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BSE: 500875|NSE: ITC|ISIN: INE154A01025|SECTOR: Cigarettes
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Directors Report Year End : Mar '17    Mar 16

The following sections outline your Company’s progress in pursuit of the ‘Triple Bottom Line’.

FINANCIAL PERFORMANCE

Your Company delivered a steady performance during the year in the backdrop of a persistently sluggish demand environment, continuing pressure on the legal cigarette industry due to the cumulative impact of steep increase in taxation and regulatory pressures, sharp hike in input costs and gestation costs relating to new products/categories especially in the non-cigarette FMCG segment. The operating environment was rendered particularly challenging in the second half of the year with the currency crunch impacting the incipient recovery in demand. The business environment in the Hotels industry also remained subdued, with only a marginal improvement in room rates reflecting the overhang of excess room inventory in key markets. The Paperboards, Paper and Packaging segment also had to contend with a weak demand and pricing environment.

Despite the challenging business environment as foretasted, Gross Revenue at Rs, 55001.69 crores grew by 6.6% primarily driven by an 8.0% growth in the non-cigarette FMCG segment, 10.8% growth in Agri Business and 5.1% growth in the Cigarettes segment. Profit Before Tax registered a growth of 7.4% to Rs, 15502.96 crores while Profit After Tax at Rs, 10200.90 crores increased by 9.4%. Total Comprehensive Income for the year stood at Rs, 10277.90 crores (previous year Rs, 9261.79 crores). Earnings Per Share for the year stood at Rs, 8.43 (previous year Rs, 7.74). Cash flows from Operations aggregated Rs, 15214.98 crores, compared to Rs, 14039.64 crores in the previous year.

Your Directors are pleased to recommend an Ordinary Dividend of Rs, 4.75 per share (previous year Ordinary Dividend of Rs, 4.33 per share and Special Dividend of Rs, 1.33 per share; adjusted for Bonus Issue) for the year ended 31st March, 2017. Total cash outflow in this regard will be Rs, 6944.65 crores including Dividend Distribution Tax of Rs, 1174.64 crores.

Your Directors approved a transfer of Rs, 1030.00 crores (previous year Rs, 990.00 crores) to General Reserve. Consequently, Retained Earnings as at 31st March, 2017 stands at Rs, 17576.81 crores (previous year Rs, 16589.89 crores).

VALUE-ADDED AND CONTRIBUTION TO EXCHEQUER

Over the last five years, the Value-Added by your Company, i.e. the value created by the economic activities of your Company and its employees, aggregated Rs, 188384 crores and grew at a compound annual rate (CAGR) of 11.8%. During this period, your Company’s Contribution to the Exchequer aggregated Rs, 138375 crores growing at 12.2% CAGR. It is pertinent to note that 75% of the incremental Value-Added during this period accrued to the Exchequer.

Including the share of dividends paid and retained earnings attributable to government owned institutions, your Company’s contribution to the Central and State Governments represents 80% of its Value-Added during the year.

Your Company remains amongst the Top three Indian corporate in the private sector in terms of Contribution to Exchequer.

FOREIGN EXCHANGE EARNINGS

Your Company continues to view foreign exchange earnings as a priority. All Businesses in the ITC portfolio are mandated to engage with overseas markets with a view to testing and demonstrating international competitiveness and seeking profitable opportunities for growth. Foreign exchange earnings of the ITC Group over the last ten years aggregated nearly US$ 7.0 billion, of which agri exports constituted 56%. Earnings from agri exports, which effectively link small farmers with international markets, are an indicator of your Company’s contribution to the rural economy.

During the financial year 2016-17, your Company and its subsidiaries earned Rs, 4609 crores in foreign exchange. The direct foreign exchange earned by your Company amounted to Rs, 3961 crores, mainly on account of exports of agri-commodities. Your Company’s expenditure in foreign currency amounted to Rs, 1828 crores, comprising purchase of raw materials, spares and other expenses of Rs, 1301 crores and import of capital goods at Rs, 527 crores.

PROFITS, DIVIDENDS AND RETAINED EARNINGS

(Rs, in Crores)

PROFITS

2017

2016

a) Profit Before Tax

15502.96

14434.07

b) Tax Expense

- Current Tax

5285.65

4896.06

- Deferred Tax

16.41

209.64

c) Profit for the year

10200.90

9328.37

d) Other Comprehensive Income

77.00

(66.58)

e) Total Comprehensive Income

10277.90

9261.79

STATEMENT OF RETAINED EARNINGS

a) At the beginning of the year

16589.89

14257.63

b) Add: Profit for the year

10200.90

9328.37

c) Add: Other Comprehensive Income (net of tax)

(24.92)

(35.21)

d) Add: Transfer from share option on exercise and lapse

14.58

7.64

e) Less: Dividends

- Ordinary Dividend of '' 6.50 (2016:

'' 6.25) per share. [Adjusted for Bonus Issue, Ordinary Dividend of'' 4.33 (2016 -'' 4.17) per share]

5230.68

5009.70

- Special Dividend of '' 2.00 (2016:

'' Nil) per share. [Adjusted for Bonus Issue, Special Dividend of '' 1.33 (2016 - '' Nil) per share]

1609.44

- Income tax on Dividend paid

1333.52

968.84

f) Less: Transfer to General Reserve

1030.00

990.00

g) At the end of the year

17576.81

16589.89

FMCG Cigarettes

The legal cigarette industry continues to be severely impacted due to the cumulative impact of steep increase in taxation, intense regulatory pressures and the tight liquidity conditions - especially in the wholesale channel - prevailing in the market during the latter half of the year. While legal cigarette industry volumes remain under pressure, illegal trade continues to grow unabated resulting in significant revenue loss to the Exchequer.

Over the last five years, the incidence of Excise Duty and VAT on cigarettes, at a per unit level, has gone up cumulatively by 131% and 157% respectively, thereby exerting severe pressure on legal industry volumes. Due to the steep hike in taxation over the past several years, at levels well above the rate of inflation, duty-paid cigarettes have become less affordable in the country, leading to a drop in volumes.

Year

Total Domestic Consumption including Illegal Cigarettes (Million Kgs)

Legal Cigarette Consumption (Million Kgs)

% Share of Legal Cigarettes in Total Tobacco Consumption

1981/82

406

86

21%

2009/10

499

73

15%

2014/15

562

62

11%

Although legal cigarettes account for only about 11% of total tobacco consumption in the country, they

Research indicates that a significant number of cigarette consumers in India are dual consumers, in that they also consume some other tobacco product. The high incidence of taxation and a discriminatory regulatory regime on cigarettes in India have over the years only served to divert consumption of tobacco to lightly taxed or tax-evaded tobacco products like bidis, chewing tobacco, guthka and illegal cigarettes. In fact, India’s per capita cigarette consumption is amongst the lowest in the world and is significantly lower in comparison to Russia, Japan, China, United States, and even neighboring countries like Pakistan and Bangladesh.

Thus, while tobacco consumption has been growing steadily in the country over the years, the share of legal cigarettes in total tobacco consumption has been on the decline as would be apparent from the figures given in the table below.

contribute more than 87% of tax revenue from the tobacco sector. The other types of tobacco products contribute barely 13% of tax revenue from the tobacco sector despite accounting for 89% of total tobacco consumption. Since these products are predominantly manufactured in a fragmented manner in the unorganized sector, there is rampant tax evasion. Moreover, most of these products escape regulatory oversight as well and tend to be manufactured in unhygienic conditions with ingredients of questionable quality. Consequently, most of these products are of inferior quality and their growing volumes undermine the health objectives of tobacco control.

