees of your Company.

AUDITORS

The Auditors, Messrs. Lovelock & Lewes, Chartered Accountants, retire at the ensuing Annual General Meeting and being eligible, offer themselves for re- appointment.

THE FUTURE

Your Company is well placed to exploit the opportunities in various geographies. The strategy of new brand launches, coupled with geographical expansion will further strengthen the market position of your Company. Your Company has been successful in improving its margins and has plans to further consolidate the momentum.

On behalf of the Board,

RAYMOND S. NORONHA

Chairman

Dated this 22nd day of April, 2014.

Azamabad, Hyderabad - 500 020


Mar 31, 2013

The Directors of your Company have pleasure in presenting their Annual Report and Accounts for the year ended 31st March, 2013.

Financial Results

Rs. Lakhs

2012-13 2011-12

Revenue from Operations 162109 159846

Net Profit after Tax 12625 14251

Profit brought forward from previous year 10205 9070

Balance available for Appropriation 22830 23321

Amount transferred to General Reserves 1265 1450

Dividend proposed 9651 10037

Corporate Dividend Tax 1640 1629

Surplus in the Statement of Profit and Loss 10274 10205

KEY RATIOS

Earnings per Share (Rs.) 81.76 92.29

Dividend per Share (Rs.) 62.50 65.00

- Value creation during the decade has been Compounded Annual Growth Rate (CAGR), 16% in Earnings per Share (EPS) and 28% in Dividend per Share (DPS).

DIRECTORS

Directors retiring by rotation

In accordance with Article 93 of the Articles of Association of your Company, Mr. T. Lakshmanan and Mr. S. Thirumalai retire from the Board and being eligible, offer themselves, for re- election. Your Board recommends their re-appointment.

Mr. T. Lakshmanan

Mr. T. Lakshmanan was re-appointed at the Annual General Meeting held on 14th July, 2011. He is now due to retire by rotation at the forthcoming Annual General Meeting and being eligible, offers himself for re-appointment.

Mr. Lakshmanan is a Post Graduate in Science and a Member of FFII. He has over 33 years of experience in various departments of General Insurance Corporation (GIC) and retired as General Manager of GIC in 2001. He was a Nominee Director on the Board of your Company prior to his appointment as a Director. He is the Chairman of the Audit Committee and

a Member of Committee of Directors and Shareholders Grievance Committee of your Company. Mr. Lakshmanan neither holds any shares in the Company nor is related to any other Director of the Company.

Mr. S. Thirumalai

Mr. S. Thirumalai was re-appointed at the Annual General Meeting held on 14th July, 2011. He is now due to retire by rotation at the forthcoming Annual General Meeting and being eligible, offers himself for re-appointment.

Mr. S. Thirumalai is a Commerce and Law Graduate and is a Fellow Member of Institute of Chartered Accountants of India and Institute of Company Secretaries of India. He is also a Certified Associate of the Indian Institute of Bankers. He attended the Advanced Management Program at Harvard Business School, Boston, M.A. (USA) in 1992. He has over 30 years of experience in manufacturing industry covering all aspects of Finance, Taxation and General Management (including three years with Reserve Bank of India/Unit Trust of India as an Officer). He is now the Senior Advisor to the consulting firm Deloitte Touche Tohmatsu India Private Limited. He is the Chairman of the Shareholders Grievance Committee and a Member of Audit Committee and Committee of Directors of your Company. Mr. Thirumalai holds 25 shares in the Company and is not related to any other Director of the Company.

Directors Resignation/

Retirement/Appointment

Mr. Milind A. Kharat

Mr. Milind A. Kharat ceased to be a

Director of your Company with effect from 1st October, 2012. The Board of Directors place on record their deep appreciation of the contribution made to your Company by Mr. Milind A. Kharat.

Mr. R.V.K.M. Suryarau

Mr. R.V.K.M. Suryarau has resigned as Director of your Company with effect from close of business on 31st March, 2013. The Board of Directors place on record their deep appreciation of the contribution made to your Company by Mr. R.V.K.M. Suryarau.

Mrs. Asha Nair

Mrs. Asha Nair was nominated by the General Insurers'' (Public Sector) Association of India as a Director of your Company with effect from 1st October, 2012 in place of Mr. Milind A. Kharat.

Mrs. Asha Nair is B.A. in Economics (Hons.) and M.A. from Delhi University. She is a Fellow of Insurance Institute of India (FIII). She has rich experience of over 30 years in the insurance industry. She joined the insurance industry as Direct Recruit Officer and is now Director of United India Insurance Company Limited. Mrs. Asha Nair neither holds any shares in the Company nor is related to any other Director of the Company.

Mr. Raymond S. Noronha

At the meeting of the Board of Directors held on 12th July, 2012, Mr. Raymond S. Noronha was elected as Chairman of your Company and of its Board of Directors with effect from 1st October, 2012.

Mr. Noronha is a B.A. (Hons.) from St.

Stephen''s College, Delhi and attended the Wharton Advanced Management Program (1995) at Philadelphia, USA. He has had over 38 years of varied experience in the cigarette business both international and domestic and has held several top level positions for over a decade. Mr. Noronha retired as Managing Director of your Company and was appointed as Non-Executive Director with effect from 3rd September, 2012. He is a Member of the Audit Committee, Committee of Directors and Shareholders Grievance Committee of your Company. Mr. Noronha neither holds any shares in the Company nor is related to any other Director of the Company.

