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Voting Advisory

September 2014 United Spirits Limited 1

17 September 2014 United Spirits LimitedAnnual General Meeting (AGM)

Company Profile BSE: 532432|NSE: MCDOWELL-N Industry: Breweries & Distilleries Index: S&P BSE 100 / CNX 100 Face Value: Rs. 10 Fiscal Year End: March

Meeting Date: 30 September 2014, 2:30 PM

Proxy Deadline: 28 September 2014, 2:30 PM

E-voting: www.evoting.nsdl.com

E-voting dates: 24 September 2014 (9:00 AM) to 26 September 2014 (6:00 PM)

Notice Date: 4 September 2014

Meeting Venue: Level 1, UB Tower, #24, Vittal Mallya Road, Bangalore 560 001

Agenda Items

# Type1 Description of resolution IiAS

Recommendation See Legend

1 O Adoption of financial statements for the year ended 31 March 2014 See Analysis

IiAS believes that a comprehensive review of the financials of a company is a critical exercise which often requires first-hand information and proper due diligence. IiAS does not provide voting recommendations on resolutions for adoption of financial statements, given the limited time between receipt of the annual report and the shareholder meeting, but provides analysis of critical ratios. Investors should note that in FY14, the company announced a one-time write off / provisions to the extent of Rs. 53.0 bn: the more concerning issues were on account of possible diversion of funds and unrecoverable loans to UB group companies. Auditors have qualified the company’s financial statements for the year ended 31 March 2014.

2 O Reappointment of Dr. Vijay Mallya as director AGAINST

Dr. Vijay Mallya has been declared a wilful defaulter by several banks in connection with their lending to Kingfisher Airlines. According to an RBI circular, banks must not extend loans to companies where a director is considered a wilful defaulter. IiAS recognizes that USL is a Diageo subsidiary, and can access funds support from its parent company. However, this is not an optimum way of doing business. IiAS further understands that the decision to declare Vijay Mallya a ‘wilful defaulter’ is being contested by Kingfisher Airlines and Vijay Mallya. But, until this matter is resolved Vijay Mallya continuing on the board will constrain USL’s ability to raise debt from the Indian financial system.

G M R S T V

3 O To not fill up the vacancy on the retirement of Gilbert Ghostine as director FOR/Noted

United Spirits Ltd. (‘USL’) does not propose to fill the vacancy on the retirement of Gilbert Ghostine, nominee of Diageo, at this point of time.

4 O Reappointment of BSR & Co. LLP as statutory auditors FOR

USL proposes to re-appoint BSR & Co. LLP as the statutory auditor. The reappointment is line with IiAS Voting Policy on Auditor Rotation and with the provisions of Section 139 of the Companies Act 2013.

5 O Reappointment of Sudhakar Rao as an Independent Director for a period of 5 years

FOR

His reappointment is in line with the statutory requirements.

6 O Reappointment of D. Sivanandhan as an Independent Director for a period of 5 years

FOR

His reappointment is in line with the statutory requirements.

7 O Appointment of Dr. (Ms.) Indu Shahani as an Independent Director for a period of 5 years

FOR

Her appointment is in line with the statutory requirements.

8 O To not fill up the vacancy caused by the retirement of GN Bajpai as an Independent Director

FOR

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Voting Advisory




USL does not propose to fill the vacancy on the retirement of GN Bajpai at this point of time.

9 O To not fill up the vacancy caused by the retirement of Arunkumar Ramanlal Gandhi as an Independent Director

FOR/Noted

USL does not propose to fill the vacancy on the retirement of Arunkumar Ramanlal Gandhi at this point of time.

10 O To not fill up the vacancy caused by the retirement of Vikramsingh Mehta as an Independent Director

FOR/Noted

USL does not propose to fill the vacancy on the retirement of Vikramsingh Mehta at this point of time.