Further, the high rates of tax on cigarettes also provide attractive tax arbitrage opportunities to unscrupulous players. Consequently, the illegal cigarette market, consisting of duty-evaded cigarettes manufactured within the country and offered to consumers at '' 1 / '' 2 per stick and the contraband international brands of cigarettes have been growing rapidly over the years. The illegal cigarette segment is the only segment that has been growing year on year and currently accounts for one-fifth of the market. According to an independent study conducted by Euro monitor International, India is today the 4th largest market for illegal cigarettes in the world. It is estimated that almost 68% of the tobacco consumed in the country remains outside the tax net on account of evasion1. The proliferation of these tax-evaded products have resulted in significant losses to the Exchequer, in excess of Rs, 9000 crores per annum according to an independent study conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI). Seizures of large quantum of smuggled cigarettes by enforcement agencies across the country over the past couple of years confirm the growing menace of illegal cigarette trade in the country.

A conducive policy framework, which effectively reduces the huge tax arbitrage opportunity enjoyed by

1 Report on the impact of current tax framework on the tobacco sector in India and suggestions for its improvements - 2014, by ASSOCHAM and KPMG.

unscrupulous players presently, is critical to arrest the unabated growth of illegal cigarette trade in the country.

As reported last year, the significant decline in legal cigarette volumes and the consequent reduction in the utilisation of Indian Flue-cured Virginia (FCV) tobacco has adversely impacted the livelihoods of over 45 million tobacco farmers, farm workers and others dependent on the tobacco sector. Besides, the soft demand for Indian FCV tobacco has prompted consecutive reductions in the authorised tobacco crop size in 2015-16 and 2016-17. This, in turn, has also led to lower exports of tobacco. Consequently, the acute distress of the tobacco farming community continues unabated, particularly in Andhra Pradesh with an estimated drop of over Rs, 900 crores in earnings in 2016-17. This distress is expected to be aggravated by the unprecedented drought in Andhra Pradesh during the year.

Unfortunately, the taxation policy of the country is largely cigarette centric and based on western models of tobacco taxation. This policy is not suitable for India since duty-paid cigarettes account for only about 11% of tobacco consumption in the country as compared to the global average of more than 90%. Your Company continues to engage with policy makers for a tobacco taxation policy that is non-discriminatory, helps combat the problem of illegal cigarettes and addresses the issues of all stakeholders, particularly tobacco farmers, Exchequer and consumers. Such a policy will not only help maximization of the revenue potential of tobacco even in a shrinking basket of tobacco consumption but also address the tobacco control and health objectives of the Government.

The Goods and Services Tax (GST) is expected to be implemented with effect from 1st July 2017.

The Government has enunciated the principle of revenue neutrality for all products including cigarettes while transitioning to the GST regime. In this context, as per the schedule of rates published pursuant to the GST Council’s meeting on 18th May 2017, cigarettes are likely to be taxed at the peak rate of 28%. Additionally, a GST Compensation Cess, comprising a 5% ad-valorem component and a specific component based on cigarette length, is likely to be imposed.

It may be noted that the GST Council is yet to finalize the GST rate applicable for bidis. It would be imperative to implement an appropriate taxation structure for bidis under the GST framework, rectifying the discriminatory treatment meted out to the legal cigarette industry under the present tax regime. A level playing field for the legal cigarette industry would go a long way in realizing the revenue potential of the tobacco sector and supporting the millions of livelihoods that are dependent on it.

In addition to the punitive taxation landscape, the legal cigarette industry in India continues to grapple with an increasingly stringent regulatory framework. As reported last year, the proposal for increasing the size of the Graphic Health Warnings (GHW) from 40% of the surface area on one side of the cigarette package to 85% of the surface area of both sides of the cigarette package with effect from 1st April 2015 was kept in abeyance pending the recommendations of the Parliamentary Committee on Subordinate Legislation (PCOSL), which had been entrusted with the responsibility of examining the issues consequent to introduction of a larger GHW. However, even before the PCOSL submitted their final report on the matter, the larger health warnings were notified for implementation with effect from 1st April 2016. In the interim, on 15th March, 2016 the PCOSL, in its final report recommended that the size of the GHW should be restricted to 50% on both sides of the cigarette package and not 85% as proposed by the Government. Pursuant to the order of the Honorable Supreme Court, the Honorable High Court of Karnataka has heard your

Companies and other writ petitions challenging the revised GHW and has reserved its judgment.

The 85% GHW is excessively large, extremely gruesome and unreasonable. There is no evidence that cigarette smoking would cause the diseases depicted in the pictures or that large GHW will lead to reduction in consumption. As reported last year, this inadequacy of evidence prompted an appeals court in USA to hold the US FDA’s proposal for introduction of similar GHW in that country as unconstitutional. It is pertinent to note that the global average size of GHW is only about 30% coverage of the principal display area. Further, over 100 countries representing 60% of the signatories to the Framework Convention on Tobacco Control (FCTC) have not adopted GHW2 . In fact, the three countries that account for about 51% of the world’s cigarette consumption viz. USA, Japan and China, have not adopted pictorial / graphic warnings and have prescribed only text-based warnings on cigarette packages. Moreover, several major tobacco producing countries, including the USA, are either not parties to the FCTC or are very recent signatories. These countries have taken into consideration the interests of their tobacco farmers in deciding whether or not to adopt large or excessive pictorial warnings.

The excessively large GHWs prevent consumers from making an informed choice in a competitive market, since they are denied adequate information about the brand on the cigarette packages. Your Company believes that such GHW also devalues the Intellectual Property Rights of brand owners and sub-optimizes the large investments made over the years in creating and nurturing the brands. Additionally, studies by independent market research agencies show that consumers tend to prefer the smuggled brands of international cigarettes which do not carry the GHWs mandated by Indian Laws. The absence of GHWs on packages of such contraband

2 Canadian Cancer Society - Cigarette Package Health Warnings, International Status Report, Fourth Edition, September 2014.

cigarettes makes consumers perceive them to be a ‘safer alternative’ notwithstanding the fact that the origins and age of such contraband stocks are not determinable. The absence of GHWs along with the significantly lower cost of these contraband cigarettes, due to reasons of tax evasion, only serve to accelerate the growth of the illegal cigarette segment.

The unintended consequences of the extant tobacco taxation and regulatory framework may be summarized as follows:

- Progressive decline in legal cigarette volumes in favor of lightly taxed and tax-evaded tobacco products resulting in sub-optimization of the revenue potential of the tobacco sector and significant loss to the Exchequer.

- About 68% of the tobacco consumption in the country remaining outside the tax net.

- Availability of illegal cigarettes and other tobacco products of dubious quality and hygiene to consumers at extremely affordable prices.

- Adverse impact on the livelihood of tobacco farmers and others dependent on tobacco for their livelihood.

- Fillip to the growth of illegal cigarettes in the absence of statutory GHW on smuggled international brands.

Your Company continues to represent to the Government for the implementation of an equitable, evidence based and pragmatic tobacco taxation and regulatory framework that cognizes for the economic imperatives of the country whilst, simultaneously, supporting the tobacco control objectives of the Government.

Despite the extremely challenging operating environment, your Company retained its leadership position in the industry and improved its standing in key competitive markets across the country. This demonstrates the resilience of your Company’s strong

portfolio of brands, superior execution of competitive strategies, relentless focus on value creation through innovation and deep consumer insights. Some of the strategic initiatives during the year include the launch of Gold Flake Kings Blue Tropical Switch, Classic Citric Burst, Classic Tangy Burst, Classic Fine Taste Plus Low Smell, American Club, Players Fruity Cool Flavour, Flake Mint Capsule, Silk Cut Mint Capsule and Navy Cut Mint Capsule.

The Business continued to make investments in manufacturing facilities towards sustaining its competitive advantage. State-of-the-art, on-line quality oversight systems and cutting-edge technology for innovative packaging were inducted during the year. Long Term Agreements with the unionized workforce were concluded successfully for the Kidderpore and Munger cigarette factories during the year. In addition to grant of patents in previous years, the ongoing initiatives in research and development have resulted in your Company being granted two more international patents during the year in respect of cigarettes.