Mr. N. Sai Sankar

At the meeting of the Board of Directors held on 12th July, 2012, Mr. N. Sai Sankar was appointed as Managing Director of your Company with effect from 3rd September, 2012 in place of Mr. Raymond S. Noronha.

Mr. Sai Sankar is a Commerce Graduate from St. Xavier''s College, Kolkata and is a Fellow Member of Institute of Chartered Accountants of India, Institute of Cost & Works Accountants of India and Institute of Company Secretaries of India. He has about 31 years of experience in finance, accounting and secretarial field. He was the Deputy Managing Director of your Company since February 2009. He is a Member of the Committee of Directors and Shareholders Grievance Committee of your Company. He is a director on the board of the Tobacco Institute of India. Mr. Sai Sankar neither holds any shares in the Company nor is related to any other Director of the Company.

DIRECTORS'' RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies Act, 1956 the 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 at the end of the financial year and of the profit of your Company for the 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, 1956 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.

TAXATION

i. Income Tax

a. Financial Services

Business

It may be recalled that your

Company had diversified into Financial Services Business and Foods Business in the early nineties. Subsequently in the year 1998-99, your Company incurred a total loss of Rs.38.67 crore in the financial services business of which Rs.29.70 crore was claimed as loss under the head ''Income from Business'' and Rs.8.97 crore was claimed as a capital loss under the provisions of the Income Tax Act.

The Income Tax Appellate Tribunal allowed the entire amount of Rs.38.67 crore as a capital loss. It may be noted that the department had treated the entire loss as a ''Speculation Loss''.

Your Company has filed an appeal before the Hon''ble High Court of Andhra Pradesh which has been admitted. The matter is yet to be heard.

Further in connection with its divestment from the Foods Business in the financial year 1999-00, your Company had incurred a total loss of Rs.53.68 crore, of which Rs.44.18 crore was claimed as a loss under the head ''Income from Business'' and Rs.9.50 crore was claimed as a capital loss under the provisions of the Income Tax Act. The Income Tax Department has disallowed the entire amount excepting Rs.5.70 crore which was allowed as a capital loss. The Commissioner of Income Tax (Appeals) further allowed Rs.11.24 crore out of the balance amount of Rs.47.98 crore, on appeal before him and the same was upheld by the Income Tax Appellate Tribunal. Your Company has preferred an appeal against the above order and the matter is now before the Hon''ble High Court of Andhra Pradesh.

Consequent to the above orders, the Income Tax Department had issued consequential orders under Section 154 of the Income Tax Act demanding Rs.28.86 crore (revised) which was paid by your Company.

b. North East

You would recall that pursuant to the withdrawal of exemption notification for manufacture of cigarettes in the North Eastern region in terms of Supreme Court judgement of 19th September, 2005, your Company had paid an amount of Rs.31.20 crore towards principal and provided an amount of Rs.12.69 crore towards interest.

In the income tax return filed by your Company for the relevant year, this amount was considered as an allowable expenditure in the assessment for the year 2006-07. However, subsequently the

Income Tax department has sent a demand notice seeking payment of Rs.19.3 crore being tax payable along with interest which was paid by your Company. Your Company has contested the same.

ii. Luxury Tax

The Hon''ble Supreme Court by its judgement dated 20th January, 2005 set aside levy of Luxury Tax on tobacconists by various States. The Court had also directed the companies to pay back to the State any amount of luxury tax recovered from the customers after obtaining Stay orders from the Court. The Department has alleged that your Company has failed to pay an amount of Rs.34.86 crore being the Luxury Tax collected from customers by your Company after passing of the interim order dated 1st June, 1999, but not paid to the State Government of Andhra Pradesh which is in violation of the said judgement dated 20th January, 2005 and filed the contempt petition against the Managing Director of your Company. An amount of Rs.29.81 crore has also been claimed as interest thereon @24% per annum. The contempt charges against the Managing Director of your Company were dismissed by the Hon''ble Supreme Court on 19th March, 2010.

The State of Andhra Pradesh decided to continue with the legal proceedings for recovery of Luxury

Tax from your Company by substituting the Company''s Managing Director with your Company as the Respondent. The Supreme Court by its Order dated 9th November, 2012 appointed M/s. Lakshminivas Neeth & Co., Chartered Accountants to examine and verify the accounts of your Company for the period 1st April, 1999 to 20th January, 2005 and submit their reply within 6 months, as to whether any sum was collected by your Company towards luxury tax during the operation of the Stay Order dated 1st April, 1999. The process of examination and verification of relevant documents and accounts has already begun and is in progress. Thereafter, the final report of the Chartered Accountant will be submitted to the Supreme Court before the next date of hearing in July, 2013.

iii. Entry Tax

As mentioned in last year''s Report, several High Courts in the country including those of Andhra Pradesh, Kerala, Tamilnadu and Assam have struck down the levy of Entry Tax on the ground that it is violative of Article 301 and not saved under Article 304(b) of the Constitution, as it is not compensatory in the manner required in terms of the Supreme Court judgement in the case of M/s. Jindal Stainless Ltd. Thereafter, several states such as Uttar Pradesh, Bihar, Haryana and Assam have attempted to re- introduce Entry Tax by amending the original Acts, sparking a fresh round of legal challenges in the High Courts. Most of the appeals filed by the various states, and individual companies have been clubbed together.

