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REPORT OF THE DIRECTORS & Management Discussion and AnalysisFor the Financial Year Ended 31st March, 2002

Your Directors submit their Report for the financialyear ended 31st March, 2002.

SOCIO-ECONOMIC ENVIRONMENT

The year under review witnessed a significantslowdown in the global economy. Output growthdropped to 2.4% against 4.7% in 2000. Similarly,the rate of growth in world trade declined sharplyto just 1% in 2001 compared to 12.4% in theprevious year. By comparison, GDP growth in Indiawas higher at 5.4% for 2001-02, although belowthe target of 6.5%. India could have achieved itstargeted growth had it not been for the slowdownin the industrial sector, which posted its lowestgrowth rate in a decade of merely 2.7%. Therecovery in the services sector was impeded by theunfortunate events of September and December2001, which had an immediate adverse impact onthe travel and tourism industry. The performanceof the agricultural sector buoyed the GDP with arobust growth of 5.7%. With the Indian economystill reliant to a large extent on the rural sector tostimulate demand, it is a matter of concern that inthe absence of appropriate diversification of landuse aligned to market demand, the growth hasserved to aggravate the situation arising fromoverstocked granaries.

The years ahead are ones of both significantopportunities and formidable challenges. The earlysigns of recovery in the US economy should augurwell for world trade. The entry of China into theWTO could pose challenges not only for Indianindustry but also for Indian agriculture in view ofChina’s much higher productivity levels. The fastpace of globalisation is increasingly resulting inprices of goods being determined by global markets,whereas costs continue to be rooted largely in thedomestic economy. Successful economicdevelopment is determined by the interplay of twomutually supportive ingredients - enterprisecompetitiveness and the vitality of the economy asa supplier of globally competitive inputs. Indiancompanies will have to hasten the achievement ofinternational competitiveness. The Governments,both at the Central and State levels, will need toaccelerate reforms in a bid to urgently upgradesocial and physical infrastructure and to create aclimate such that investments rooted in the soil ofIndia can become globally competitive.

The growing fiscal imbalance, particularly at thelevel of the States, is leading some of the States toimpose indiscriminate and differential taxation. Suchtaxes militate against the need to establish a largercommon Indian market, necessary for creatingcompetitiveness in a globalising environment. Suchshortsighted actions triggered by self-interest at theState level carry the potential of causing irretrievablelong term injury to the affected sectors of theeconomy. There is an urgent need for a harmonisedtaxation structure that provides buoyancy of revenuefrom an expanding tax base induced by moderationof taxes, thereby taking the fullest advantage of thelarger unified Indian market comprising more thana billion people.

It is axiomatic that high rates of inclusiveeconomic growth cannot be sustained withoutputting in place an effective growth strategy forrural India. Growth in rural incomes is both a meansand an end of India’s economic objectives. Theprolonged slowdown in industrial growth hashighlighted even more starkly the vital need tosustain rural demand. Your Company, as part andparcel of its endeavour to enhance thecompetitiveness of its agri-based businesses, isengaged in making a major contribution to theIndian farming sector. Your Company’s IT-enabledinterventions carry the potential to yield a profoundtransformational impact on India’s rural economy.Vignettes of these interventions are set out in thepictorial sections of this Report. In a climate ofgrowing competitive challenges, the strategy ofyour Company aims to leverage the diverse skillsand resources accumulated over time to nurtureworld-class businesses that would create growingvalue for the Indian economy and yield handsomerewards for shareholders.

COMPANY PERFORMANCEDespite difficult trading conditions, your

Company concluded yet another year of satisfyingresults. The financial results for the year ended 31stMarch, 2002 include that of ITC BhadrachalamPaperboards Limited, which was amalgamated withyour Company with effect from 1st April, 2001. Theimpact of the amalgamation is set out later in theReport. Gross Turnover grew by an impressive13% to Rs. 9840 crores. Post-tax profit increasedby 18% to Rs. 1190 crores, while Pre-tax profit atRs. 1780 crores registered a growth of 11%. Thisperformance is even more satisfying as it has been

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(Rs. in crores)2002 2001

g) Surplus availablefor Appropriation 1469.22 1255.95

h) Transfer to DebentureRedemption Reserve 21.49 17.50

i) Less : Release fromDebentureRedemption Reserve 12.28 14.50

j) Transfer to General Reserve 800.00 700.00

k) Proposed dividend for thefinancial year at a rate ofRs. 13.50 per Ordinary Share(previous year Rs.10 perOrdinary Share) (2002 -subject to deduction ofincome tax) 334.14 245.42

Income Tax onproposed dividend — 25.03

l) Retained profit carriedforward to the following year 325.87 282.50

1469.22 1255.95

Proposed dividend for the financial year ended31st March, 2002 includes dividend payable on thenew Ordinary Shares of the Company, issued andallotted to the shareholders of erstwhileITC Bhadrachalam Paperboards Limited, which rankpari passu in all respects with the existing OrdinaryShares of the Company, in accordance with theScheme of Amalgamation of ITC BhadrachalamPaperboards Limited with the Company.

FOREIGN EXCHANGE EARNINGSYour Company remains committed to enlarging

foreign exchange earnings. Earnings from exportscreate growing value for the Indian economy andalso serve to benchmark the competitiveness ofyour Company’s operations with global standards.The ITC Group’s contribution to foreign exchangeearnings over the last decade amounted to morethan US$ 2 billion, of which over US$ 1.5 billionwas accounted for by agri-exports, a measure ofyour Company’s growing contribution to the ruraleconomy. In this context, it is significant that duringthe year under review, your Company’s earningsfrom agri exports registered a growth of 28% indollar terms.

During the year under review, your Company,its subsidiaries and the ITC Welcomgroup hotelchain together crossed the Rs. 1000 crore milestonein foreign exchange earnings, of which

achieved despite severe cost and revenue pressuresstemming from a steep increase in cigarette taxes,the tobacco crop holiday in Andhra Pradesh, thegestation of new hotel investments and theincubation of new businesses for tomorrow’s growth.The financial results thus reflect your Company’ssoundness of operations and robustness of strategy.