It is a matter of deep satisfaction that the Business won several awards during the year for its focus on manufacturing excellence, commitment to sustainability and superior standards in Environment, Health and Safety (EHS) in line with your Company’s commitment to the ‘Triple Bottom Line’. The Ranjangaon cigarette factory was awarded ‘Platinum Rating’ at the India Manufacturing Excellence Awards 2016 (IMEA) by Frost & Sullivan, a global consulting firm. This highly acclaimed award acknowledges Indian manufacturing capability and its global competitiveness. The Munger cigarette factory was awarded ‘Eminent Supply Chain and Logistics Unit’ at CII National Supply Chain and Logistics Excellence Awards 2016 in recognition of its consistent achievement of benchmark performances in supply chain and logistics. The Business received industry recognition and several accolades for its commitment towards excellence in sustainability. With the Kidderpore cigarette factory receiving the Indian Green Building Council (IGBC) Platinum Rating under Green Factory Building certification during the year, all cigarette factories of your Company are today IGBC Green Platinum rated. The Bengaluru and Munger factories also received the ‘Excellent Energy Efficiency Unit’ award under the CII National Awards for Excellence in Energy Management 2016 whilst the Saharanpur cigarette factory received the first prize in FICCI Water Awards under ‘Industrial Water Use Efficiency’ category.

In recognition of the growing trend of consumers seeking alternative sources of nicotine like Electronic Vaping Devices (EVD), your Company expanded its EON brand of EVDs to several new markets during the year. The rechargeable variant, ‘EON Charge’, launched in the previous year was extended to several new markets and a disposable variant, ‘EON ZIP’, was launched during the year. Initial consumer response to this variant has been positive. The market for this category is, however, at an embryonic stage globally and, as reported last year, the regulatory oversight is still evolving. Accordingly, your Company remains engaged with policy makers for an opposite regulatory framework for this emerging category.

In the Nicotine Gum category, the Business extended the KwikNic brand to several new markets and has received encouraging response from consumers.

The operating environment for the legal cigarette industry, marked by a punitive taxation and discriminatory & increasingly stringent regulatory regime, will undoubtedly test the resilience of all legitimate players in the industry. Your Company is, however, confident that the trust reposed on it by consumers together with its strong brand portfolio and robust strategic initiatives - based on excellence in product quality and innovation in manufacturing and operations - will enable it to sustain its leadership position in the market.

Corporate Social Responsibility (CSR)

Your Company’s overarching aspiration to create significant and sustainable societal value is manifest in its CSR initiatives that embrace the most disadvantaged sections of society, especially in rural India, through economic empowerment based on grassroots capacity building. Towards this end, your Company adopted a comprehensive CSR policy in 2014-15 outlining programmes, projects and activities that your Company plans to undertake to create a significant positive impact on identified stakeholders. All these programmes fall within the purview of Schedule VII of the provisions of Section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014.

The key elements of your Company’s CSR interventions are to:

- Deepen engagement in identified core operational geographies to promote holistic development, designed to respond to the most prominent development challenges of your Company’s stakeholder groups.

- Strengthen capabilities of Non-Government Organizations (NGOs) / Community Based Organizations (CBOs) in all the project catchments for participatory planning, ownership and sustainability of interventions.

- Drive the Development agenda in a manner that benefits the poor and marginalized communities in our factory and agri-catchments thereby significantly improving Human Development Indices (HDI).

- Move beyond mere asset creation to behavior change through focus on demand generation for all interventions thereby enabling participation, contribution and asset creation for the community.

- Continue to strive for scale by leveraging government partnerships and accessing the most contemporary knowledge / technical know-how.

Your Company’s stakeholders are confronted with multi-dimensional and inter-related issues, at the core of which is the challenge of securing sustainable livelihoods. Accordingly, interventions under your Company’s Social Investments Programme (SIP) are appropriately designed to build their capacities and promote sustainable livelihoods.

The footprint of your Company’s projects is spread over 26 States / Union Territories covering 182 districts.

Social Forestry

Your Company’s pioneering afforestation initiative through the Social Forestry programme is currently spread across 19 districts in six States covering 2.55 lakh acres in 4,809 villages, impacting over 96,500 poor households. Together with your Company’s Farm Forestry programme, this initiative has greened over 6.20 lakh acres till date, and generated over 113 million person days of employment for rural households, including poor tribal and marginal farmers. Integral to the Social Forestry programme is the Agro-Forestry initiative, which currently extends to over 82,255 acres and ensures food, fodder and wood security. .

Besides enhancing farm level employment, generating incomes and increasing green cover, the Social and Farm Forestry initiative of your Company, through a multiplier effect, has led to improvement in pulpwood availability in Andhra Pradesh and Telangana. This initiative is also contributing meaningfully towards the nation’s Endeavour in creating additional carbon sinks for tackling climate change.

During the year, your Company’s Social Forestry programme was extended to West Tripura district and Malkangiri district (Odisha). In Tripura, your Company plans to promote bamboo plantations covering an area of 5,000 acres over the next five years, which would benefit around 2,000 families. In addition, your Company aims to promote 10,000 acres under Agro-Forestry in Malkangiri district of Odisha in order to provide livelihood opportunities to small and marginal farmers.

Soil and Moisture Conservation

The Soil and Moisture Conservation programme promotes the development and management of local water resources in moisture-stressed areas by facilitating village-based participation in planning and implementing such measures as well as building, reviving and maintaining water-harvesting structures. The coverage of this programme currently extends to 45 districts across 12 States. During the year, the area under watershed increased by 1.36 lakh acres taking the cumulative coverage area till 2016-17 to over 7.76 lakh acres. 2,101 water harvesting structures were built during the year, taking the total number of water harvesting structures to 10,099.

Biodiversity

The focus of the programme is on reviving ecosystem services provided to agriculture by nature, comprising natural regulation of pests, pollination, nutrient cycling, soil retention and genetic diversity, which have witnessed considerable erosion in recent decades. During the year, your Company’s biodiversity conservation initiative covered 2,060 acres, in seven States and 15 districts, taking the cumulative area under biodiversity conservation to 11,803 acres. While the conservation work is being carried out in select plots of village commons, this intervention significantly benefits agricultural activity in the vicinity of these plots through soil moisture retention, carbon sequestration and by acting as hosts to insects and birds.

Sustainable Agriculture

The Sustainable Agriculture programme attempts to de-risk farmers from erratic weather events through the promotion of climate smart agriculture premised on dissemination of relevant package of practices, adoption of appropriate mechanization and provision of institutional services. Spread in 60 districts across 16 States,

1,280 Farmer Field Schools (FFS) disseminated advanced agri-practices covering over 1.50 lakh acres under different crops. 326 Agri Business Centres (ABCs) delivered extension services, arranged agri-credit linkages and established collective input procurement and agricultural equipment on hire. In pursuit of your Company’s long-term sustainability objective of increasing soil organic carbon, a total of 3,931 compost units were constructed during the year taking the total number till date to 34,799 units. In addition, the ‘Choupal Pradarshan Khet’ programme promoted field demonstrations of improved seed varieties and effective production practices covering around 1.5 lakh acres and directly benefitting more than 69,000 farmers with a multiplier effect of 10X in terms of adoption by the farming community.

With the addition of 23 model villages during the year, the ‘Village Adoption Programme’ pioneered by your Company’s Leaf Tobacco Business presently covers 108 model villages. This initiative comprises several focused farm level interventions towards enhancing quality and productivity, promoting sustainable agriculture practices and community empowerment. The programme has resulted in generating significant economic surplus for the farming community including creating sustainable rural livelihoods.