The Hon''ble Supreme Court by its Order dated 18th December, 2008 in the batch of cases headed by Jai Prakash Associates vs the State of MP has referred a number of vital questions on levy of Entry Tax, to the Constitutional Bench in terms of Article 145(3) of the Constitution which are still pending adjudication.

iv. Excise

a. Wrapping Materials

As mentioned in last year''s Report, the Customs, Excise and Service Tax Appellate Tribunal, Bangalore by its Order dated 8th October, 2004, had allowed your Company''s appeal and set aside the demand of the Excise Department for an amount of Rs.3.62 crore (including penalty and interest @24%) 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 March 2002. An appeal against the said Order has been filed by the Excise Department and is presently pending in the Hon''ble Supreme Court.

b. Cigarette manufacture in North Eastern states

As mentioned in last year''s Report, the Excise Department had demanded a sum of Rs.5.85 crore from two of your Company''s former contract manufacturers, by way of interest on the principal amount of Rs.31.20 crore repaid to the Excise Department, consequent upon the judgement of the Hon''ble Supreme Court dated 19th September, 2005. A Division Bench of the Gauhati High Court by its judgement dated 18th June, 2012, confirmed the judgement of the single judge and held that interest was also payable for the period 1st August, 2003 to 7th February, 2006 on the principal amount already repaid. Special Leave Petitions have been filed in the Supreme Court against the said judgement of the Gauhati High Court. By its order dated 11th January, 2013, the Supreme Court admitted the SLPs but declined to grant stay of the said judgement.

c. Tobacco Refuse

Your Company has received show cause notices demanding recovery of duty on cut tobacco used in the manufacture of tobacco refuse together with interest and penalty from January 2005 to October 2012, amounting to Rs.14.40 crore, four of which were confirmed by the Orders of the Commissioner of Central Excise. Your Company''s stay applications in the appeals before CESTAT were heard favourably and stay with complete waiver of pre-deposit has been granted in the interim as prayed for. Your Company continues to receive show cause notices for subsequent periods pending final hearing of the appeals to the Appellate Tribunal.

d. Service Tax

Your Company has received show cause notices from the Excise Department seeking to deny CENVAT credit availed on service tax paid by various service providers on the ground that the same are not in relation to the manufacture of final products. They are all pending adjudication at various levels. Total amount involved is approximately Rs.5.27 crore with equivalent penalty and interest thereon.

e. Enhancement of duties - Budget 2012

Your Company has received a show cause notice from the Excise Department seeking payment of differential duty amounting to Rs.15.6 crore together with interest and penalty for the period 17th March, 2012 to 27th May, 2012 on the ground that the proposed excise duty increase which was further enhanced during the pendency of the Finance Bill, 2012 in Parliament was saved by the declaration under the Provisional Collection of Taxes Act, 1931 and would therefore, come into effect from 17th March, 2012 i.e. the date when the Finance Bill was introduced in the Lok Sabha and not from 27th May, 2012 when the Bill received the assent of the President. Similar demands have also been raised on the other major cigarette manufacturers in the country. Your Company will be preparing and submitting a detailed reply to the show cause notice in support of its contention that the excise duties were correctly paid during the period in question and no differential duty is payable.

PUBLIC INTEREST LITIGATION (PIL)

i. The two PILs filed in the Madras High Court and the Andhra Pradesh High Court against the Central Government and the cigarette manufacturers including your Company, seeking strict implementation of COTP Act and Rules are still pending.

ii. A PIL was filed in the Karnataka High Court by Mr. Ravishankar, an Advocate/Activist against various Ministries of the Central Government, State Government, Advertising Standards Council of India, your Company and other cigarette manufacturing companies seeking several reliefs on various aspects and issues relating to COTPA and its implementation. Notice has been received by your Company and steps are being taken to prepare and file a suitable reply denying any violations of the existing legislations together with other cigarette manufacturing companies.

INTELLECTUAL PROPERTY

As mentioned in the last year''s report, the suit for infringement and passing off filed by ITC Limited against your Company alleging that your Company had violated ITC Limited''s ''Gold Flake'' trade mark by using a deceptively similar get up and trade dress consisting of a combination of red and gold colors, on its ''Special'' brand of cigarettes is still pending in the Calcutta High Court and the trial is yet to begin. ITC''s application for temporary injunction was refused by a single Judge of the Calcutta High Court by his order dated 4th March, 2011. Their appeal against the said order is pending before the Division Bench.

FINANCIAL SERVICES BUSINESS

As mentioned in last year''s Report the Company Petition filed by the Official Liquidator in the Hon''ble High Court of Andhra Pradesh seeking directions to some of the Ex-Directors of ITC Agro Tech Finance and Investments Limited (ITCATF) to file a Statement of Affairs is still pending.

In terms of the Order dated 10th July, 2007 the Division Bench of the Hon''ble High Court of Andhra Pradesh had directed the Regional Director, Department of Corporate Affairs, Chennai to conduct an investigation and submit a report showing the persons who promoted ITCATF and the persons who were responsible in conducting its affairs until its winding up. A comprehensive report dated 19th May, 2008 was prepared and filed in the Hon''ble High Court of Andhra Pradesh by the Regional Director in July 2008. All the 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. Some of the provisions of COTPA have come into force with effect from 1st May, 2004. These include ban on advertising in print and visual media, ban on outdoor advertising, regulation of in-store advertising, prohibition of sale of cigarettes to persons below the age of 18 years and printing of pictorial warnings on cigarette packets, which came into effect from 31st May, 2009 and were further revised with effect from 1st December, 2011. A new set of pictorial warnings have been notified to come into force with effect from 1st April, 2013. All cigarette packets manufactured after that date will bear the new warning.