11 O Appointment of Anand Kripalu as Director FOR His appointment is in line with the statutory requirements.

12 S Appointment of Anand Kripalu as Managing Director and Chief Executive Officer for a period of five years and fix the terms of remuneration

FOR

Anand Kripalu has been brought in from Monedelez, a global food and beverages company and part of the Kraft / Cadbury group. He has over 30 years of experience in the business. IiAS recognizes that Anand Kripalu’s proposed remuneration, at Rs 91.8 mn per annum, is high compared to industry peers. If incentives are paid, his remuneration will be higher. But, given the stage and performance of the business, IiAS recognizes that Anand Kripalu’s appointment is an important decision for the future performance of the company. IiAS also recognizes that the proposed remuneration is being set as minimum remuneration in case the company makes losses. IiAS expects that, with the change in management, disclosures and provisions in the nature (but not necessarily the same extent) of what has already occurred in 2013-14 will likely continue into the next year. Such write-offs and provisions that result in the company reporting losses, have occurred for transactions that occurred well before Anand Kripalu’s appointment.

13 S Revise the terms of remuneration of PA Murali, Executive Director AGAINST

PA Murali has been part of the UB group for over two decades. Prior to being appointed as Executive Director in 2013, he was USL’s Joint President and Chief Financial Officer. Therefore, PA Murali is answerable for the intra-group transactions for which USL has taken write-offs and provided for in its 2013-14 financial statement. Given that context, IiAS recommends that PA Murali step down from his directorship on the board. USL proposes to revise PA Murali’s remuneration from Rs 42.0 mn per annum to Rs 128.9 mn (includes Rs 50 mn paid in FY15 as one-time bonus). For nine months effective 4 July 2013, he was paid remuneration of Rs 47.8 mn. The proposed remuneration is not commensurate with the performance of the company, and is significantly higher than industry peers. Moreover, given that IiAS believes that PA Murali should step down from the board, a discussion on his remuneration is moot.

G M R S T V

14 S Approve the borrowing limit of Rs 100 bn AGAINST

The proposed borrowing limit of Rs.100 bn is high – if drawn down, it would allow the company a debt/equity of over 3x. In case the company undertakes more write-off next year, the impact of this borrowing limit will be much higher. With the current write-off, USL’s net worth has eroded by over 50% - therefore the company will have to report to BIFR. IiAS recognizes that the company is not ‘sick’ yet, but increasing the leverage at this stage is not advisable. Additionally, USL has decided to reappoint Dr. Vijay Mallya: Dr. Mallya has been declared a wilful defaulter by several banks. This constrains the company’s ability to refinance its debt, especially from banks.

G M R S T V

Voting Advisory




USL’s long term facilities and short term facilities are rated ‘ICRA BBB-/Watch Dev’ and ‘ICRA A3/Watch Dev’: The ratings have been put on rating watch with developing implications following the announcement of losses in 2013-14, qualified audit report, and Dr. Mallya being declared a willful defaulter.

15 O Approve to contribute to bona fide charitable and other funds up to Rs 150 mn AGAINST

In FY14, the company has incurred a net loss of Rs. 51.0 bn. Average profit for the last three years (FY12-FY14) aggregate to negative (Rs. 14.8 bn). The company proposes to make donations in any financial year up to Rs 150 mn, however this may exceed five percent of average net profit of the preceding three financial years. IiAS believes that the company should not contribute to donations when it is incurring losses.

G M R S T V

16 S Approve to pay commission up to one percent per annum of net profit to Non-Executive Directors

FOR

In FY14, no commission was paid because the company reported significant losses. USL’s board has changed in FY14. The new board has the role of cleaning up the books. In case they company reports profits, they must be paid commission. While IiAS recommends voting for this resolution, we recommend that the company to set an absolute cap on the commission that will be paid to its non-executive directors.

G M R S T V

[1] O/S: Ordinary/Special

Voting Advisory


Company Overview United Spirits Ltd (‘USL’ or ‘the company’) is one of the largest spirits company in the world with a portfolio of about 140 brands including popular brands such as McDowell’s No 1, Bagpiper, Royal Challenge, Antiquity and Old Tavern. It has established manufacturing and bottling plants in every state of India. It exports to 37 countries.

Promoters: i. Diageo Plc through Relay BV ii. Dr. Vijay Mallya

Market snapshot Mkt Price (Rs): 2362.8 Mkt Cap (Rs bn): 343.4 Equity Capital (Rs bn): 1.5 Net Worth (Rs bn): 30.3 52 week H-L (Rs): 2940.6 – 2226.0 Current P/E(x): Negative Current P/B (x): 11.3

Previous Advisory USL Limited PB – 2 Jul’14 USL Limited CCM – 16 Jun’14 USL Limited EGM - 18 Mar ’14 USL Limited AGM – 25 Sept ’13

Price Performance (Period ended 15 September 2014)

Financial performance (Consolidated) (Rs.bn) Year ending 31-Mar 2012 2013 2014

Total Income 95.0 106.5 113.0

EBITDA 13.7 12.5 5.5

EBITDA Margin (%) 14.4 11.7 4.8

Profit before exceptional items 3.5 0.8 (9.8)

Exceptional items (0.1) (0.1) (32.4)

PBT 3.4 0.7 (42.2)

PBT Margin (%) 3.5 0.7 Neg.