Relentless focus on the efficiency of capitaldeployment, including working capital, containedthe increase in Net Assets Employed to a mere 7%,including the impact of amalgamation of thepaperboards business and the strategic capitalout lays towards atta ining internat ionalcompetitiveness. Consequently, cash flows fromoperations at Rs. 1770 crores represented an increaseof over 78%. These cash flows also enabledsignificant debt retirement, resulting in furtherreduction in interest costs.

In order to strike a balance between the need tosustain strategic investments for a secure future andthe annual expectation of shareholders for growingincome, your Directors are pleased to recommenda dividend of Rs. 13.50 per share (previous yearRs. 10 per share) for the year ended 31st March,2002. The cash outflow in this regard will beRs. 334.14 crores (previous year Rs. 270.45 croresincluding Dividend Tax of Rs. 25.03 crores). Theproposed dividend represents a growth of 35%.Your Board further recommends a transfer to GeneralReserve of Rs. 800 crores (previous yearRs. 700 crores). Consequently, your Boardrecommends leaving an unappropriated balance inthe Profit and Loss Account of Rs. 325.87 crores(previous year Rs. 282.50 crores).

PROFITS, DIVIDENDS AND RETENTION(Rs. in crores)

2002 2001a) Profit Before Tax 1780.26 1600.30b) Income Tax 590.54 594.04c) Profit After Tax 1189.72 1006.26d) Add : Profit brought forward

from previous year 282.50 201.28e) Transfer from Hotel

Foreign ExchangeEarnings Reserve — 54.01Less : Transfer to Hotel

Foreign ExchangeEarnings Reserve 3.00 6.00

f) Release from InvestmentAllowance Reserve — 0.40

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Rs. 948 crores represents direct earnings by yourCompany. Your Company’s expenditure in foreigncurrency amounted to Rs. 435 crores, comprisingpurchase of raw materials, spares and other expensesat Rs. 327 crores, and import of capital goods atRs. 108 crores.

The details of foreign exchange earnings andoutgo are provided in Schedule 19 to the Accounts.

other forms. Consequently, the tax base of thetobacco sector is rapidly shrinking. The shrinkingdomestic consumption base of cigarette type Virginiatobacco has also, over time, adversely impacted theexport potential of the tobacco sector. The exportprospects were further affected by the uncertaintyand diminished market presence caused by the cropholiday in Andhra Pradesh. As a result, the exportattractiveness of Indian tobaccos is caught up in avicious cycle to the growing detriment of the tobaccofarmers. This situation has been made worse by thegrowing inflow of contraband cigarettes that donot use Indian tobaccos.

Although non-cigarette forms of tobaccoconstitute nearly 86% of the tobacco consumptionin the country, they contribute barely 10% ofrevenues to the Exchequer. Discriminatory taxationon cigarettes has led to progressive downgradingof consumption to lower value formats therebyshrinking the effective tax base. While tobaccoconsumption in the cigarette format has declined,the overall consumption of tobacco in the countrycontinues to grow. It is therefore evident that highrates of taxes on cigarettes have neither impartedbuoyancy to tax revenues from the tobacco sectornor curtailed overall consumption. It is now wellestablished that sustainable tax buoyancy can berealised only from an expanding tax base.Moderation in rates of taxes, coupled with theaspiration of tobacco consumers to upgradeconsumption, can multiply the share of cigaretteseven in a shrinking basket of tobacco consumption.Consequently, the tax base of the sector can standsignificantly enhanced, yielding for the Exchequerthe much needed resources for urgent investmentsin social and physical infrastructure. This approachcan realise the objective of multiplying resourceseven with reduced aggregate per capitaconsumption of tobacco.

The already high levels of Central taxation oncigarettes are exacerbated by a plethora of Statetaxes, under various nomenclature such as ‘luxury’,‘entry’ and other taxes. Recognising the high degreeof sensitivity of taxes on cigarette trade, the principleof uniform, single point taxation was embodied inthe understanding between the Centre and theStates at the National Development Council meetingof 1955, which substituted State sales tax oncigarettes with additional excise duties. Theimposition of luxury and other taxes by many States

BUSINESS SEGMENTS

A. FAST MOVING CONSUMER GOODS(FMCG)

FMCG - Cigarettes

Tobacco consumers in India aspire to upgradeconsumption to the cigarette format in line withinternational trends. Internationally, the pattern ofconsumption is predominantly in the cigaretteformat, accounting for over 90% of tobaccoconsumption. In India, however, the prolongedpunitive and discriminatory taxation regime atCentral and State levels has made cigarettesunaffordable to the majority of tobacco consumers.As a result, there is a growing migration to lowervalue forms of tobacco consumption. The share ofcigarettes now stands at a mere 14% in the basket

Decline in the Share of Cigarettes in Tobacco consumption

of tobacco consumption in India, with per capitaconsumption of cigarettes in India being amongthe lowest in the world. Non-cigarette forms oftobacco products are largely produced in theunorganised sector characterised by lower rates oftax and ineffective enforcement. The tax yield perkilogram of tobacco consumed as cigarettes is morethan 30 times that of equivalent consumption in

23%21%

19%

16%14%

0%

5%

10%

15%

20%

25%

1971-72 1981-82 1994-95 1998-99 est 2001-02

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tantamounts to an infringement of this arrangement.The levy of luxury and other taxes is currently beingcontested by your Company at appropriate forums,including the Supreme Court, and your Companyis hopeful of a positive outcome. The State leveltaxes impart a cascading effect to an already highlytaxed commodity. Differential rates of such taxesdistort trade and militate against the economicbenefits of a larger common market. The need forsingle point taxation on a highly taxed commoditylike cigarettes cannot be overstated.