ii. Some tobacco manufacturers have challenged various provisions of COTPA and Rules made thereunder in different High Courts across the country. The Union Government filed transfer petitions in the Hon''ble Supreme Court seeking to transfer 31 pending writ petitions from various High Courts to the Hon''ble Supreme Court. On 18th November, 2008 all the transfer petitions were allowed and the writ petitions have thus been moved to the Hon''ble Supreme Court, for final adjudication.

iii. Your Company had also filed a writ petition in the Hon''ble High Court of Andhra Pradesh challenging The Cigarettes and Other Tobacco Products (Packaging & Labelling) Rules, 2006 and the Amendment Rules 2008, on the grounds inter alia 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 was admitted on 17th October, 2008 but no interim orders were passed by the Hon''ble Court.

iv. A ban on smoking in public places as envisaged under COTPA, came into effect on 2nd October, 2008 under which smoking has been banned in virtually all public places including courts, public buildings, restaurants, bars, cinema halls etc. A batch of writ petitions challenging this was filed in the Hon''ble Delhi High Court and transferred to the Hon''ble Supreme Court, which came up for admission on 29th September, 2008. While the Hon''ble Supreme Court admitted the transfer petitions it declined to grant interim relief prayed for by the petitioners seeking to postpone implementation of the ban on smoking in public places.

REAL ESTATE

The 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 45 years. By its judgement dated 28th July, 2010, the Land Grabbing Court had held that your Company was not a land grabber but had given the State Government the right to initiate proceedings against your Company to recover possession of the land at some future date. Against this part of the judgement, your Company had filed a writ petition in the Hon''ble 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. In the meantime, after a lapse of over 3 years, the State Government has also filed a writ petition in the Hon''ble High Court of Andhra

Pradesh seeking to set aside the said judgement of the Land Grabbing Court. An interim Order was passed without the Company being present, restraining your Company from changing the status of the land or creating any third party interest therein. Your Company is taking steps to consolidate all the pending matters, vacate the interim orders and seek speedy disposal so that the property becomes available for development.

COMPANY EMPLOYEES

Under the provisions of Section 217(2A) of the Companies Act, 1956, read with Companies (Particulars of Employees) Rules, 1975 as amended, the particulars of employees are set out in annexure to the Directors Report.

However, as per the provisions of Section 219(1)(b)(iv) of the Act, the Report and Accounts are being sent to all the shareholders of the Company excluding the aforesaid information. Any shareholder interested in obtaining such particulars may write to the Company Secretary.

Your Directors take this opportunity to record their deep appreciation of the continuous support and contribution from all employees of your Company.

AUDITORS

The Auditors, Messrs. Lovelock & Lewes, Chartered Accountants, retire at the ensuing Annual General Meeting and being eligible, offer themselves for re- appointment.

THE FUTURE

The focus of your Company will continue to remain on cigarettes and tobacco with thrust on twin strategies of growth and productivity. VAT rates vary from 12.5% to 65% from state to state and it is expected that high taxation will continue to be a norm. Implementation of Goods and Services Tax is expected shortly which could throw up new challenges. However, your Company is geared up to meet these challenges.

New pictorial warning on the cigarettes have come into force effective 1st April, 2013 and the same could be found on cigarette packs.

New Companies Bill encompassing wide range of changes is on the anvil and after being approved by the Lok Sabha is awaiting the approval of the Rajya Sabha.

Leaf tobacco exports have been growing over the last several years and your Company''s thrust on this area will continue.

On behalf of the Board,

RAYMOND S. NORONHA

Chairman

Dated this 18th day of April, 2013.

Azamabad, Hyderabad - 500 020, Andhra Pradesh.


Mar 31, 2011

The Directors of your Company have pleasure in presenting their Annual Report and Accounts for the year ended 31st March, 2011.

Financial Results Rs. Lakhs

2010-11 2009-10

Revenue from Operations 139654 112542

Net Profit after Tax 9501 6205

Profit brought forward from previous year* 8620 8200

Balance available for Appropriation 18121 14405 Amount transferred to General Reserves 975 625

Dividend proposed 6949 4632

Corporate Dividend Tax 1127 770

Surplus carried in Profit and Loss Account 9070 8378

*Including Rs. 242 lakhs taken over on amalgamation of the wholly owned subsidiary VST Distribution, Storage & Leasing Company Private Limited with the Company.

KEY RATIOS

Earnings Per Share (Rs.) 61.53 40.18

Dividend Per Share (Rs.) 45.00 30.00

The financial year 2010-11 recorded an improvement of 24.1% in Sales (Gross) and 53.1% Profit after Tax when compared to the previous year. A record year with record Sales, record Profit after Tax and Dividends Per Share of Rs. 45, the best in the decade. Value Creation during the decade has been Compounded Annual Growth Rate (CAGR) of 9.9% in Earnings Per Share (EPS) and 28.2% in Dividends Per Share (DPS).

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

Information in accordance with clause (e) of sub-section (1) of Section 217

read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 is given in the Annexure to this Report.

ENVIRONMENT, HEALTH & SAFETY (EHS) AND COMMUNITY SERVICES

Your Company has been maintaining a high safety performance for the last 364 days without any accident.

Gold Award for the year 2010 was presented to your Company by Royal Society for Prevention of Accidents (RoSPA), U.K. for maintaining highest standards in Occupational, Health and Safety.

Accident Free Award was awarded to your Company from British American Tobacco on 5th April, 2010 for One Year Accident Free from 21st March, 2009 to 20th March, 2010.

Safety Innovation award was awarded to your Company from Institution of Engineers India on 28th December, 2010.