PAT 1.9 (1.0) (44.9)

PAT Margin (%) 2.0 Neg. Neg.

EPS (Rs.) 14.9 (8.0) (316.9)

ROANW (%) 13.6 Neg. Neg.

ROACE (%) 15.8 Neg. Neg.

Debt/EBITDA (x) 6.0 6.6 15.2

Trend in Shareholding Pattern (%) As on Promoter1 DII FII Others

30-Jun-14 33.0 0.1 10.9 56.0

31-Mar-14 38.6 4.0 40.1 17.3

31-Dec-13 37.3 4.9 40.9 16.9

30-Sep-13 36.2 5.0 42.4 16.4

31-Mar-13 22.9 6.0 41.8 30.1

31-Mar-12 27.8 7.3 47.5 17.4

31-Mar-11 28.0 3.0 50.3 18.6

31-Mar-10 29.2 6.8 46.3 17.8

[1] Pledged Shares: Nil

Top Public Shareholders

No. Name of the Shareholder Shares

held (million) Holding

as % of total

1 Relay BV-USL Open Offer Escrow Demat Account 69.1 47.5

2 USL Benefit Trust 3.5 2.4

3 Morgan Stanley Asia (Singapore) Pte. 2.4 1.6

4 Merrill Lynch Capital Markets Espana Sa. S.V. 2.2 1.5

Total 77.1 53.1

58% 63%60%69%

179%166%

3 Yr 5 Yr

S&P BSE 100 CNX 100 USL

http://iias.in/NoticesandOutcomes.aspx?scrip=532432

http://www.iias.in/downloads/IIASreports/UnitedSpiritsLtd-CCM-16Jun14-IiASVotingRecommendations_20140605124639.pdf

http://www.iias.in/downloads/IIASreports/UnitedSpiritsLtd-EGM-18Mar14-IiASVotingRecommendations_20140310102748.pdf

http://www.iias.in/downloads/IIASreports/UnitedSpiritsLtd-AGM-24Sept13-IiASRecommendations_20130910114730.pdf

Voting Advisory


Category: Accounts

Resolution 1: Adoption of Financial Statements

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

Break up of write offs & provisions (Rs bn) Revenue by Geography

Parameter Standalone Consolidated Profit/(loss) from operation 2.7 -

W&M write off (43.2) (32.4) Provision for doubtful debt of prior period (6.5) (6.5) Provision for Principal Outstanding (3.3) (3.3) Profit/(Loss) before tax (50.3) (42.2)

Inner ring represents FY13 data Outer ring represents FY14 data

.

Leverage Profile

For the year ended 31-Mar 2012 2013 2014

CFO/EBITDA (x) 0.6 1.6 (1.0)

Exceptional items/total income (%)

(0.1) (0.1) (28.6)

Interest/Average Debt (%) 11.2 12.0 16.0

Contingent liabilities/net worth (%)

12.1 13.8 18.3

Receivables Days 66.7 75.0 78.8

Major Related Party Transactions (RPT) (Rs.bn) Year 2013 2014 Details Assessment

Receivables 56.8 74.3 Predominantly from promoter controlled entities

& subsidiaries -

Payables - 6.1 Payable to subsidiaries -

Liquidity

As on 31-Mar-2014 Rs.bn

Current Investments 1.2

Cash flow from operations (5.5)

Cash and cash equivalents 7.0

Audit Integrity Parameter Result

Name of Auditor BSR & Co. LLP

Audit Network KPMG

Tenure of auditor (yrs) 1

Tenure of audit partner (yrs) 1

Note: Investors should note that in FY14, the company announced a one-time write off / provisions to the extent of Rs. 53.0 bn: the more concerning issues were on account of possible diversion of funds and unrecoverable loans to UB group companies. Auditors have qualified the company’s financial statements for the year ended 31 March 2014.