During the year under review, State taxes oncigarettes were imposed in Goa, Uttaranchal,Jharkhand and Chattisgarh, while the rate of taxwas increased in Rajasthan. Recently, an entry taxof 10% was imposed in Tamil Nadu, and a luxurytax of 20% in Delhi as part of the respective StateBudgets. The levies in Tamil Nadu and Delhi havesince been stayed by the appropriate High Courts.Similar stay orders had been granted in earlier yearsin respect of the levy of luxury tax in Kerala, AndhraPradesh and Tamil Nadu. Your Company, by wayof abundant caution, continues to provide for thedisputed amounts in its Accounts. The aggregateprovisions on this account as at 31st March, 2002was Rs. 589 crores.

Punitive rates of taxation, loopholes in theregulatory environment and inadequate enforcementcontinue to fuel contraband trade. The menace ofcontraband and its detrimental effect on theeconomy is recognised the world over. In the Indiancontext, the absence of tax harmonisation amongthe SAARC countries, coupled with the inordinatelyhigh rates of domestic taxation, further aggravatessuch illegal tax arbitrage, resulting in a large andgrowing tax export. Smuggling of cigarettes intoIndia is growing at an alarming pace estimated tobe upwards of 20%. The loss to the nationalExchequer is estimated to be in excess of Rs. 1,000crores per annum. There are a number of avenuesthat facilitate the flow of contraband into India.Legal channels of duty free import are used as acover by unscrupulous purveyors for supply to thecontraband channel. The channels that carry sucha risk of misuse are: duty free import under theBaggage rules, duty free shops at internationalairports, duty free imports by agents on behalf ofembassies and naval ships, and duty free import ofcigarettes for re-export. While various restrictionsare being imposed on consumption of cigarettes,

it is anachronistic to continue to permit such dutyfree imports. The policy related to import of dutyfree cigarettes therefore requires urgent revision,backed up by effective enforcement. In this regardyour Company continues to make comprehensiverecommendations to the Government.

The regulatory framework in respect of tobaccoproducts needs to be purposeful, practical andequitable. Whilst seeking to reduce per capitaconsumption over time, regulations should notimpede the maximisation of economic value perunit of consumption. Since most tobacco productsother than cigarettes belong to cottage andunorganised sectors, new regulations and controlsseriously disadvantage the cigarette segment aseffective enforcement is not feasible for other formsof tobacco consumption. The regulatory framework,unless carefully crafted, can lead to the unintendedconsequence of placing Indian cigarette brands ata disadvantage in a globalising market on the onehand, and of encouraging downgrading ofconsumption on the other, thereby seriously erodingthe economic contribution from the tobacco sectorwithout fulfilling the objective of containingaggregate per capita consumption. Whileregulations prohibit Indian cigarette brands frombeing advertised on television, internationalbrands such as Marlboro, Mild Seven etc. continueto be promoted through international motorracing events, freely beamed into India bysports and other television channels viewedlargely by the young. Similarly, programmesuplinked from overseas continue to carry advertisingof foreign cigarette brands. Such an unfair advantageto foreign brands would encourage imports,both legal and contraband, leading to an alarmingflight of value that a developing economy like Indiacan ill afford.

The Cigarettes and Other Tobacco Products Bill,2001 seeks to modify the legal framework forregulation of the Tobacco Industry. This Bill wasreferred to a Standing Committee of Parliament,who after carrying out extensive hearings with theIndustry constituents and other interest groups,have made their recommendations to the CentralGovernment. Your Company as a responsiblemember of the Industry continues to represent tovarious concerned agencies with the objective ofsecuring a uniform, fair, pragmatic and purposefulpolicy for the Indian industry.

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Your Company continues to upgrade the qualityof its products to provide the finest global standardsto the Indian consumer. As a result of a steep increaseof 15% in Central Excise taxation, together withthe growing menace of contraband, the domesticindustry declined by about 11%. Whilst yourCompany’s volumes were also affected, its relativeposition was strengthened by improvement in marketshare. Your Company’s brands now account for sixout of the top ten cigarette brands in the country.Based on ongoing market research, two of yourCompany’s cigarette brands were successfullyextended into new and innovative flavour options.Ongoing upgradation of packaging has now resultedin most of the filter cigarettes being marketed inthe internationally preferred hinged lid form ofpackaging. The prestigious India Kings brand wasextended to a Lights version in the ultra premiumbeveled edge packaging. Encouraged by the initialresponse to the 5s form of packaging, several brandsare being made available in this format.

Your Company’s commitment to world-classstandards in products and processes continues toreceive national and international acknowledgement.With the Munger factory also having received theISO 14000 accreditation, all the cigarette factoriesof your Company are now ISO 14000 certified. Thefactory in Bangalore was awarded the ‘PrashansaPatra’ for excellence in safety by the National SafetyCouncil, while the Indian Association of OccupationalHealth conferred the award of ‘Best OccupationalHealth Centre’ on the factory in Kolkata.

The increasing levels of taxation and restrictiveregulation continue to pose challenges to yourCompany’s cigarette business. As stated earlier,nearly 86% of tobacco consumption in formatsother than cigarettes represents a large potentialmarket with tobacco consumers aspiring to upgradeconsumption. A policy of moderation in taxes canfulfil this aspiration, thereby creating growing valuefor the economy from the tobacco sector even ina shrinking basket of tobacco consumption. Inconclusion, growth prospects depend upon the rateof growth of per capita incomes of tobaccoconsumers, moderation in taxes, effectiveness ofmeasures to curb the flow of contraband and policymeasures that do not disadvantage the domesticcigarette industry. Given an enabling environment,your Company, with its strategy of continuous valueaddition to its brands, is well positioned to sustainits leadership role in the tobacco sector.