Environment, Health and Safety (EHS) in day-to-day business operations is given very high priority by your Company. 395 employees and 30 contractors have undergone EHS training and 543 employees have undergone fire fighting training programme. Mock Fire Drills were also conducted for workers and management during the period to comply with the Companys EHS guidelines. Involvement by workmen in quarterly EHS reviews along with staff members and periodical inspections have kept the performance monitoring on vigil. Quarterly and annual EHS audits of Company operations including leaf godowns was carried out to ensure

compliance of EHS requirements and to measure the EHS progress. EHS Road Map rating for your Company was assessed at 3.54 as against the scale of 4.0 for the year 2010-11.

Your Company celebrated National Safety Day on 4th March, 2011 by conducting safety meetings inside factory and all contractors attended safety programme conducted by National Safety Council.

Surveillance Reviews of ISO 14001: 2004 & OHSAS 18001: 2007 for the year 2010 by Registro Italiano Navale India (RINA) revalidated your Companys certifications.

On the environmental side, as a responsible corporate, your Company continues to put in sustained efforts in the upkeep and improvement of existing systems like Scrubber, DRF systems, rain water harvesting pits, ETP with soil bio- technology and also in energy conservation installation of solar water heating panels for boiler feed water and for workers canteen boiler.

Water Consumption was reduced by 30 Kl/day.

As a social responsibility and to conserve greenery, your Company is encouraging social forestry through afforestation and Trees for Life programme. It is also actively discouraging child labour involvement in tobacco growing/processing. Your Company has installed water purifiers in major tobacco growing villages to improve health through supply of clean drinking water to the rural community.

All statutory compliances are in place.

The thrust on EHS will continue while emphasizing the focus on Best International Work practices.

FINANCE

a. Profits

The Profit after Tax for the year at Rs. 95 crore is the highest ever recorded by your Company in its history.

The continuous increase in taxation over the last several years has made improvement in margins a daunting task thereby impacting profitability.

Your Companys thrust on growing volumes continued during the year with reasonable success though industry growth remained flat.

Your Companys focus on working capital management and budgetary control on expenses has resulted in improvement of profitability. When compared to previous year, your Companys profits improved both in cigarettes and leaf tobacco operations.

b. Treasury Operations

Your Company follows a SLR model (Safety, Liquidity and Return) in deployment of surplus funds which arise during various periods of time. The Company predominantly deploys money in income funds of reputed mutual funds and tax free bonds. Such investments earned Rs. 13 crore during the current year.

ENTERPRISE RESOURCE PLANNING (ERP)

Your Company was able to successfully manage the entire ERP system by developing an in-house team. All routine business issues as well as improvements in existing systems have been

undertaken by the team. This team interacts with managers of the operating teams and works continuously to help improve the overall business processes. Your Company has also developed adequate skills to manage issues arising out of facilities management and networking which are the other limbs of the IT infrastructure.

FIXED DEPOSITS

Your Company has stopped accepting fresh deposits for several years now.

As on 31st March, 2011, your Company does not have any deposits for the purpose of its business. Unclaimed deposits amounting to Rs. 8,000 is outstanding.

RATING

The Credit Rating Information Services India Limited (CRISIL) has re-affirmed the rating of your Company to "FAAA/ Stable" for Fixed Deposit Schemes, "AA+/Stable" for Long Term Non- convertible Debentures and P1+ for Non-fund based liabilities (Letter of Credit and Bank Guarantee).

UNCLAIMED DIVIDENDS

Your Company had by its letter dated 25th October, 2001 communicated to all the Members about the promulgation of rules pertaining to the Investor Education and Protection Fund. Dividends which remain unpaid or unclaimed for a period of seven years would be deposited in the Investor Education and Protection Fund. The final dividend for the year ended 31st March, 2004 remaining unpaid would be deposited by 26th August, 2011 in accordance with Section 205C read with Investor Education and Protection Fund (Awareness and Protection of Investors) Rules, 2001.

UNCLAIMED SHARE CERTIFICATES

Your Company has communicated to the Members whose share certificates are returned undelivered to the Company that these would be transferred to the Unclaimed Suspense Account if not claimed by them, as required under the Listing Agreement amended by SEBI vide its Circular dated 16th December, 2010.

CORPORATE GOVERNANCE

The Companys Report on Corporate Governance is annexed to this Report.

Certificate of the Statutory Auditors of your Company regarding compliance of the conditions of Corporate Governance as stipulated in Clause 49 of the Listing Agreement with stock exchanges is annexed to this Report.

Your Company has taken adequate steps for strict compliance with the Corporate Governance guidelines, as amended from time to time.

The Ministry of Corporate Affairs has released draft guidelines for voluntary compliance covering various aspects. Your Company has already implemented most of the items and examined the balance provisions for implementation.

INTERNAL CONTROL SYSTEMS

Your Company remains committed to improve effectiveness of internal control systems and processes which would help in increasing the efficiency of operations and provide security of its assets.

The internal audit process in your Company captures the control environment prevalent in the

organization. Over a period of three years, the entire business process of your Company is reviewed through a systems audit process which helps review the systems on a continuous basis. The objective is to identify potential risk areas and come up with a comprehensive 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 of focus which were dealt with by the Committee. The Statutory Auditors/System Auditors were invited to attend all the Audit Committee meetings and make presentations covering their observation on adequacy of internal controls and the steps required to bridge gaps, if any.

The self-evaluation system which was put in place on internal controls is being reviewed continuously to improve its effectiveness.

Risk Management

Risk Management is monitored by a Committee comprising members from various functions. The Committee meets periodically to identify the potential risks as well as to take adequate steps for mitigating the risks which have been identified. A comprehensive note covering various aspects is reported to the Board every quarter.