Livestock Development

The programme provides an opportunity for farmers to convert an existing asset into a substantial supplementary income with the potential of growing into a sustainable source of livelihood. The programme provided extension services, including breeding, fodder propagation and training of farmers in order to increase their incomes through enhanced productivity of milch animals across 25 districts in seven States. During the year, 2.28 lakh Artificial Inseminations (AIs) were carried

out which led to the birth of 1.01 lakh cross-bred progeny. Cumulatively, the figures for AI and calving stand at 20.19 lakh and 6.72 lakh respectively.

In addition, pilot projects on indigenous breed promotion were initiated during the year in Madhya Pradesh in partnership with 13 existing gaushalas. Your Company has also implemented a project in Punjab to demonstrate to dairy farmers the commercial viability of having cattle farms with indigenous breeds with the intent of encouraging them to preserve indigenous cattle varieties.

Women Empowerment

This initiative is designed to provide a range of gainful entrepreneurial opportunities to poor women supported with financial assistance by way of loans and grants. Strong market linkages are attempted to ensure long-term sustainability.

Currently spread across eight districts in six States, the programme covers over 10,200 ultra-poor women who have been trained in entrepreneurial skills and provided with assets for income generation, taking the cumulative number of women impacted to 13,800. In addition, during the year 496 Self-Help Groups (SHGs) with 6,398 members were formed, in 11 states and 28 districts. Over 46,000 women were linked to individual bank accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY) and life insurance schemes under Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY).

Education

The Primary Education Programme aims to provide children from weaker sections of society access to education with focus on learning outcomes and retention in your Company’s factory catchment areas in 19 districts across 11 States. Over 49,000 children were covered during the year under this initiative comprising ‘Read India Plus’ programme and 210 Supplementary Learning Centres to mainstream out-of-school children into regular schools. Till date, these programmes have reached out to over 5.14 lakh children in aggregate.

In addition, 160 government primary schools were provided infrastructure support comprising boundary walls, additional classrooms, sanitation units, and furniture, taking the total number of government primary schools covered till date to 1,482. To ensure sustainable operations and maintenance of infrastructure provided, School Management Committees were strengthened in 276 schools and 215 Child Cabinets and Water and Sanitation (WATSAN) Committees were formed in various schools with the active involvement of students and teachers.

Skilling & Vocational Training

The Skilling & Vocational Training Programme focuses on providing market-linked skills to young people to make potential job-seekers industry-ready and employable in the services and manufacturing sectors. During the year, 12,338 youth were enrolled for training under different courses like Hospitality, Bedside Assistance, Electricals, Industrial Sewing Machines etc., offered as part of this programme. Of the total students enrolled, 11,344 (92% of enrolled) completed training and 8,084 (71% of trained) students were provided placement. The students trained included a healthy mix of women and SC/ST candidates. The initiative is spread across 29 districts covering 17 States and has enrolled over 43,700 youth cumulatively.

Your Company continues to work with the Welcomgroup Graduate School of Hotel Administration (WGSHA) together with Dr. TMA Pai Foundation to cater to the ever growing need for professionally trained human resources in the hospitality industry. WGSHA has been recently rated by CEO World Magazine amongst the top 50 hospitality schools in the world. In addition, since the inception of ITC Culinary Skills Training Centre, Chhindwara in 2014, 63 trainee chefs in five batches have successfully completed the 6-months programme wherein cooking skills are imparted to youth from the disadvantaged sections of society.

Health & Sanitation

Your Company continues to adopt a multi-pronged approach to improve public health. To promote a hygienic environment through prevention of open defecation and reduce incidence of water-borne diseases, 8,550 household toilets were constructed during the year in collaboration with the Government’s Swachh Bharat

Abhiyan. With this, a total of 23,979 low-cost sanitary units have been constructed so far in your Company’s catchment areas covering 22 districts in 14 States. In areas with water quality problems, 85 Reverse Osmosis plants have been installed providing safe drinking water to nearly 1 lakh rural households in Andhra Pradesh.

Efforts to enhance awareness on various health issues continued through ‘Swasthya Choupal’, your Company’s e-Choupal Rural Health initiative. A network of 300 women Village Health Champions (VHCs) across seven Districts in Uttar Pradesh and three in Madhya Pradesh reached out to nearly two lakh women, adolescent girls and school children during the year. The VHCs conducted over 5,000 village meetings and participated in over 2,000 group events apart from making door-to-door visits focusing on aspects like sanitation, menstrual and personal hygiene, family planning, diarrhoea prevention and nutrition.

Through your Company’s ‘Savlon Swasth India Mission’, a mix of audio-visual aids, games and practical training was leveraged to encourage healthy hygiene habits. More than nine lakh children from around 1,900 schools in 23 cities were covered during the year. Under the ‘First Cry Programme’, 60,000 mothers were made aware of hygienic practices in 1,500 hospitals.

Solid Waste Management

Your Company’s solid waste recycling programme, ‘WOW - Well Being Out of Waste’, helps in the creation of a clean and green environment through awareness and education of citizens on source segregation and recycling of dry waste. It also promotes sustainable livelihoods for ragpickers and waste collectors. During the year, in addition to Hyderabad, Coimbatore, Chennai and Bengaluru, the programme was expanded to Delhi, Tirupati and Muzaffarpur. The quantum of dry waste collected aggregated 33,982 MT from 417 wards. The programme covers over 64 lakh citizens, 25 lakh school children and 2,000 Corporates and creates sustainable livelihoods for 13,500 ragpickers and waste collectors by propagating source segregation and facilitating effective collection in collaboration with municipal corporations. Besides, the intervention has also created over 60 social entrepreneurs who are involved in maximizing value capture from the dry waste collected.

In addition, another programme on solid waste management under the Mission Sunehra Kal initiative has spread to 10 districts of seven states covering 61,200 households and collected 6,033 MT of waste during the year. This programme focuses on home composting in addition to recycling of dry waste. Under this programme, 4,161 MT wet waste was composted and 459 MT of dry waste recycled in 2016-17.

ITC Sangeet Research Academy

The ITC Sangeet Research Academy (ITC SRA), which was established in 1977, is a true embodiment of your Company’s sustained commitment to a priceless national heritage. Your Company’s pledge towards ensuring enduring excellence in Classical Music education has helped ITC SRA uphold the age-old ‘Guru-Shishya Parampara’ - a model that has otherwise begun fading away owing to lack of patronage. Although methods of music education are now changing with the advent of digitisation, exceptionally gifted students, carefully handpicked across India receive full scholarships to reside and pursue their music education at the Academy’s campus. This has helped young talent who have limited access to the newer modes of music education, to train under the tutelage of the country’s most distinguished stalwarts who are helping create the next generation of musical masters.

Forging Partnerships with NGOs

The substantial progress made by your Company’s Social Investments Programme in contributing to address some of the country’s key development challenges, has been possible in significant measure, due to your Company’s partnerships with globally renowned NGOs such as BAIF, DB Tech, DSC, FES, MYRADA, Pratham, SEWA Bharat, Outreach, WASH Institute and Water for People amongst others. These partnerships, which bring together the best-in-class management practices of your Company and the development experience and mobilization skills of NGOs, will continue to provide innovative grassroots solutions to some of India’s most challenging problems of development in the years to come.

CSR Expenditure

The annual report on Corporate Social Responsibility activities as required under Sections 134 and 135 of the Companies Act, 2013 read with Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 and Rule 9 of the Companies (Accounts) Rules, 2014 is provided in the Annexure forming part of this Report.

Environment, Health & Safety

Your Company’s Environment, Health & Safety (EHS) strategies are directed towards achieving the greenest and safest operations across all your Company’s units by optimizing natural resource usage and providing a safe and healthy workplace. Systemic efforts continue to be made towards natural resource conservation by continuously improving resource-use efficiencies and enhancing the positive environmental footprint following a life-cycle based approach.