FMCG - Others

It is your Company’s endeavour to continuouslyexplore opportunities for long term growth bysynergising and blending its multiple corecompetencies. In line with this strategy, yourCompany’s multiple strengths are being leveragedacross three product groups, namely, LifestyleRetailing, Greeting Cards & Gifts and BrandedPackaged Foods. Each of these businesses is at anascent stage of development and accordingly theSegment Results set out in Schedule 20 to theAccounts reflect the impact of start-up costs.

Lifestyle Retailing

During 2001-02, your Company’s LifestyleRetailing business was engaged in rapidly scalingup operations. The international quality shoppingexperience and world-class product range are nowavailable to discerning customers at 42 exclusiveWills Lifestyle stores across 35 cities in India. Thebusiness’ internationally benchmarked quality earnedindustry recognition, with Wills Sport winning the‘Most Admired Brand Launch of the Year’ awardand Wills Lifestyle winning the ‘Most AdmiredExclusive Retail Chain of the Year’ award at theImages Fashion Awards 2001.

This business is in its nascent stage in acompetitive market. The primary focus is centredaround consolidating capabilities and buildingmarket standing. Over time, it is the objective togain a position of leadership in the growing domesticlifestyle market before taking the Wills Lifestyle brandoverseas into the more developed internationalmarkets.

Greeting Cards & Gifts

During the year under review, the organisedgreeting cards market in India witnessed a significantcorrection in inventory and restructuring of businessmodels by the traditional players. Your Company’sGreeting Cards business expanded its reachsignificantly, with ‘Expressions’ greeting cards nowavailable across 600 markets in over 10,000 retailoutlets. In growing recognition of market acceptance,over 100 retail outlets already bear the ‘Expressions’brand signage and logo in important locationsacross the country. The design capability of thebusiness has been strengthened with the setting upof an in-house studio with creative talent drawnfrom across the country. A B2B web-based system

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has been implemented to enhance supply chainfulfillment capability. During the year newpartnerships were cemented with SOS Children’sVillages of India for social cause cards, withIntercontinental Greetings, USA for designs andwith Maple Leaf, Mumbai for speciality cards. TheGreeting Cards & Gifts business intends to expandits product portfolio with other offers thatcomplement greeting cards, by leveraging thecompetencies residing in the Paperboards, Paper& Packaging business segment of your Company.

Progressive cross-cultural exposure in India viathe television and Internet, the proliferation of newmodes of communication, together with growingdisposable incomes, are expected to enhance thewidth of social contact, leading to a growth in papercards and gifting products. Your Company’s GreetingCards & Gifts business, with its strengtheningcapability and distribution reach is expected tocapture the emerging growth opportunities.

Branded Packaged Foods

Your Company views the branded packagedfoods market as a significant opportunity for growthin the long term. Alongside the growing per capitaincomes, the Indian food consumption habit isexpected to progressively evolve from basic foodsto value added products. Changing consumerpreferences and heightened quality awareness,together with the expected reform of the regulatoryframework and tax structures, will provide a fillipto the food processing industry. Your Companypossesses many a strength to exploit this growthpotential, namely the sourcing skills residing in itsAgri Business segment, the vast FMCG distributioncapability and the cuisine knowledge and trademarksof the Hotels business.

Branded foods is an emerging industry in Indiaand constitutes a fraction of the entire foodconsumption in India. During the year, yourCompany made an entry in this industry segmentby launching ambient stable ready-to-eat packagedfoods under the brand ‘Kitchens of India’. Thepremium products under this umbrella brand featureethnic, signature recipes from ITC Welcomgroup.The market response has been encouraging. Thegourmet foods category within branded foods iscurrently miniscule but carries a substantial growthpotential over time. Export opportunities of theseproducts are also being explored.

Your Company also acquired the “mint-o”trademark in the confectionery segment. The relatedpre-launch product development work is under way.In order to build a secure foundation for the growthof the Branded Foods business a state-of-the-artResearch and Development Centre is beingestablished at Bangalore. It is the objective of thisbusiness to establish its product brands acrosssegments, and towards this end the business is atan advanced stage of readiness to launch a host ofhigh-quality value added products.

B. HOTELSYour Company continues its commitment towards

establishing a leadership position for the ITCWelcomgroup chain. ITC Hotel Grand MarathaSheraton & Towers and ITC One at the MauryaSheraton are rapidly emerging as the pre-eminentbusiness accommodation for the upmarket traveller.ITC Hotel Sonar Bangla at Kolkata is expected tocommence commercial operations by end 2002, asplanned. The ITC Grand Central project at Mumbaiwas held up pending statutory approvals. Barringunforeseen circumstances it is now likely to opentowards the end of 2003. The eight acres of primeland acquired in Chennai is awaiting developmentat an opportune time to coincide with the expectedgrowth in that market. The outlays on these projectsand the new hotels amounting to Rs. 676 croresupto 31st March, 2002 are included in the SegmentAssets set out in Schedule 20 to the Accounts.

It is well known that the Hotels and Tourismindustry was severely affected by the unfortunateevents of September and December 2001, and thegeneral slowdown in the global economy. YourCompany believes that the impact of these eventswould persist only in the near term and that thelong term prospects of this business remain attractive.Hotels constitute an important part of infrastructurefor the growth of trade, commerce and industry.The increasing globalisation of markets and theexpected high rates of growth of the Indian economywill spur demand for high quality accommodation.Travel and tourism, already the largest industry inthe world, has contributed significantly to theturnaround and growth of several economies in theworld. This sector ranks amongst the highestemployment generators per unit of investmentand imparts a very large multiplier impact tothe economy. It is heartening to note the

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acknowledgement of this industry’s potential in theUnion Budget speech of the Finance Minister whostated that “Tourism constitutes a priority area inview of its beneficial impact on growth ofemployment, generation of foreign exchange...”.The current foreign exchange earnings of this sectorof about US $3 billion represents a fraction of itspotential. Tourism is an industry of industries. It willprosper as all-round development takes place in thequality and scale of infrastructure. In the context ofthis potential, India is grossly under-roomed evenin comparison with its much smaller neighbouringEast Asian countries. Your Company’s initial objectiveof completing its chain in the super deluxe segmentin all key locations in India is well on its way tocompletion. It is companies such as yours, with astrong balance sheet and world-class humanresource, that can contribute to the creation andsustenance of such capital intensive and longgestation infrastructure projects, so necessary toprecede any prospects of rapid economic growth.The expanded ITC Welcomgroup chain, withcompetitively superior hoteliering capability, is wellpoised to attain industry leadership.