DIRECTORS

Directors retiring by rotation

In accordance with Article 93 of the Articles of Association of your Company, Mr. T. Lakshmanan and

Mr. S. Thirumalai retire from the Board and being eligible, offer themselves, for re-election. Your Board recommends their re-appointment.

Mr. T. Lakshmanan

Mr. T. Lakshmanan was re-appointed at the Annual General Meeting held on 17th July, 2008. He is now due to retire by rotation at the forthcoming Annual General Meeting and being eligible, offers himself for re-appointment.

Mr. Lakshmanan is a Post Graduate in Science and a Member of FFII. He has over 33 years of experience in various departments of General Insurance Corporation (GIC) and retired as General Manager of GIC in 2001. He was a nominee Director on the Board of your Company prior to his appointment as an Additional Director. He is the Chairman of the Audit Committee and a Member of Committee of Directors and Shareholders Grievance Committee of your Company. Mr. Lakshmanan does not hold any shares in the Company and is not related to any other Director of the Company.

Mr. S. Thirumalai

Mr. S. Thirumalai was re-appointed at the Annual General Meeting held on 16th July, 2009. He is now due to retire by rotation at the forthcoming Annual General Meeting and being eligible, offers himself for re-appointment.

Mr. S. Thirumalai is a Commerce and Law Graduate and is a Fellow Member of Institute of Chartered Accountants of India and Institute of Company Secretaries of India. He is also a Certified Associate of the Indian Institute of Bankers. He attended the Advanced

Management Program at Harvard Business School, Boston, MA (USA) in 1992. He has over 30 years of experience in manufacturing industry covering all aspects of Finance, Taxation and General Management (including three years with Reserve Bank of India/Unit Trust of India as an Officer). He is now the Senior Advisor to the consulting firm Deloitte Touche Tohmatsu India Private Limited. He is the Chairman of the Shareholders Grievance Committee and a Member of Audit Committee and Committee of Directors of your Company. Mr. Thirumalai holds 25 shares in the Company and is not related to any other Director of the Company.

Directors Resignation/ Appointment

Mr. R.V.K.M. Suryarau

Mr. R.V.K.M. Suryarau is elected Chairman of your Company and of its Board of Directors with effect from 15th October, 2010 in place of Mr. Abhijit Basu who had tendered his resignation.

The Board of Directors place on record their deep appreciation of the contribution made to your Company by Mr. Abhijit Basu.

DIRECTORS RESPONSIBILITY STATEMENT

Pursuant to Section 217(2AA) of the Companies (Amendment) Act, 2000 the Directors confirm that:

1. in the preparation of the Annual Accounts, the applicable accounting standards have been followed;

2. appropriate accounting policies have been 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 at the end of the financial year and of the profit of your Company for the 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, 1956 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.

VST DISTRIBUTION, STORAGE & LEASING COMPANY PRIVATE LIMITED

The wholly owned subsidiary, VST Distribution, Storage & Leasing Company Private Limited was merged with your Company effective 1st April, 2010 in terms of Court Order dated 16th March, 2011.

TAXATION

i. Income Tax

a. Financial Services

Business

It may be recalled that your Company had diversified into Financial Services Business and Foods Business in the early nineties. Subsequently in the year 1998-99, your Company incurred a total loss of Rs. 38.67 crore in the financial services business of which Rs. 29.70 crore was claimed as loss under the

head "Income from Business" and Rs. 8.97 crore was claimed as a capital loss under the provisions of the Income Tax Act.

The Income Tax Appellate Tribunal allowed the entire amount of Rs. 38.67 crore as a capital loss. It may be noted that the department had treated the entire loss as a "Speculation Loss".

Your Company has filed an appeal before the Honble High Court of Andhra Pradesh which has been admitted. The matter is yet to be heard.

Further in connection with its divestment from the Foods Business in the financial year 1999-2000, your Company had incurred a total loss of Rs. 53.68 crore, of which Rs. 44.18 crore was claimed as a loss under the head "Income from Business" and Rs.9.50 crore was claimed as a capital loss under the provisions of the Income Tax Act. The Income Tax Department has disallowed the entire amount excepting Rs. 5.70 crore which was allowed as a capital loss. The Commissioner of Income Tax (Appeals) further allowed Rs. 11.24 crore out of the balance amount of Rs. 47.98 crore, on appeal before him and the same was upheld by the Income Tax Appellate Tribunal. Your Company has preferred an appeal against the above order and the

matter is now before the Honble High Court of Andhra Pradesh.

Consequent to the above orders, the Income Tax Department had issued consequential orders under Section 154 of the Income Tax Act demanding Rs. 28.86 crore (revised) which was paid by your Company.

b. North East

You would recall that pursuant to the withdrawal of exemption notification for manufacture of cigarettes in the North Eastern region in terms of Supreme Court judgement of 19th September, 2005. Your Company had paid an amount of Rs. 31.20 crore towards principal and provided an amount of Rs. 12.69 crore towards interest.