Your Company’s focus on inculcating a green and safe culture is supported through the adoption of EHS standards that incorporate best international standards, codes and practices and verified through regular audits.

Your Company is addressing the critical area of climate change mitigation through several innovative and pioneering initiatives. These include continuous improvement in energy efficiency, enhancing the renewable energy portfolio, integrating green attributes into the built environment, better efficiency in material utilization, maximizing water use efficiencies and rain water harvesting, maximizing reuse and recycling of waste and utilizing post-consumer waste as raw material.

Energy Conservation and Renewable Energy

Your Company is well positioned to benefit from India-specific energy conservation and renewable energy promotion schemes such as Perform, Achieve and Trade (PAT) and Renewable Energy Certificates (RECs) promoted by the Government of India. As a responsible corporate citizen, your Company has made a commitment to reduce dependence on energy from fossil fuels and to achieve 50% of its total energy requirements from renewable sources by 2020.

Significant progress has been made in enhancing the renewable energy portfolio and during 2016-17 over 48% of your Company’s total energy requirements was met from carbon neutral fuels such as biomass, and wind and solar. Your Company has drawn up action plans based on a feasible balance of energy conservation and renewable energy investments to progressively move towards meeting the foretasted target.

Water Security

With water scarcity increasingly becoming an area of serious concern, your Company continues to focus on an integrated water management approach that includes water conservation and harvesting initiatives at its units - while also working towards meeting the water security needs of all stakeholders at the local watershed level. These include interventions to improve water use efficiencies by adopting latest technologies and increasing reuse and recycling practices within the fence while also working with farmers and other community members towards improving agricultural water use efficiencies. The supply side interventions include enhanced capture and storage of rainwater (in soil and storage ponds) and recharging aquifers. These initiatives, have resulted in the creation of rainwater harvesting potential that is over three times the net water consumption of your Company’s operations.

Greenhouse Gases and Carbon Sequestration

The greenhouse gas (GHG) inventory of your Company for the year 2016-17 compiled as per the ISO 14064 standard, has been assured, as in the earlier years, at the highest ‘Reasonable Level’ by a third party assurance provider. During the year, your Company was determined as having achieved ‘Leadership’ position in the Climate Change disclosure of CDP. The CDP Global Climate Change Report ‘Out of the Starting Blocks’, has commended your Company for decoupling emission growth with financial growth (having reduced 10% or more GHG emission over five years while simultaneously growing revenue by 10%).

Reaffirming your Company’s commitment to the ethos of ‘Responsible Luxury’, all luxury hotels of your Company are LEED® Platinum certified, making it the ‘greenest luxury hotel chain’ in the world. In order to continually reduce your Company’s energy footprint, green features are integrated in all new constructions and also incorporated in existing hotels, manufacturing units, warehouses and office complexes.

Your Company’s Social and Farm Forestry initiatives enabled sequestration of over twice the amount of Carbon Dioxide emitted by its operations. Besides mitigating the impact of increasing levels of GHG emissions in the atmosphere, these initiatives help greening degraded wasteland, prevent soil erosion, enhance organic matter content in soil and enable ground water recharge.

Waste Recycling

Your Company continues to make significant progress in reducing specific waste generation through constant monitoring and improvement of efficiencies in material utilization and also in achieving almost total recycling of waste generated in operations. In this way, your Company has prevented waste reaching landfills and the associated problems of soil and groundwater contamination and GHG emissions, all of which can impact public health. In the current year, your Company has achieved over 99% waste recycling, with the Paperboards and Specialty Papers Business, which accounts for 90% of the total waste generated in your Company, recycling 99.9% of the total waste generated by its operations. During the year, this Business also recycled around 1,15,074 tonnes of externally sourced post-consumer waste paper, thereby creating yet another positive environmental footprint.

Safety

Your Company’s commitment to provide a safe and healthy workplace to all has been reaffirmed by several national and international awards and certifications received by various units. Your Company’s approach is to institutionalize safety as a value-led concept with focus on inculcating a sense of ownership at all levels to drive behavioral change. In line with this approach, several of your Company’s operating units are progressively implementing behavioral-based safety initiatives and customized risk assessment programmes to strengthen their safety culture. Your Company continuously strives to improve on safety performance by incorporating best-in-class engineering standards in the design and project execution phase itself for all investments in the built environment, besides optimizing costs. During the year, the total number of on-site lost time accidents (LTA) reduced by 11.1% over the last year. Environment, Health & Safety audits before commissioning and during the operation of units are carried out to verify compliance with standards.

Promoting Thought Leadership in Sustainability

The ‘CII-ITC Centre of Excellence for Sustainable Development’, established by your Company in 2006 in collaboration with the Confederation of Indian Industry (CII), continues to focus on its Endeavour to promote sustainable business practices amongst Indian enterprises. The major highlights during the year include the 11th Sustainability Summit held on 14th-15th September 2016 in New Delhi. Some eminent personalities who addressed the delegates included Late Mr. Anil Madhav Dave, Minister for Environment, Forests and Climate Change, Mr. Piyush Goyal, Minister for Power, New & Renewable Energy, Coal and Mines, Mr. Amitabh Kant, CEO, NITI Aayog, Mr. Yuri Afanasiev, UN Resident Coordinator & UNDP Resident Representative in India.

The 11th CII-ITC Sustainability Awards were handed over by Mr. Prakash Javadekar, Union Minister of Human Resources to 23 winning companies for excellence in sustainable business in different categories. Your Company participated in the Business and Biodiversity Forum organized by Convention on Biological Diversity (CBD) COP 13, Mexico on 2nd - 3rd December 2016. The India Business & Biodiversity Initiative (IBBI) also released a case study publication ‘Reimagining Business for Biodiversity Enhancement: Case Studies from Indian Industry’ which featured your Company.

R&D, QUALITY AND PRODUCT DEVELOPMENT

Your Company continues to invest in a comprehensive Research & Development programme leveraging its world-class infrastructure, benchmarked processes, state-of-the-art technology and a business-focused R&D strategy.

ITC Life Sciences & Technology Centre (LSTC) has a mandate to develop unique sources of competitive advantage and build future readiness by harnessing contemporary advances in several relevant areas of science and technology, and blending the same with classical concepts of product development and leveraging cross-business synergies. This challenging task of driving science-led product innovation has been carefully addressed by appropriately identifying the required set of core competency areas of science. LSTC has evolved over the years and is presently resourced with nearly 350 highly qualified scientists, world-class measurement systems and state-of-the-art facilities to conduct experimental research, rapid prototyping and process development. Several Centres of Excellence have been established over the past few years in these areas in LSTC. In addition, a number of areas centred around these capabilities have secured global quality certifications of the highest order.

The Agrisciences R&D team continues to engage in evaluating and introducing several germplasm lines of identified crops including Casuarina and Eucalyptus to increase the genetic and trait diversities in these species. This intervention would facilitate the development of new varieties with higher yields, better quality and other traits relevant for your Company’s Businesses.

LSTC continues to evaluate and build research collaborations with globally recognized Centres of Excellence to remain contemporary and fast-track its journey towards demonstrating multiple ‘proofs of concept’. These collaborations, covering identified species, are designed in a manner that enables your Company in gaining fundamental insights into several technical aspects of plant breeding and genetics and the influence of agro-climatic conditions on the growth of these species. Such interventions will accelerate LSTC’s efforts in creating future generations of these crops with greater genetic and trait diversities leading to significant benefits for your Company’s Businesses. Further, these outcomes have a strong potential to contribute towards augmenting the nation’s ecological capital and biodiversity as well. Several ‘proof of concept’ studies have been accomplished at laboratory scale which are being advanced to large scale field trials in multiple locations. These initiatives are expected to produce significant business impact in the years to come. The Agrisciences team continues to focus on delivering world-class solutions using contemporary technologies in crops such as wheat, soya, potato and rice.