C. PAPERBOARDS, PAPER AND PACKAGING

Bhadrachalam Paperboards

The Scheme of Amalgamation of the erstwhileITC Bhadrachalam Paperboards Limited (ITCBhadrachalam) with your Company was sanctionedby the Hon’ble High Court at Calcutta and theHon’ble High Court of Judicature of Andhra Pradeshat Hyderabad, on 24th January, 2002 and 8thFebruary, 2002, respectively. Upon completion ofthe requisite formalities, the Scheme became effectiveon 13th March, 2002, and operative from 1st April,2001. ITC Bhadrachalam thus became a Division ofyour Company under the nomenclature‘Bhadrachalam Paperboards Division’.

In consideration of the amalgamation, 20,96,982fully paid-up Ordinary Shares of Rs.10/- each ofyour Company were issued and allotted on 6thMay, 2002 to the members of ITC Bhadrachalam.The new Ordinary Shares rank pari passu with theexisting Ordinary Shares of your Company. Thepaid-up Share Capital of your Company hasconsequently increased from Rs.245.41 crores toRs.247.51 crores. Your Directors take pleasure inwelcoming the shareholders, employees and all

other stakeholders of ITC Bhadrachalam into theITC family.

The amalgamation contributed an incrementalRs. 511 crores to your Company’s Gross Turnover,excluding inter-divisional sales. Cash Profits fromoperations (PBDIT) increased by Rs. 101 crores asa result of the amalgamation, while Operating Profit(PBIT) grew by an incremental Rs. 59 crores. Theaggregate increase in Capital Employed consequentto the amalgamation amounted to Rs. 281 croresonly. The amalgamation enhanced the Earnings perShare of your Company, while simultaneouslybenefiting the shareholders of the erstwhileITC Bhadrachalam Paperboards Limited, throughaccelerated returns from dividends.

During the major part of the year, the businessenvironment for the paperboard segment wascharacterised by a global slowdown in demand,oversupply and the resultant fierce price competition.Notwithstanding these challenging conditions, thecontinued focus of the Bhadrachalam PaperboardsDivision (BPD) on technology upgradation,development and the related expansion of themarket for value added products, and benchmarkingof quality and operating standards to internationallevels, enabled a significant improvement inperformance. Production during 2001-02 was2,10,440 tonnes, at a capacity utilisation of 115%,compared to 2,05,817 tonnes in the previous yearat a capacity utilisation of 113%. While overall sales,including inter-divisional sales, increased to 2,09,030tonnes from 2,04,649 tonnes, the sale of valueadded products grew by nearly 18% to 35,600tonnes from 30,233 tonnes in 2000-01, therebyresulting in an enriched product mix. BPD’s enduringcommitment to environment and energymanagement earned the Division a slew of awardsincluding the ISO 14001 accreditation for itsenvironmental management system from Det NorskeVeritas and the Award for ‘Excellence in EnergyManagement’ from CII (Southern Region).

In continuing testimony to the world-class qualityof BPD’s products, exports were maintained at theprevious year’s levels despite a steep slowdown ininternational trade, thereby contributing Rs. 89 croresin foreign exchange. Foreign exchange conservationincluding substitution of imports amounted to nearlyRs. 250 crores. Such contribution is likely to grow infuture as the volume of value added products

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grow. BPD’s products command a significantpresence in the markets of Sri Lanka, Bangladesh,Malaysia, Iran, United Arab Emirates and SouthAfrica. The export effort earned recognition, withthe Division bagging Capexil’s ‘Special Export Award2000-01’, in the category of Paper and Paperboardproducts for the second consecutive year.

The Rs. 227 crore pulp mill modernisation andupgradation project at your Company’s plant atBhadrachalam is progressing as per schedule andis expected to be fully operational by October 2002.The commissioning of the project will significantlyenhance the cost competitiveness of the Divisionand also enable it to achieve world-classenvironmental compliance standards. The Division’sfarm forestry programme, aimed at improving accessto cost effective fibrous raw materials, made furtherprogress with the distribution of nearly 3.4 millionhigh yielding disease resistant “Bhadrachalam”clonal saplings to growers in the economic vicinityof the mill. With a view to achieving internationallybenchmarked standards in operations, the Divisionhas embarked upon an IT-based Supply ChainManagement Project, in association with a solutionprovider of international repute. These initiativesare expected to further enhance the Division’sinternational competitiveness in terms of quality,costs and environmental compliance.

The growing sophistication of the Indianconsumer is expected to accelerate the demand forhigh quality packaging for branded goods and theresultant demand for value added paperboards.Further, it is estimated that the Asian region,excluding Japan, would become a net importer ofpaperboards over the next few years. The Division,with its growing competitive capability, is poisedto capture the emerging growth opportunities. Theintegration of the paperboards business with yourCompany and the consequent synergistic benefitswill further facilitate scaling up of operations,including the vital farm forestry programme, therebyfurther strengthening the prospects of yourCompany in the Afro Asian markets.

Speciality Papers

The Speciality Papers business continued its focuson creating value through product qualityupgradation, increasing market presence of coreproducts and strategic cost management, particularly

in areas of energy costs and manpower productivity.Consequently, the business significantly improvedits operating and financial performance. Importsconstitute the major source of competition. Thiscompetition will intensify in the context of rapidlyshrinking tariffs. This Division is therefore confrontedwith a major challenge to its competitiveness. Theamalgamation of the Paperboards business hascreated a new opportunity for unleashing synergyamong the pulp, paper and paperboards segmentsthat would further support the competitiveness ofthe Speciality Papers business.