80%

20%

76%

24%

India

Outside India

0.0

4.0

8.0

12.0

16.0

0.0

30.0

60.0

90.0

FY12 FY13 FY14

debt Debt/Net worth Debt/EBIDTA

Rs Bn Ratio

Voting Advisory


Category: Auditors

# Type Description of resolution IiAS

Recommendation Indicators See Legend

4 O Reappointment of BSR & Co. LLP as statutory auditors FOR

IiAS Assessment Parameters for Auditor Appointment

Parameter Comment Details

Is the tenure of the auditor firm more than 10 consecutive years? No

Has the audit partner been rotated in the last five years? Yes

Is the auditor remuneration commensurate with size of company? Yes

Discussion BSR & Co. LLP have been the statutory auditors of the company since 2013. Prior to that Walker, Chandiok & Co, was the statutory auditor of the company from 2011. We find that the two firms are not part of the same audit network. Accordingly, the proposed reappointment is line with the provisions of the Companies Act 2013 (refer box below). Box 1: Regulatory snapshot: Auditor appointment under Section 139 of the Companies Act 2013

IiAS recommends voting FOR the resolution.

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

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

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

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

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

Voting Advisory


Category: Board Appointments



2 O Reappointment of Dr. Vijay Mallya as director AGAINST G M R S T V

3 O To not fill up the vacancy on the retirement of Gilbert Ghostine as director

FOR/Noted

5 O Reappointment of Sudhakar Rao as an Independent Director for a period of 5 years

FOR

6 O Reappointment of D. Sivanandhan as an Independent Director for a period of 5 years

FOR

7 O Appointment of Dr. (Ms.) Indu Shahani as an Independent Director for a period of 5 years

FOR

8 O To not fill up the vacancy caused by the retirement of GN Bajpai as an Independent Director

FOR/Noted

9 O To not fill up the vacancy caused by the retirement of Arunkumar Ramanlal Gandhi as an Independent Director

FOR/Noted

10 O To not fill up the vacancy caused by the retirement of Vikramsingh Mehta as an Independent Director

FOR/Noted

11 O Appointment of Anand Kripalu as Director FOR

Table 1: Board Composition

Sl. No

Name of director

Occupation Age Tenure

(yrs)

% of board meetings attended

Other directorships

Pay (Rs.mn)

IiAS Recommendation

Executive Directors

1 Anand Kripalu[1] MD & CEO - <1 - 1 - FOR

2 PA Murali WTD - 1 100 9

Non-executive Non-Independent Directors

3 Dr. Vijay Mallya (P)

Chairman 59 30 78 8 0.16 AGAINST

4 Paul Steven Walsh (N)

Fmr. CEO, Diageo Plc.

- 1 25 0 0

5 Ravi Rajagopal (N)

Global Head Business Dev., Diageo Plc.

- 1 83 0 0

Non-executive Independent Directors

6 Sudhakar Rao Former Chief Secretary, Karnataka

63 1 67 5 0.29 FOR

7 D Sivanandhan Former DGP, Maharashtra

63 1 100 5 0.30 FOR

8 (Ms.) Dr. Indu Shahani[1]

Principal, HR College of Commerce & Economics

62 <1 - 4 - FOR

Seeking reappointment Seeking appointment (P) Denotes Promoter (N) Nominee of Diageo Plc. NA: Not

Applicable

[1] Appointed effective 14 August 2014

Voting Advisory


Table 2: Committee Composition1

Name of Committee

No of directors

Chairman % of

independence Compliance Remarks

Audit 7 Independent 71 Compliant Chairman and 67% should be independent

Remuneration 6 Independent 83 Non-Compliant

Investor Grievance 4 Independent 100 Compliant -

[1] as per IiAS Classification

IiAS Assessment Parameters for Board Appointments

Assessment Parameter Comment Regulatory Requirement

Is the chairman of the board an independent director? No Recommended

Is there a separation in the roles between the Chairman and MD/CEO? Yes Recommended

Proportion of independent directors on the board [1] 38% 50%

Proportion of non-executive directors on the board 75%

Is there at least one woman director on the board? Yes Required, At least 1

Does the company have a policy on the retirement age of directors? No

Does the company have a whistleblower policy? Yes Required

[1] As per IiAS classification

On the retirement of Gilebert Ghostine, GN Bajpai, Arunkumar Gandhi and Vikramsingh Mehta at the forthcoming AGM, independent directors will comprise 38% of the board composition. The board composition will not in accordance with the spirit of Clause 49 of SEBI’s Listing Agreement which requires 50% of the board to be independent if the chairman is an executive or a promoter.