Recognising the unique construct of your Company in terms of its strong presence in Agri, Branded Packaged Foods and Personal Care Product Businesses, a convergence of R&D capabilities is being leveraged to deliver future products aimed at nutrition, health and well-being. Advances in biosciences are creating a convergence of these areas and it is likely that several future developments in these Businesses and their products are heavily influenced by this trend. In this context, LSTC has created a Biosciences R&D team to design and develop several long-term research platforms evolving multi-generation product concepts and associated claims that are fully backed by scientific evidence for the Branded Packaged Foods and Personal Care Products Businesses. Multiple value propositions have been identified in the area of functional foods, which are being progressed to products of the future with strong scientifically validated claims via clinical trials. Similar advances have been made in the area of skin care and hair care.

LSTC has a clear vision and road map for long-term R&D, backed by a well-crafted Intellectual Property strategy. With scale, speed, science and sustainability considerations, LSTC is poised to deliver long-term competitive advantage for your Company.

In line with your Company’s relentless focus on operational excellence and quality, each Business is mandated to continuously innovate on processes and systems to enhance their competitive position. During the year, your Company’s Hotels Business leveraged its ‘Lean’ and ‘Six Sigma’ programmes to improve business process efficiencies. This will further enhance capability to create superior customer value through a service excellence framework. The Paperboards, Paper & Packaging Businesses continued to pursue ‘Total Productive Maintenance’ (TPM) programmes in all units, resulting in substantial cost savings and productivity improvements.

All manufacturing units of your Company have ISO quality certification. All manufacturing units of the

Branded Packaged Foods Businesses (including contract manufacturing units) and hotels operate in compliance with stringent food safety and quality standards. Almost all Company owned units / hotels and contract manufacturing units of the Branded Packaged Foods Businesses are certified by an accredited third party in accordance with ‘Hazard Analysis Critical Control Points’ (HACCP) / ISO 22000 standards. Additionally, the quality of all FMCG products of your Company is regularly monitored through ‘Product Quality Ratings Systems’ (PQRS).

PROCEEDINGS INITIATED BY THE ENFORCEMENT DIRECTORATE

In the proceedings initiated by the Enforcement Directorate in 1997, in respect of some of the show cause memoranda issued by the Directorate, after hearing arguments on behalf of your Company, the appropriate authority has passed orders in favour of your Company, and dropped those memoranda.

In respect of some of the remaining memoranda, your Company, has filed writ petitions before the Honorable Calcutta High Court challenging their validity. These petitions are pending. Meanwhile, some of the prosecutions launched by the Enforcement Directorate have been quashed by the Honorable Calcutta High Court while others are pending.

TREASURY OPERATIONS

During the year, your Company’s treasury operations continued to focus on deployment of surplus liquidity and management of foreign exchange exposures within a well-defined risk management framework.

During the year, Reserve Bank of India (RBI), reduced policy interest rates by 50bps. This coupled with the surplus banking system liquidity, post demonetization of Specified Bank Notes, led to decline in market interest rates. Consolidation in Fiscal / Current Account Deficits and persistent decline in headline inflation during the year also contributed to the positive sentiment in Debt Markets.

All investment decisions relating to deployment of surplus liquidity continued to be guided by the tenets of Safety, Liquidity and Return. Proactive rebalancing of portfolio mix during the year in line with the evolving interest rate environment helped improve treasury performance. Your Company’s risk management processes ensured that all deployments were made with proper evaluation of underlying risk while remaining focused on capturing market opportunities.

The foreign exchange market remained stable for most part of the year barring periods of heightened volatility induced by global / domestic events such as the surprise outcome of UK referendum to exit the European Union, escalation of geo-political tensions with Pakistan,

US Presidential elections and demonetization of Specified Bank Notes. These events led to depreciation of the Indian Rupee (INR) to a lifetime low of '' 68.86 per US$ in November 2016. However, the INR recovered significantly in February and March 2017 to close the year at '' 64.84 per US$. During the year, INR outperformed most of its emerging market peers and appreciated by 2.1% vs. the US Dollar on the back of stability in domestic macro-economic and political environment and sharp increase in capital inflows mainly from foreign institutional investors. In this scenario, your Company adopted a proactive forex exposure management strategy, which included the use of foreign exchange forward contracts and plain vanilla options, to protect business margins and reduce risks / costs.

As in earlier years, commensurate with the large size of the temporary surplus liquidity under management, treasury operations continue to be supported by appropriate control mechanisms, including independent check of 100% of transactions, by your Company’s Internal Audit department.

DEPOSITS

Your Company’s erstwhile Public Deposit Scheme closed in the year 2000. As at 31st March, 2017, there were no deposits due for repayment except in respect of two deposit holders totaling to '' 20,000/- which have been withheld on the directives received from the government agencies.

There was no failure to make repayments of Fixed Deposits on maturity and the interest due thereon in terms of the conditions of your Company’s erstwhile Schemes.

Your Company has not accepted any deposit from the public / members under Section 73 of the Companies Act, 2013 read with the Companies (Acceptance of Deposits) Rules, 2014 during the year.

DIRECTORS Changes in Directors

Mr. Yogesh Chander Deveshwar shed his executive role on completion of term as Chairman and Wholetime Director on 4th February, 2017. Mr. Deveshwar’s period of Executive Chairmanship witnessed transformation of your Company into one of India’s most admired and valuable corporations. His vision to make your Company an engine of growth for the Indian economy, keeping societal value creation as an integral part of business purpose, has led to the creation of multiple drivers of growth, world-class Indian Brands and recognition of your Company as a global exemplar in Sustainability. Your Directors would like to place on record their deep appreciation for Mr. Deveshwar’s invaluable contribution in the transformation of your Company under his leadership as Executive Chairman.

It may be recalled that Mr. Deveshwar, at the request of the Nomination & Compensation Committee and the Board of Directors of your Company (‘the Board’), recognizing the need for orderly transition in a company of ITC’s size and complexity, agreed to continue as Chairman in non-executive capacity and also play the role of Mentor to the new executive management.

Mr. Deveshwar was appointed Non-Executive Director, not liable to retire by rotation, and Chairman of the Company for a period of three years with effect from 5th February, 2017, as approved by the Members at the 105th Annual General Meeting (‘AGM’) held on 22nd July, 2016.

On the recommendation of the Nomination & Compensation Committee, the Board at the meeting held on 27th January, 2017 appointed Mr. Sanjiv Puri, Whole time Director, also as Chief Executive Officer of the Company with effect from 5th February, 2017 to take independent charge of the executive leadership of your Company.

Mr. Robert Earl Lerwill [representing Tobacco Manufacturers (India) Limited (‘TMI’), a subsidiary of British American Tobacco p.l.c.] resigned from the Board

on medical grounds with effect from 22nd June, 2016. Mr. Angara Venkata Girija Kumar [representing General Insurers’ (Public Sector) Association of India (‘GIPSA’)], on completion of his term, ceased to be Non-Executive Director of your Company on conclusion of the 105th AGM. Mr. Krishnamoorthy Vaidyanath, on completion of his term, also ceased to be Non-Executive Director of your Company with effect from close of business on 28th July, 2016. Mr. Anil Baijal ceased to be an Independent Director of your Company with effect from 30th December, 2016, consequent to his appointment as Lt. Governor of Delhi. Your Directors would like to record their appreciation for the services rendered by Messrs. Lerwill, Girija Kumar, Vaidyanath and Baijal.