Packaging and Printing

During the year under review, the operations atthe Tiruvottiyur factory in Chennai were disruptedon two occasions due to illegal strikes by workmen.As highlighted in the Report of the Directors lastyear, the first strike, which began in February 2001was called off in May 2001. The second strike inNovember 2001 was marked by unprovokedviolence by the workmen. Firm action by themanagement resulted in dismissal of the miscreantsafter due compliance with internal and statutoryregulations. Workmen, in increasing numbers,voluntarily called off their strike from 21st January,2002 and returned to work after agreeing to abideby statutory regulations and the Memorandumof Agreement signed between the workmen andthe management. Uninterrupted supply ofpackaging to your Company’s cigarette businesswas secured through the continuing operations atthe Munger factory and outsourcing the balancerequirement largely f rom internat ionalmanufacturers.

Continuous technology upgradation and valueadded services to customers are aimed at sustainingthe status of the Packaging and Printing businessas a preferred supplier of premium printedpaperboard-based packaging for the FMCG industryin India, particularly for cigarettes, liquor, foods andpersonal care products. Both factories at Mungerand Tiruvottiyur are certified to ISO 9000 standardsof Quality and ISO 14000 standards of EnvironmentManagement.

The business is thus actively engaged in leveragingits world-class capability in premium, paperboardpackaging to expand its product base in the domesticand export markets.

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D. AGRI BUSINESSCigarette Leaf Tobacco

As stated in the Report of the Directors last year,the Tobacco Board declared a Crop Holiday inrespect of the 2001 Andhra Crop. Despite thisconstraint, and the continuing oversupply situationin the global markets, your Company was able tomaintain nearly the same levels of exports as thatof 2000-01. As also stated in the Report last year,your Company had, as a measure of assistance tothe farmers, purchased leaf tobacco well in excessof requirements in 2000-01. Consumption oftobacco for the manufacture of your Company’scigarette brands during 2001-02 was thereforelargely from inventories. The Segment Results inSchedule 20 to the Accounts reflect this situation.

Your Company entered into a strategiccollaborative agreement with the Tobacco Board(Ministry of Commerce, Government of India) toestablish a ‘Tobacco Farmers’ Portal’. Christened‘Pogaku Vedika’ in Telugu and ‘Tambaku Vedike’ inKannada, the website will provide information tothe farmers in their own language, on modern farmpractices, integrated pest management, curing andgrading techniques, post-harvest productmanagement and the latest prices prevailing ininternational markets and India’s Tobacco AuctionPlatforms. The website will also provide customisedinformation to an individual farmer. It is expectedthat the Portal would cover about 150 villages inAndhra Pradesh and Karnataka over the nextthree years.

Several initiatives were undertaken to furtherstrengthen the competitive capability of yourCompany’s leaf tobacco business. The portfolio ofproduct offers to customers is being enlarged toalign product mix with emerging requirements. Aweb-based Customer Relationship Managementinitiative is being developed to provide value addedservices to global customers. With a view toimproving the competitiveness of Indian tobaccosin global and domestic markets, and to improveeconomics of the Indian tobacco farmer, yourCompany continues to strengthen its cropdevelopment and related services at the farm level.The Research Center at Rajahmundry is engaged invarietal research through its plant breedingprogramme to develop leaf tobacco varieties withexport potential. These initiatives, together with

the superior threshing capability of the state-of-the-art leaf tobacco processing lines at Chirala, wouldnot only improve your Company’s exportcompetitiveness but also support the qualityenhancement objective of your Company’s cigarettesbusiness.

Agri Exports

The creative harnessing of InformationTechnology across the value chain from the farmto the foreign customer enabled your Company tosubstantially increase its export earnings. Agri exportsof the International Business Division (IBD) grewsubstantially by over 48% during 2001-02 (Rs. 535crores against Rs. 361 crores last year), despite thenear stagnation of aggregate exports from thecountry. The Division’s IT-based CRM initiativerepresents a trend-setting customer-centric businessmodel that vindicated its utility even in thecommodity business by efficiently servicing thespeci f ic needs of identi f ied customers.

On the supply side, the Division drew upon thecompetencies residing in your Company’sInformation Technology business to create a uniqueclick-and-mortar capability christened e-Choupal.The e-Choupal initiative leverages InformationTechnology to: (a) deliver real-time information andcustomise knowledge to improve farmers’ decisionmaking ability to align farm output to marketdemands and secure quality, productivity andimproved price discovery (b) aggregate demand inthe nature of a virtual producers’ cooperative toaccess high quality farm inputs and knowledge atthe lowest cost and (c) set up a direct marketingchannel virtually linked to the mandi system for thepurposes of price discovery, yet eliminating wastefulintermediation, multiple handling and thus reducingtransaction costs and making logistics efficient andcost effective. Through virtual clustering, thesee-Choupals are re-organising the farm supply chainfor more cost effective sourcing using the physicaltransmission capabil it ies of the existingintermediaries, yet disintermediating them from theinformation flow and market signals.

The benefits from e-Choupals, which operatedat a critical mass scale for the first time during thesoya season of 2001-02, testify to the assumptionsbehind efficiency gains through virtual integrationof the Division’s supply chain. Encouraged by theresults, this model is being rapidly scaled up and

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replicated across other geographies andcommodities where your Company has nurtureddeep rural linkages for over a decade. Starting withsix pilot choupals in June 2000, today this strategicinitiative has already become rural India’s largestinternet-based intervention of its type, reaching outto more than half-a-million farmers in 4500 villagesthrough 770 choupals in the States of MadhyaPradesh, Karnataka, Andhra Pradesh and UttarPradesh.