The company needs to appoint additional independent director within six months from date of retirement to ensure compliance with clause 49.

Box 2: IiAS policy snapshot – minimum number of independent directors

Sudhakar Rao attended only four of the six meetings held since his appointment in July 2013. IiAS expects directors to attend 75% of the board meetings held in any financial year. Hence, even though he has attended only 67% of the board meetings in FY14, IiAS recommends voting FOR his reappointment. We will monitor his attendance going forward and may recommend voting AGAINST his reappointment in the future if the attendance levels fail to pick up. As Dr. Vijay Mallya has been declared as wilful defaulter by a couple of banks, his association with USL will impede the company’s ability to borrow from any bank. Therefore, IiAS recommends voting AGAINST his reappointment.

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

http://www.oracle.com/us/industries/financial-services/internal/corp-gov-report-jun2012-1690634.pdf

http://www.oracle.com/us/industries/financial-services/internal/corp-gov-report-jun2012-1690634.pdf

Voting Advisory


Director Profile Vijay Mallya

Qualification Ph.D in Business Administration

Work experience Over 34 years of experience

Chairman, USL

Other directorships

1. Kingfisher Airlines Ltd. (listed) 2. Bayer CropScience Ltd. (listed) 3. Mangalore Chemicals & Fertilizers Ltd. (listed) 4. Sanofi India Ltd. (listed) 5. United Breweries Ltd. (listed) 6. United Breweries (Holdings) Ltd. (listed) 7. Four Seasons Wines Ltd. 8. United Racing and Bloodstock Breeders Ltd.

Voting Advisory


Category: Remuneration



12 S Appointment of Anand Kripalu as Managing Director and Chief Executive Officer and fix the terms of remuneration

FOR

13 S Revise the terms of remuneration of PA Murali, Executive Director

AGAINST G M R S T V

Assessment Parameters for Managerial Remuneration

Assessment Parameter Comment[1] Comment[1] Details

Is the remuneration for promoter? No No

Is the current remuneration higher than peers? NA No

Is the proposed remuneration in line with industry peers? No No Refer Table 5

Is there a significant hike in remuneration from previous term/year? NA Yes

Is the remuneration commensurate with the growth in profits/operations?

NA No

Is the proposed resolution open-ended? Yes Yes

Is there a component of performance-linked pay in the proposed salary? Yes Yes Refer Table 3. 4

Does the person have the requisite qualifications? Yes Yes

Has the company disclosed a clear remuneration policy to the shareholders?

No No

[1] Anand Kriapalu as Managing Director and Chief Executive Officer [2] PA Murali as Executive Director

Discussion USL proposes to appoint Anand Kripalu as Managing Director and Chief Executive Officer for a period of five years effective 14 August 2014. He is a B. Tech from IIT, Chennai and MBA from IIM, Kolkata and has done an Advanced Management Program in Wharton Business School. He has over 30 years of experience in FMCG business. He was formerly President, India and South Asia, at Mondelez International. Table 3: Proposed remuneration of Anand Kripalu (Rs mn per annum)

Parameter Proposed

Basic Salary (range of 24.0 – 42.0) 31.6

Special Allowance (50% of basic) 15.8

Personal Allowance (range of 10.8 – 19.2) 11.4

Contribution Improvement Incentive Scheme (CRIIS) As per company rules

Long Term Incentive Plan (LTIP)

Perquisites 18.21

Housing (50% of basic as HRA or furnished/unfurnished residential accommodation) 15.8

Flexi Compensation Plan 0.2

National Pension Scheme Contribution (NPS – 10% of basic salary) 3.2

Retirement benefits 14.8

Provident fund (assumed @ 12% of Basic + special allowance) 5.7

Superannuation gratuity fund (assumed @ 15% of Basic + special allowance) 7.1

Gratuity (assumed @ 4.16% of Basic + special allowance) 2.0

Total 91.8

Source: Company filings, IiAS Research 1 In addition perquisites medical reimbursement, club fees, group mediclaim policy, group term life insurance, personal accident insurance, leave encashment, provision of car, cell phone, telephone

In case of inadequate or no profit in any financial year, he shall be paid the above as minimum remuneration.