On the recommendation of the Nomination & Compensation Committee, Mr. Zafir Alam (representing GIPSA), Mr. David Robert Simpson (representing TMI), and Mr. Ashok Malik (representing Specified Undertaking of the Unit Trust of India), were appointed by the Board as Additional Non-Executive Directors with effect from 26th October, 2016, 27th January, 2017 and 11th April, 2017, respectively.

By virtue of the provisions of Article 96 of the Articles of Association of your Company and Section 161 of the Companies Act, 2013 (‘the Act’), Messrs. Alam, Simpson and Malik will vacate office at the ensuing AGM of your Company.

On the recommendation of the Nomination & Compensation Committee, your Board at the meeting held on 26th May, 2017 recommended for the approval of the Members, the appointment of Messrs. Alam, Simpson and Malik as Non-Executive Directors of your Company, liable to retire by rotation.

Requisite Notices under Section 160 of the Act have been received for the appointment of Messrs. Alam, Simpson and Malik, who have filed their consents to act as Directors of the Company, if appointed.

Appropriate resolutions seeking your approval to the aforesaid appointments are appearing in the Notice convening the 106th AGM of your Company.

Retirement by Rotation

In accordance with the provisions of Section 152 of the Act read with Article 91 of the Articles of Association of

the Company, Mr. Suryakant Balkrishna Mainak will retire by rotation at the ensuing AGM and being eligible, offers himself for re-election. Your Board has recommended his re-election.

Number of Board Meetings

Six meetings of the Board were held during the year ended 31st March, 2017.

Attributes, Qualifications & Independence of Directors and their Appointment

As reported in earlier years, criteria for determining qualifications, positive attributes and independence of Directors were approved by the Nomination & Compensation Committee pursuant to the Act and the Rules there under, in respect of Directors, including Independent Directors. The Corporate Governance Policy also, inter alia, requires that Non-Executive Directors be drawn from amongst eminent professionals with experience in business / finance / law / public administration & enterprises. The Board Diversity Policy of the Company requires the Board to have balance of skills, experience and diversity of perspectives appropriate to the Company. The Articles of Association of the Company provide that the strength of the Board shall not be fewer than five nor more than eighteen.

Directors are appointed / re-appointed with the approval of the Members for a period of three to five years or a shorter duration, in accordance with retirement guidelines and as may be determined by the Board from time to time. All Directors, other than Independent Directors, are liable to retire by rotation, unless otherwise approved by the Members. One-third of the Directors who are liable to retire by rotation, retire every year and are eligible for re-election.

The Independent Directors of your Company have confirmed that they meet the criteria of independence as prescribed under Section 149 of the Act and Regulation 16 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

The Company’s Policy on remuneration of Directors, Key Managerial Personnel and other employees is provided under the section ‘Report on Corporate Governance’ in the Report and Accounts.

Board Evaluation

As reported in earlier years, the Policy on Board evaluation, evaluation of Board Committees’ functioning and individual Director evaluation was approved by the Nomination & Compensation Committee. In keeping with ITC’s belief that it is the collective effectiveness of the Board that impacts Company performance, the primary evaluation platform is that of collective performance of the Board as a whole. Board performance is assessed against the role and responsibilities of the Board as provided in the Act and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 read with the Company’s Governance Policy. The parameters for Board performance evaluation have been derived from the Board’s core role of trusteeship to protect and enhance shareholder value as well as fulfill expectations of other stakeholders through strategic supervision of the Company. Evaluation of functioning of Board Committees is based on discussions amongst Committee members and shared by the respective Committee Chairman with the Board. Individual Directors are evaluated in the context of the role played by each Director as a member of the Board at its meetings, in assisting the Board in realizing its role of strategic supervision of the functioning of the Company in pursuit of its purpose and goals.

While the Board evaluated its performance against the parameters laid down by the Nomination & Compensation Committee, the evaluation of individual Directors was carried out anonymously in order to ensure objectivity. Reports on functioning of Committees were placed before the Board by the Committee Chairmen.

AUDIT COMMITTEE & AUDITORS

The composition of the Audit Committee is provided under the section ‘Board of Directors and Committees’ in the Report and Accounts.

Statutory Auditors

The Auditors, Messrs. Deloitte Haskins & Sells, Chartered Accountants (‘DHS’), were appointed with your approval at the 103rd AGM to hold such office till the conclusion of the 108th AGM. On the recommendation of the Audit Committee and pursuant to Section 139 of the Act, the Board recommended for the ratification of the Members, the appointment of DHS from the conclusion of the ensuing AGM till the conclusion of the 107th AGM. On the recommendation of the Audit Committee and pursuant to Section 142 of the Act, the Board also recommended for the approval of the Members, the remuneration of DHS for the financial year 2017-18. Appropriate resolution for the purpose is appearing in the Notice convening the 106th AGM of the Company.

Cost Auditors

Your Board, as recommended by the Audit Committee, appointed for the financial year 2017-18:

(i) Mr. P. Raju Iyer, Cost Accountant, for audit of Cost Records maintained by the Company in respect of ‘Paper and Paperboard’ and ‘Nicotine Gum’ products.

(ii) Messrs. Shome & Banerjee, Cost Accountants, for audit of Cost Records maintained in respect of all applicable products of the Company, other than ‘Paper and Paperboard’ and ‘Nicotine Gum’ products.

Pursuant to Section 148 of the Act read with the Companies (Audit and Auditors) Rules, 2014, appropriate resolutions seeking your ratification to the remuneration of the said Cost Auditors are appearing in the Notice convening the 106th AGM of the Company.

Secretarial Auditor

Your Board appointed Messrs. S. M. Gupta & Co., Company Secretaries, to conduct secretarial audit of the Company for the financial year ended 31st March, 2017. The report of Messrs. S. M. Gupta & Co. is provided in the Annexure forming part of this Report, pursuant to Section 204 of the Act.

CHANGES IN SHARE CAPITAL

During the year, the following changes were effected in the Share Capital of your Company:-

a) Increase in Authorized Share Capital

The Authorized Share Capital of your Company was increased from Rs, 1000 crores to Rs, 2000 crores divided into 2000,00,00,000 Ordinary Shares of Rs, 1/- each, with effect from 27th June, 2016.

b) Issue of Bonus Shares

402,66,57,100 Ordinary Shares of Rs, 1/- each, fully paid-up, were issued and allotted as Bonus Shares, in the proportion of 1 (One) Bonus Share of Rs, 1/each for every existing 2 (Two) fully paid-up Ordinary Shares of Rs, 1/- each held on 4th July, 2016, being the Record Date determined by the Board for the purpose. The Bonus Shares were allotted on 7th July, 2016.

c) Issue of Shares under ITC Employee Stock Option Schemes 7,35,18,980 Ordinary Shares of Rs, 1/- each, fully paid-up, were issued and allotted during the year upon exercise of 73,51,898 Options under the Company’s Employee Stock Option Schemes.

Consequently, the Issued and Subscribed Share Capital of your Company, as on 31st March, 2017, stands increased to Rs, 1214,73,83,071/- divided into 1214,73,83,071 Ordinary Shares of Rs, 1/- each.

The Ordinary Shares issued during the year rank pari passu with the existing Ordinary Shares of your Company.

EMPLOYEE STOCK OPTION SCHEMES

Disclosures with respect to Stock Options, as required under Regulation 14 of the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 (‘the Regulations’), are available in the Notes to the Financial Statements and can also be accessed on the Company’s corporate website ‘www.itcportal.com’ under the section ‘Shareholder Value’. During the year, there has not been any material change in the Company’s Employee Stock Option Schemes.

Your Company’s Auditors, Messrs. Deloitte Haskins & Sells, have certified that the Employee Stock Option Schemes of the Company have been implemented in accordance with the Regulations and the resolutions passed by the Members in this regard.