Your Company’s strategic intent seeks to enhancefarm productivity manifold and to create a farmingmetamarket across India through e-hubs. Thesee-hubs will service the information needs of clustersof villages, as well as create the infrastructure tofacilitate efficiency in purchase and sale of highquality inputs and farm produce. This e-infrastructurecan also be used to create a unique channel for thetwo-way flow of a range of goods and services inand out of rural markets, thereby serving as a sourceof future growth in revenues.

NOTES ON SUBSIDIARIES

The following may be read in conjunction withthe Consolidated Financial Statements enclosedwith the Accounts, prepared in accordance withAccounting Standard 21 and the Statement pursuantto Section 212 of the Companies Act, 1956.

ITC Hotels Limited (ITCHL)

ITCHL derives over 60% of its income fromproperties in tourist locations and from fees relatedto consulting, operating and marketing services.Incomes are generally weighted towards the secondhalf of a financial year, which represents the peaktourist season. Foreign arrivals in October andNovember 2001 fell steeply by over 25 % indicativeof the acute adverse impact on the industry,particularly in respect of tourist locations.Consequently, ITCHL recorded a 7% decline inoverall occupancy. Gross income for the financialyear ended 31st March, 2002 was Rs. 113.41 croresas compared to Rs. 134.57 crores in the previousyear, with a loss of Rs. 3.12 crores (previous yearProfit of Rs. 12.69 crores). In view of the loss, theBoard of Directors of ITCHL has not recommendedthe payment of dividend for the financial year 2001-02.

The Hotels business continues to contributesignificantly to foreign exchange earnings. The ITC

Welcomgroup chain’s foreign exchange earningsfor the year 2001-02 amounted to Rs. 189.59crores, comprising Rs. 90.69 crores earned by hotelproperties of ITC Ltd., Rs. 49.58 crores earned bythe hotels owned/leased by ITCHL and Rs. 49.32crores by other properties of the chain. The Hotelsbusiness is also an important constituent ofinfrastructure, essential to achieve overall economicgrowth objectives. It is in this context that yourCompany believes that the impact of the eventsof 2001 would persist only in the near termand that the long term prospects of this businessremain attractive. With this perspective,ITC Welcomgroup remains committed to itsstrategy of providing a superior and world-classproduct and service offering. Towards thisend, planned expansion, renovation andrefurbishing programmes are progressingsatisfactorily to sustain and consolidate marketstanding, despite the strain on current financialperformance.

As a result, ITC Welcomgroup, particularly itsflagship ITC Hotel Maurya Sheraton & Towers,continues to be patronised by world leaders. Duringthe year, amongst others, Mr. Tony Blair, the BritishPrime Minister and Mr. Colin Powell, US Secretaryof State, were distinguished guests of ITCWelcomgroup hotels. In further testimony to ITCWelcomgroup’s superior hoteliering expertise,the ITC Hotel Maurya Sheraton & Towers wonthe Gold Award from the Hospitality Sales &Marketing Association International, USA (HSMAI)while ITC Hotel Grand Maratha Sheraton &Towers campaign was conferred with two SilverAwards - HSMAI 2001.

The re-branding exercise completed last yearenabled the effective positioning of the productand service offerings of the ITC-Welcomgroup chainacross its different segment of consumers. TheWelcomHotel brand was strengthened during theyear with the induction of Marriott WelcomHotel,New Delhi.

ITC Infotech India Limited

As stated in the Report of the Directors last year,your Company restructured its InformationTechnology business into a wholly-owned subsidiary,in accordance with the approval of the shareholders.The restructuring plan was completed during the

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year under review, whereby ITC Infotech IndiaLimited (I3L) acquired:

● the entire Share Capital of ITC Infotech Limited,UK (I2B) comprising 6,85,815 Ordinary Sharesof GBP 1.00 each at GBP 1.50 per OrdinaryShare from your Company at a totalconsideration of Rs. 6,86,85,837/- ; concurrentwith the transfer of shares, I2B became a whollyowned subsidiary of I3L with effect from 19thJune, 2001.

● the entire Share Capital of ITC Infotech (USA)Inc., (I2A) comprising 2000 Common Sharesof US$ 100 each from I2B at an aggregateconsideration of US$ 400,000; concurrent withthe transfer of shares, I2A became a whollyowned direct subsidiary of I3L with effect from24th May, 2001.

I3L also invested US$ 2 million in the equity sharecapital of I2A by subscribing to 20000 CommonShares for cash at US$ 100 per share.

ITC Infotech India Limited (I3L) was confrontedwith severe adverse market challenges soon aftercommencement of business. The slowdown in theUS economy and the consequent curtailment of ITspends severely affected the Indian IT sector. Underthese circumstances I3L had to bear the costs ofhuman resources and infrastructure withoutcommensurate revenues.

Early signs of recovery in the US market, coupledwith the growing trend amongst US companies ofconverting on-site software development work tooffshore assignments, represent significantopportunities for leveraging the world-classdevelopment centres and human capital of I3L. UScontinues to be the largest market for IT servicesand it is the strategic intent of I3L to build businessin that market. Accordingly, the Board of I3Lapproved an investment of upto US $ 2.5 millionin the equity Share Capital of I2A, for cash at par,subject to the approval of the Reserve Bank of Indiaand such other approvals as may be necessary.

Barring unforeseen circumstances, the businessis expected to make early breakthroughs and carvea niche for itself.

Russell Credit Limited

During the year, the Company purchased 17,250(0.06%) equity shares of ITC Hotels Limited. The

Company’s Counter Offer to the shareholders ofVST Industries Limited, in accordance with the SEBI(Substantial Acquisition of Shares & Takeovers)Regulations, 1997, pursuant to a Public Offer madeby an Acquirer, closed on 13th June, 2001.