Voting Advisory


In addition to the proposed remuneration of Rs 91.8 mn per annum, Anand Kripalu will be eligible for benefits under the Diageo Associated Companies Share Incentive Plan (“DACSIP” or the “Plan”). DACSIP is a discretionary benefit offered by the Diageo Group for the benefit of the employees of its associate companies. The plan is an incentive for the employees’ future performance and commitment to the goals of the Diageo Group. Shares purchased or received, any cash received and any gains obtained under the Plan are not part of salary for any purpose (except to any extent required by statute). There will be no cost to the company on account of Anand Kripalu’s eligibility under the DACSIP. DACSIP does not involve any shares of the company. In the 2013 AGM, shareholders had approved appointment and fixed the terms of remuneration of PA Murali as Executive Director effective 3 July 2013. USL proposes to revise the terms of remuneration effective 1 April 2014. Table 4: Previous terms and proposed terms of remuneration of PA Murali (Rs mn)

Parameter Paid for 9 Months FY14

As Approved in 2013 AGM

Proposed

Basic Salary 20.7

12.9 28.91

Special Allowance (50% of basic) 6.5 14.5 Personal Allowance (range of 4.8 – 9.6) 4.6 5.02

Performance Evaluation Payment 16.4

As a percentage of basic salary +

Special allowance

Withdrawn effective 1 July’14, merged with basic

and other linked components

Contribution Improvement Incentive Scheme (CRIIS) As per company rules

Long Term Incentive Plan (LTIP) Perquisites3 6.4 12.3 17.6 Housing (50% of basic as HRA or furnished/unfurnished residential accommodation)

7.8 (60% of basic) 14.5 (50% of basic)

Flexible Compensation Package (FCP)

i. FCP 1 - LTA 0.2 0.2

ii. FCP 2 - Car lease and lunch vouchers 2.8 -

iii. FCP 3 - Driver’s salary 0.2 -

National Pension Contribution (10% of basic) 1.3 2.9

Retirement benefits 4.3 5.7 12.9

Provident fund (assumed @ 12% of Basic + special allowance) 2.3 5.2

Superannuation gratuity fund (assumed @ 15% of Basic + special allowance)

2.9 6.5

Gratuity (assumed @ 4.16% of Basic + special allowance) 0.5 1.2

Special one time bonus - - 50.0

Total 47.8 42.0 128.9 1 Rs 1.87 mn per month from 1 April 2014 to 30 June 2014 and Rs 2.59 mn per month 1 July 2014 onwards in the range of Rs 1.8 – 3.0 mn per month 2 In the range of Rs 0.4 mn – 0.8 mn per month 3 In addition perquisites medical reimbursement, club fees, group mediclaim policy, group term life insurance, personal accident insurance, leave encashment, provision of car, cell phone, telephone

In case of inadequate or no profit in any financial year (including one-time bonus of Rs 50 mn paid in FY15), he shall be paid the above as minimum remuneration.

Voting Advisory


Table 5: Remuneration of peers Sr. No.

Company Name

Name of Director

Designation Remuneration

(Rs mn) Total income

(Rs bn) PAT

(Rs bn)

1

USL

Anand Kripalu MD & CEO 91.81

113.0 (44.9) 2 PA Murali WTD 128.92

3 Ashok Capoor Former MD 66.2

4 Hindustan Unilever

Sanjeev Mehta MD & CEO 61.5

298.0 39.5 5 Sridhar Ramamurthy CFO 48.3

6 Pradeep Banerjee WTD 43.4

7 ITC

YC Deveshwar Chairman &

CEO 112.8

343.4 87.9 8 Nakul Anand WTD 23.7

9 United Breweries

Kalyan Ganguly MD 67.3 42.6 2.3

10 H. Petrus Van Zon CFO 54.0

11 Dabur India

PD Narang WTD 64.5 72.3 9.2

12 Sunil Duggal WTD 64.3

13 Nestle India Etienne Benet MD 110.43 91.0 11.2

Source: Company filings 1 Proposed 2 proposed includes Rs 50 mn as one time bonus 3 Proposed effective 1 October 2013