In the income tax return filed by your Company for the relevant year, this amount was considered as an allowable expenditure in the assessment for the year 2006-07. However, subsequently the Income Tax department has now sent a demand notice seeking payment of Rs. 20 crore being tax payable along with interest. Your Company will contest the same.

c. Subsidiary Company

During the financial year 1998-1999, your Companys subsidiary had received financial assets worth of Rs. 1200 lakhs against a future

liability of Rs. 5200 lakhs. This was settled on 31st March, 1999 for an immediate payment of Rs. 1250 lakhs. The settlement was not accepted during the assessment proceedings and accordingly disallowed by the Income Tax Authorities. On appeal before the CIT(A), the matter was held in favour of your Companys subsidiary. However, the Income Tax Tribunal while holding the matter against your Companys subsidiary held that the ratification of the said settlement agreement by the Board did not relate to 31st March, 1999 and

consequently the liability to pay Rs. 1250 lakhs did not arise in the financial year 1998- 1999 and therefore not allowable as a deduction for the year. The tax liability on this is Rs. 420 lakhs apart from interest.

Your Companys subsidiary preferred an appeal against the above order before the Honble High Court of Andhra Pradesh.

ii. Luxury Tax

As mentioned in last years Report, a Contempt Petition has been filed in the Honble Supreme Court by the Commercial Tax Officer, on behalf of the Government of Andhra Pradesh against the Managing Director of your Company alleging contempt of the Honble Supreme Courts judgement dated 20th January,

2005, which had set aside levy of Luxury Tax. The Department has alleged that your Company has failed to pay an amount of Rs. 34.86 crore being the Luxury Tax collected from customers by your Company after passing of the interim order dated 1st June,1999, but not paid to the State Government of Andhra Pradesh which is in violation of the said judgement dated 20th January, 2005. An amount of Rs. 29.81 crore has also been claimed as interest thereon @ 24% per annum. Your Company and the Managing Director have both filed separate counter affidavits strenuously denying that there has been any contempt on their part of the said judgement of the Honble Supreme Court. The contempt case against the Managing Director of your Company was dismissed by Honble Supreme Court. As far as the case against the Company is concerned, there have been no further developments during the year.

iii. Entry Tax

As mentioned in last years Report, several High Courts in the country including those of Andhra Pradesh, Kerala, Tamilnadu and Assam have struck down the levy of Entry Tax on the ground that it is violative of Article 301 and not saved under Article 304(b) of the Constitution, as it is not compensatory in the manner required in terms of the Supreme Court judgement in the case of M/s.Jindal Stainless Ltd. Thereafter, several states such as Uttar Pradesh, Bihar and Haryana

have attempted to re-introduce Entry Tax by amending the original Acts, sparking a fresh round of legal challenges in the High Courts. Most of the appeals filed by the various states, and individual companies have been clubbed together. The Honble Supreme Court by its Order dated 18th December, 2008 in the batch of cases headed by Jai Prakash Associates vs the State of MP has referred a number of vital questions on levy of Entry Tax, to the Constitutional Bench in terms of Article 145(3) of the Constitution which are still pending adjudication.

iv. Excise

a. Wrapping Materials

As mentioned in last years Report, the Customs, Excise and Service Tax Appellate Tribunal, Bangalore by its Order dated 8th October, 2004, had allowed your Companys appeal and set aside the demand of the Excise Department for an amount of Rs. 3.62 crore (including penalty and interest @ 24%) 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 March 2002. An appeal against the said Order has been filed by the Excise Department and is presently pending in the Honble Supreme Court.

In the meantime, the Honble Supreme Court by its Order dated 27th November, 2008 has remanded various other similar appeals pertaining to other manufacturers back to their respective Tribunals for re-adjudication in the light of individual facts of each case. Notices for subsequent periods have also been received by your Company which have been kept pending awaiting the decision of the Honble Supreme Court.

b. Cigarette manufacture in North Eastern states

As mentioned in the last years Report, the Excise Department had demanded a sum of Rs. 5.85 crore from two of your Companys former contract manufacturers, by way of interest on the principal amount of Rs. 31.20 crore repaid to the Excise Department, consequent upon the judgement of the Honble Supreme Court dated 19th September, 2005. The two contract manufacturers had filed Writ Petitions challenging the said demands in the Honble Guwahati High Court and obtained Interim Orders staying partial recovery until final disposal. Against the said Interim Orders, the Department had filed appeals in the Honble Supreme Court. By its Order dated 15th April, 2009 the Honble Supreme Court has requested the Honble High Court to dispose

off the Writ Petitions within a period of two months from the date of communication of the Order. A Single Member Bench disallowed the writ petitions and upheld levy of interest. Against the judgement, the contract manufacturers filed appeals before the Division Bench, which passed interim orders staying the judgement of the Single Bench. First hearing has been completed and the appeals are reserved for judgement.

c. Tobacco Refuse

Your Company has received show cause notices demanding recovery of duty on cut tobacco used in the manufacture of tobacco refuse together with interest and penalty from January 2005 to November 2009.

Your Company has now received a demand for Rs. 10.22 crore being excise duty and penalty for the period upto 30th November, 2009. Interest is payable separately till the date of payment. Your Company is in the process of filing an appeal before CESAT.

v. Service Tax

Your Company has received show cause notices from the Excise Department seeking to deny CENVAT credit availed on service tax paid by various service providers on the ground that the

same are not in relation to the manufacture of final products. They are pending adjudication at various levels. Total amount involved is approximately Rs. 2.5 crore with equivalent penalty and interest thereon.

PUBLIC INTEREST LITIGATION (PIL)

i. A PIL was filed in the Honble Supreme Court by an NGO Health for Millions seeking immediate implementation of various provisions of COTPA including the pictorial warnings, is still pending.

ii. A PIL has been filed by Mr. A. Sherfuddin in the Honble Madras High Court against the Health Ministry and tobacco companies (including your Company) seeking various reliefs including printing of ingredients contained in cigarettes on packets and their ill effects so as to inform the public of the dangers of smoking, removal of all hoardings and other visible representations of the brands which is still pending.

iii. A PIL has been filed in the Honble High Court of Andhra Pradesh by the Old Students Association, PG College, Secunderabad against the Central Government and the tobacco companies (including your Company) seeking introduction of stronger pictorial warnings on both sides of the packets. Your Company has entered appearance in the Court.