INVESTOR SERVICE CENTRE

The Investor Service Centre of your Company (‘ISC’), registered with Securities and Exchange Board of India as Category II Share Transfer Agent for providing in-house share registration and related services, maintains its position as an exemplar in investor servicing. ISC with its experienced team of professionals, supported by contemporary infrastructure, continues to provide best-in-class services to the investors.

During the year, the ISO 9001:2008 Quality Management System certification for investor servicing by ISC was renewed by Messrs. Det Norske Veritas, accredited agency for ISO certification, up to 15th September, 2018. ISC achieved the highest ‘Level 5’ rating for the eighth consecutive year - a testimony to the excellence achieved by ISC in providing quality investor services.

RELATED PARTY TRANSACTIONS

All contracts or arrangements entered into by the Company with its related parties during the financial year were in accordance with the provisions of the Companies Act, 2013 and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. All such contracts or arrangements have been approved by the Audit Committee. No material contracts or arrangements with related parties were entered into during the year under review. Further, the prescribed details of related party transactions of the Company in Form No. AOC-2, in terms of Section 134 of the Act read with Rule 8 of the Companies (Accounts) Rules, 2014 is given in the Annexure to this Report.

DIRECTORS’ RESPONSIBILITY STATEMENT

As required under Section 134 of the Companies Act, 2013, your Directors confirm having:

a) followed in the preparation of the Annual Accounts, the applicable accounting standards with proper explanation relating to material departures if any;

b) selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of your Company at the end of the financial year and of the profit of your Company for that period;

c) taken proper and sufficient care 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;

d) prepared the Annual Accounts on a going concern basis;

e) laid down internal financial controls to be followed by your Company and that such internal financial controls were adequate and operating effectively; and

f) devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

CONSOLIDATED FINANCIAL STATEMENTS

Your Company’s Board of Directors is responsible for the preparation of the consolidated financial statements of your Company & its Subsidiaries (‘the Group’), Associates and Joint Venture entities, in terms of the requirements of the Companies Act, 2013 and in accordance with the accounting principles generally accepted in India, including the Indian Accounting Standards specified under Section 133 of the Act.

The respective Board of Directors of the companies included in the Group and of its associates and joint venture entities are responsible for maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets and for preventing and detecting frauds and other irregularities; the selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and the design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error, which have been used for the purpose of preparation of the consolidated financial statements by the Directors of your Company, as foretasted.

OTHER INFORMATION Compliance with conditions of Corporate Governance

The certificate from your Company’s Auditors, Messrs. Deloitte Haskins & Sells, confirming compliance of the conditions of Corporate Governance as stipulated under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, is annexed.

Compliance with requirements relating to downstream investments

Your Company’s Auditors, Messrs. Deloitte Haskins & Sells, have certified that the Company and its subsidiaries are in compliance with the requirements relating to downstream investment as laid down in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India)

(Ninth Amendment) Regulations, 2013 and other applicable FEMA Regulations.

Going Concern status

There is no significant or material order passed during the year by any regulator, court or tribunal impacting the going concern status of the Company or its future operations.

Extract of Annual Return

The information required under Section 134 of the Act read with Rule 12 of the Companies (Management and Administration) Rules, 2014, is provided in the Annexure forming part of this Report.

Particulars of loans, guarantees or investments

Details of Loans, Guarantees and Investments covered under the provisions of Section 186 of the Companies Act, 2013 are provided in Notes 4, 5, 6, 9 and 27 (v) (a) (ii) to the Financial Statements.

Particulars relating to Conservation of Energy and Technology Absorption

Particulars as required under Section 134 of the Companies Act, 2013 relating to Conservation of Energy and Technology Absorption are also provided in the Annexure to this Report.

Employees

The total number of employees as on 31st March, 2017 stood at 25,883.

There were 59 employees, who were employed throughout the year and were in receipt of remuneration aggregating Rs, 102 lakhs or more or were employed for part of the year and were in receipt of remuneration aggregating Rs, 8.5 lakhs per month or more during the financial year ended 31st March, 2017. The information required under Section 197(12) of the Companies Act, 2013 and the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is provided in the Annexure forming part of this Report.

Dividend Distribution Policy

The Dividend Distribution Policy of the Company, adopted by your Board pursuant to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, is provided in the Annexure forming part of this Report.

FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements that involve risks and uncertainties. When used in this Report, the words ‘anticipate’, ‘believe’, ‘estimate’, ‘expect’, ‘intend’, ‘will’ and other similar expressions as they relate to the Company and/or its Businesses are intended to identify such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Actual results, performances or achievements could differ materially from those expressed or implied in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of their dates. This Report should be read in conjunction with the financial statements included herein and the notes thereto.

CONCLUSION

Inspired by the super ordinate purpose to serve national priorities, your Company redefined its Vision two decades ago to transform itself into a vibrant engine of growth that would make a substantial contribution to the Indian economy, whilst rewarding shareholders by creating growing value for the Indian society.

Over the last 21 years, your Company has created multiple drivers of growth by developing a portfolio of world-class businesses across all sectors of the national economy spanning agriculture, manufacturing and services. Your Company ranks amongst the top three in the private sector in terms of Contribution to the Exchequer. Over the last 21 years, your Company’s Value Addition aggregated Rs, 3.6 lakh crores of which nearly 75% accrued to the Exchequer at the Central and State levels. During this period, your Company’s Gross Revenue and Post-tax profit have recorded an impressive compound annual growth of 12.0% and 19.1% respectively. Total Shareholder Returns, measured in terms of increase in market capitalization and dividends, have grown at a compound rate of 23.6% per annum during this period, placing your Company amongst the foremost in the country in terms of efficiency of servicing financial capital.

Your Company’s non-cigarette businesses have grown over 18-fold since 1996 and presently constitute 58% of net segment revenue. In aggregate, the non-cigarette businesses account for nearly 80% of your Company’s operating capital employed, about 90% of the employee base and over 80% of annual investments.

Your Company today, is the leading FMCG marketer in India, a pre-eminent hotel chain and a globally acclaimed icon in green hoteliering, the clear market leader in the Indian Paperboard and Packaging industry, a pioneering trailblazer in farmer and rural empowerment through its Agribusiness and a global exemplar in sustainable business practices. Additionally, its wholly-owned

subsidiary, ITC Infotech India Limited, is a player of promise in the field of Information Technology.

Aligned with the Government’s Make in India Vision, your Company is building national assets in the manufacturing and tourism sector. As stated earlier in this Report, around 20 world-class Integrated Consumer Manufacturing & Logistics facilities are being built to deliver sustainable competitive advantage to your Company’s FMCG businesses. In total, 65 projects with an outlay of Rs, 25,000 crores are in various stages of implementation / planning across the length and breadth of the country facilitating regional and national economic development. Recognizing that tomorrow’s world will belong to those who create, own and nurture intellectual capital, your Company continues to invest in augmenting the capability of its globally benchmarked Life Sciences and Technology Centre to ensure that its Businesses are future-ready and contribute to building intellectual property assets for the nation.

Your Company’s Board and employees are inspired by the Vision of sustaining ITC’s position as one of India’s most admired and valuable companies, creating enduring value for all stakeholders, including the shareholders and the Indian society. The vision of enlarging your Company’s contribution to the Indian economy is driven by its ‘Let’s Put India First’ credo anchored on the core values of Trusteeship, Transparency, Empowerment, Accountability and Ethical Citizenship, which are the cornerstones of ITC’s Corporate Governance philosophy.

Inspired by this Vision, driven by Values and powered by internal Vitality, your Directors and employees look forward to the future with confidence and stand committed to creating an even brighter future for all stakeholders.

On behalf of the Board

26th May 2017 Y C. DEVESHWAR

Chairman

Kolakta S. PURI Chief Executive Officer & Director

India R. TANDON Director & Chief Financial Officer

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