IiAS recognizes that Anand Kripalu’s at Rs 91.8 mn per annum, is high compared to industry peers. If CRIIS and LTIP are paid, his remuneration will be higher. But, given the stage and performance of the business, IiAS recognizes that Anand Kripalu’s appointment is an important decision for the future performance of the company. IiAS also recognizes that the proposed remuneration is being set as minimum remuneration in case the company makes losses. IiAS expects that, with the change in management, disclosures and provisions in the nature (but not necessarily the same extent) of what has already occurred in 2013-14 will likely continue into the next year. Such write-offs and provisions which result in the company reporting losses have occurred for transactions that occurred well before Anand Kripalu’s appointment. PA Murali has been part of the UB group for over two decades. Prior to being appointed as Executive Director in 2013, he was USL’s Joint President and Chief Financial Officer. Therefore, PA Murali is also responsible for the intra-group transactions for which USL has taken write-offs and provided for in 2013-14. Given that context, IiAS recommends that PA Murali step down from his directorship on the board. The proposed remuneration of PA Murali is not in commensuration with the performance of the company, and is significantly higher than industry peers. Moreover, given that IiAS believes that PA Murali should step down from the board, a discussion on remuneration is moot. IiAS recommends voting FOR resolution #12 and AGAINST #13.

Voting Advisory


Category: Borrowings



14 S Approve the borrowing limit of Rs 100 bn AGAINST G M R S T V

Discussion At the AGM held in December 2006, the shareholders approved borrowing funds up to Rs. 100.0 bn by way of an ordinary resolution. In the ensuing AGM, the company is seeking shareholders’ approval for a borrowing limit of Rs 10.0 bn by a special resolution. As per Section 180(1) (c) of the Companies Act, 2013, a company will need shareholders’ approval to borrow money by way of special resolution, which in aggregate will exceed the sum of its paid up capital and free reserves.

Box 3: Regulation snapshot: Section 180(1) (c) of Companies Act, 2013 The board of the directors of a public company shall not borrow moneys, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company’s bankers in the ordinary course of business), in excess of the aggregate of the paid up capital and free reserves of the company unless it is approved by the shareholders.

For the purposes of this clause, the expression “temporary loans” means loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature.

Table 6: Capital structure and proposed borrowing limit of USL (as on 31 March 2014)

Parameter Amount (Rs. bn)

Paid-up Capital (a) 1.5

Free Reserves (b) (9.0)

Sum of paid up capital and free reserve (a+b) (7.5)

Proposed Borrowing limit 100.0

Source: Company filings, IiAS Research

Table 7: Borrowings and leverage ratios

For the year ended

Standalone Consolidated

Total Debt

Net worth EBITDA Debt/

Net worth Debt/

EBITDA Total Debt Net worth EBITDA

Debt/ Net worth

Debt/ EBITDA

Rs. Bn. Rs. Bn. Rs. Bn. (x) (x) Rs. Bn. Rs. Bn. Rs. Bn. (x) (x)

31-Mar-12 42.8 58.8 11.7 0.7 3.7 81.6 46.6 13.7 1.8 6.0

31-Mar-13 43.9 63,9 12.3 0.7 3.6 82.4 47.9 12.5 1.7 6.6

31-Mar-14 49.0 38.1 (0.01) 1.3 Neg. 83.1 30.3 5.5 2.7 15.2 Source: MoneyControl; Company Annual Reports

USL’s long term facilities and short term facilities are rated ‘ICRA BBB-/Watch Dev’ and ‘ICRA A3/ Watch Dev’: these ratings were put on rating watch following the announcement of USL‟s financial results for 2013-14 and the qualified opinion issued by the company’s statutory auditors in relation to the financial statements of the company. Further the presence of a wilful defaulter‟ on the company’s board may impact the company’s financial flexibility.

Voting Advisory


USL financial health is weak, with debt/equity of 1.7x and a negative debt/EBIDTA on a standalone basis. On a consolidated level, debt/equity stood at 2.7 x and debt/EBIDTA at 15.2x as on 31 March 2014. The proposed limit is twice the existing debt, considering the weak financial health of the company, IiAS believes that the company should consider having a lower and more manageable limit. IiAS recommends voting AGAINST the resolution.