INTELLECTUAL PROPERTY

A Suit for infringement and passing off was filed by ITC Limited against the

Company in the Original Side of Calcutta High Court alleging that the Company had violated ITC Limiteds Gold Flake trade mark by using a deceptively similar get up and trade dress consisting of a combination of red and gold colors, on its Special brand of cigarettes. A Single judge of the Calcutta High Court by his Order dated 4th March, 2011 has dismissed ITC Limiteds application for interim injunction. The main suit is posted for trial in August 2011. Your Company has filed a Caveat in the Division Bench of the Calcutta High Court in anticipation of ITC Limited filing an appeal against this said interim order of the Single Judge.

FINANCIAL SERVICES BUSINESS

As mentioned in last years Report the Company Petition filed by the Official Liquidator in the Honble High Court of Andhra Pradesh seeking directions to some of the Ex-Directors of ITC Agro Tech Finance and Investments Limited (ITCATF) to file a Statement of Affairs is still pending.

In terms of the Order dated 10th July, 2007 the Division Bench of the Honble High Court of Andhra Pradesh had directed the Regional Director, Department of Corporate Affairs, Chennai to conduct an investigation and submit a report showing the persons who promoted ITCATF and the persons who were responsible in conducting its affairs until its winding up. A comprehensive report dated 19th May, 2008 was prepared and filed in the Honble High Court of Andhra Pradesh by the Regional Director in July 2008. All the 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. Some of the provisions of COTPA have come into force with effect from 1st May, 2004. These include ban on advertising in print and visual media, ban on outdoor advertising, regulation of in-store advertising, prohibition of sale of cigarettes to persons below the age of 18 years.

ii. The tobacco industry has been told to print the prescribed graphic health warnings on all its product packing. The Cigarettes and Other Tobacco Products (Packaging & Labelling) Rules, 2006 (COTPR) had originally prescribed pictorial warnings along with health messages and sign of skull and cross bones. However, due to vociferous objections from various sections of the industry and public, a Committee of a Group of Ministers (GoM) was constituted to relook at the warnings. Based on their recommendations, a new set of labelling requirements has been prescribed under the COTPR which were published on 16th March, 2008. However, these have again been modified based on representations made. The GoM is yet to give its conclusive recommendations. The revised implementation date as originally envisaged from 1st November, 2010 has been deferred.

iii. In the meantime, some Tobacco manufacturers had challenged various provisions of COTPA and Rules made thereunder in different High Courts across the country. The Union Government filed Transfer Petitions in the Honble Supreme Court seeking to transfer 31 pending Writ Petitions from various High Courts to the Honble Supreme Court. On 18th November, 2008 all the Transfer Petitions were allowed and the Writ Petitions have thus been moved to the Honble Supreme Court, for final adjudication.

iv. Your Company had also filed a Writ Petition in the Honble High Court of Andhra Pradesh challenging COTPR and the Amendment Rules 2008, on the grounds inter alia that they are ultra vires of COTPA and therefore the Notifications issued thereunder (including those seeking implementation of Graphic Health Warnings) should be quashed. The said Writ Petition was admitted on 17th October, 2008 but no interim orders were passed by the Honble Court.

v. A ban on smoking in public places as envisaged under COTPA, came into effect on 2nd October, 2008, under which smoking has been banned in virtually all public places including courts, public buildings, restaurants, bars, cinema halls etc. A batch of writ petitions challenging this was filed in the Honble Delhi High Court and transferred to the Honble Supreme Court, which came up for admission on 29th September, 2008. While the Honble Supreme Court admitted the Transfer Petitions it declined to grant interim relief prayed for by the petitioners seeking to postpone implementation of the ban on smoking in public places.

COMPANY EMPLOYEES

Under the provisions of Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975 as amended, the particulars of employees are set out in annexure to the Directors Report.

However, as per the provisions of Section 219(1)(b)(iv) of the Act, the Report and Accounts are being sent to all the shareholders of the Company excluding the aforesaid information. Any shareholder interested in obtaining such particulars may write to the Company Secretary.

Your Directors take this opportunity to record their deep appreciation of the continuous support and contribution from all employees of your Company.

AUDITORS

The Auditors, Messrs. Lovelock & Lewes, Chartered Accountants, retire at the ensuing Annual General Meeting and being eligible, offer themselves for re-appointment.

THE FUTURE

In the current years Budget no increase in excise duties has been proposed which has been a welcome relief.

The focus of your Company will continue to remain on cigarettes and tobacco. The strategy of offering "value for money" brands in both existing and new geographies which provide opportunities will continue as it has improved the performance of your Company for the last several years.

The challenge to cope with increased bout of taxation across various states would continue as would be the challenge when comprehensive Goods and Services Tax (GST) is introduced in the financial year 2012-13 as per current indication, as GST would lead to change in the operation structure.

New pictorial warnings would have to be displayed on the packs effective financial year 2011-12. However the exact date for change in graphical warning is awaited.

Leaf tobacco exports have been growing over the last several years and your Companys thrust on this area will continue.

On behalf of the Board,

R.V.K.M. SURYARAU Chairman

Dated this 13th day of April, 2011. Azamabad, Hyderabad - 500 020, Andhra Pradesh.

 
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