Category: Contribution to charitable and other trusts



15 O Approve to contribute to bona fide charitable and other funds up to Rs 150 mn

AGAINST G M R S T V

Discussion USL proposes to contribute up to Rs 150 mn to bona fide charitable and other funds, this may exceed 5% of average net profit of three preceding financial years. As per Section 181, the Company can contribute up to 5% of net profit of the three preceding years to bona fide charitable trusts without shareholders’ approval. For FY15, the average net profit of the three preceding years is negative (Rs. 14.8 bn). Therefore, after approval the company can contribute to charitable and other trusts up to Rs 150 mn. Box 4: Regulatory snapshot Section 181: The Board of Directors of a company may contribute to bona fide charitable and other funds: provided that prior permission of the company in general meeting shall be required for such contribution in case any amount the aggregate of which, in any financial year, exceed five per cent of its average net profits for the three immediately preceding financial years.

Table 8: Net profit and average net profit for the last three years (Rs. mn)

Net profit/(loss) Mar-12 Mar-13 Mar-14 Average Standalone 3427.9 3208.0 (51028.2) (14797.4) Charity & Donations - - -

While there is no information of the quantum of donations made in the last three years, however, IiAS believes that the company should not make donations when the company is incurring losses. We also expect the company to disclose the information relating to charitable/other trusts such as name of trusts, activities these trusts carry out etc. IiAS recommends voting AGAINST the resolution.

Voting Advisory


Category: Commission for Non-Executive Directors

# Type Description of resolution IiAS Recommendation Indicators See Legend

16 S Approval of payment of commission up to one percent to Non-Executive Directors

FOR G M R S T V

Discussion

In the 2010 AGM, shareholders had approved payment of commission up to one percent of net profit to Non- Executive Directors for a period of five years commencing FY12. Pursuant to Section 197 (1) and 198 of the Companies Act, 2013, USL seeks shareholders’ approval to pay commission up-to one percent of the net profit of the company, (computed in the manner as referred in Section 198 of the Companies, 2013) to the non-executive directors. The commission will be in addition to the sitting fees paid for attending board and committee meetings. Box 5: Regulation Snapshot

The provisions contained in section 309 (4) of the Companies Act 1956 stipulate that a non-executive director may be paid remuneration by way of commission if the company by special resolution authorizes such payment; provided that the remuneration paid to such directors shall not exceed 1% of the net profits where the company has a managing director or whole- time director or 3% where there is no MD or whole-time director. A similar provision is available in the Companies Act, 2013, under section 197 (1) (ii).

Table 9: Details of commission paid to the non-executive directors (Rs. mn)

For the year ended 31 March 2012 2013 2014

Commission 55.6 56.0 0.0

Net profit as reported[1] 3427.9 3208.0 (51028.2)

Commission as a % of net profit 1.6 1.7 - 1 Commission is paid as per of net profit calculated as referred in Section 198 of the Companies, 2013. In-absence of this, reported net profit has been stated.

Commission to Non-Executive Directors for FY12 and FY13 has been around 1.7% of reported PAT. For FY14, no commission is proposed in absence of profit. IiAS would advise shareholders to ask for a cap on the absolute amount that is expected to be paid as commission. IiAS recommends voting FOR the resolution.

Voting Advisory


Legend

IiAS publishes voting recommendations on shareholder resolutions. These recommendations are non-binding in nature. Investors may have their own voting parameters which may, on aspects, differ from those of IiAS. On such occasions, investors should use these recommendations as a guiding tool. The data and regulations reviewed while arriving at a recommendation are disclosed to the investors. This gives the investor clarity regarding the basis for our recommendations. Please note that voting recommendations do not constitute advice to buy, sell or hold securities.

Indicator Meaning Description Common Examples

Governance Issue

This symbol is used for resolutions which indicate poor corporate governance practices or non-compliance with the regulatory provisions. Consequently, they are usually accompanied with an AGAINST recommendation. IiAS may also include measures/best practices which the company can adopt to improve its governance record.

Managerial remuneration, Auditor appointments

Minority shareholder impact

This symbol is used for resolutions which negatively affect the minority shareholders of the company. IiAS usually recommends voting AGAINST such resolutions as they benefit the controlling or a class of shareholders at the expense of others.

Preferential warrants, Differential rights

Moderate - High Risk

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

Any resolution

Strategic

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

Mergers, Amalgamations, Hive-offs, Entering new lines of business

Transparency Issue

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

Any resolution

Valuation

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

Increase in borrowings. Related party transactions, Excessive dilution

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Voting Advisory


Disclaimer

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publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be

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