During the currency of the Public Offer, a suitwas filed by an individual in the Hon’ble High Courtat Calcutta, seeking an injunction against theCompany’s offer. The Hon’ble High Court at Calcuttawhile refusing to grant such an injunction, instructedthat the acquisition of shares pursuant to the CounterOffer by the Company and the other Acquirer,would be subject to the final Order of the Hon’bleHigh Court, which is awaited. Similar suits filed byan individual and two shareholders, in the Hon’bleHigh Courts of Delhi at New Delhi and AndhraPradesh at Hyderabad, were, however, dismissedby the respective High Courts.

The Company holds 15,45,142 equity shares ofVST Industries Limited, as at close of business on31st March, 2002.

Gold Flake Corporation Limited

During the year, the Company changed its statusfrom a Deemed Public Company to a Public LimitedCompany with effect from 12th September, 2001.The Company also changed its name from All IndiaTobacco Company Limited to Gold FlakeCorporation Limited, with effect from 9th January,2002.

Wills Corporation Limited

During the year, the Company changed its statusfrom a Deemed Public Company to a Public LimitedCompany with effect from 6th August, 2001. TheCompany also changed its name from ElanEnterprises Limited to Wills Corporation Limited,with effect from 13th February, 2002.

Landbase India Limited

As stated in the Report of the Directors last year,your Company acquired 70% of the equity capitalof Landbase India Limited (LBI). The equity stakewas purchased from International Travel HouseLimited (Travel House), an associate of yourCompany. LBI had developed a Jack Nicklaussignature golf course and a premium condominiumcomplex, widely acknowledged as among the finestin the country. It became increasingly difficult forTravel House, with its limited financial resources, to

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support the long gestation projects of its subsidiary,LBI. Faced with the options of either closing thebusiness or finding a partner, Travel Houseapproached your Company with an offer to sell itsstake. The development of golf resorts presentattractive long term prospects in view of theirgrowing popularity the world over. Golf basedresorts also complement the hotels business of yourCompany. It is in this context that your Companysupported the restructuring of LBI. Accommodationfacilities are being developed to transform the golfcourse into a destination resort taking advantageof its attractive location outside Delhi.

BFIL Finance Limited

Consequent to the amalgamation of ITCBhadrachalam Paperboards Limited, BFIL FinanceLimited became a subsidiary of your Company.BFIL Finance Limited continued to focus onrecoveries. During 2001-02, the Company collectedRs. 468.25 lakhs (including by way of propertysettlements) and used the proceeds, inter alia, torepay Rs. 156.39 lakhs to banks. As a result, theCompany posted a profit of Rs. 659.24 lakhs forthe year ended 31st March, 2002 against a loss ofRs. 600.20 lakhs in the previous year.

ITC Global Holdings Pte Ltd.

Since 8th November, 1996, the Judicial Managershave been conducting the affairs of ITC Global, inthe interest of ITC Global’s creditors under theauthority of the High Court of Singapore.

The Judicial Managers have indicated to yourCompany that the outstanding dues of ITC Globalto its creditors were likely to be around US$ 50million (apart from the debt of approximatelyUS$ 10 million owed by ITC Global to ITC and forwhich your Company has already filed its formalProof of Debt to the Judicial Managers) and hadsought your Company’s financial support to ITCGlobal to enable it to settle with its creditors. YourBoard does not accept any liability in this regardand has accordingly advised the Judicial Managers.

However, without prejudice, and with theintention of preserving the goodwill of theinternational banking and other investingcommunities and thereby to subserve yourCompany’s future business interests in a fast-globalising economy, your Company proposed a

goodwill assistance of US$ 26 million to ITC Global.This would be subject to your consent and allnecessary approvals from all Government and otherauthorities, both at Singapore, and in India, andalso subject to concluding a comprehensiveAgreement between your Company and the JudicialManagers in this regard.

The High Court of Singapore had ruled that, “theCompany (i.e. ITC Global) is not required to conductany audit of the Company during the period ofjudicial management of the Company”. As aconsequence of the aforesaid Order, your Companycannot attach the audited accounts of ITC Globaland its subsidiaries for the year ended 31st December,2001, this position having also prevailed in theprevious five years. Approval in this regard is awaitedfrom the Central Government granting exemptionfrom the provisions of Section 212 of the CompaniesAct, 1956. Your Company shall, as soon as suchaccounts are received, circulate the same to theMembers of the Company.

NOTES ON TRADE INVESTMENTS

Surya Tobacco Company (P) Limited

In spite of a slow-down in the Nepalese economythe cigarette industry volumes grew at 12% withresultant Government revenues from the industryincreasing by 21%. The Company continues to bethe single largest private sector contributor to theNepalese Exchequer accounting for more than 3%of the total revenue collected by His Majesty’sGovernment. The spread of insurgent activities hasimpacted the Company’s supply chain as well asposed threats to the security of its personnel andproperty.

Despite difficult trading conditions, theCompany’s performance for the year ended15th July, 2001 reflects a 17% increase in GrossTurnover with a 26% increase in Profit after Tax.Dividend for the year was increased to 100% ascompared to 80% last year. The Company’s brandscontinue to occupy leadership positions in theirrespective segments, resulting in a value share ofthe cigarette industry of around 64%.

Your Company has received the RBI’s approvalfor investing in a further 10% of the share capitalof Surya Tobacco Co. (P) Limited from its NepalesePromoters.

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Real Estate

There is nothing significant to report in this area.Your Company expects to redeem its investmentsover time as and when economic revival makesit attractive to develop the substantial real estateassets.

ITC Filtrona Limited

ITC Filtrona retained its Filter business volumedespite a major drop in the cigarette industry in2001. The Company consolidated its leadershipposition in the market, with volume share increasingfrom 55% to 58%. The gross turnover for theyear ending 31st December, 2001 at Rs. 65 croresdeclined by 3% compared to the previous year. TheCompany recorded an 8.5% growth in operatingprofits. The Board of Directors of ITC Filtronarecommended a dividend of 25% for the secondconsecutive year.

The Company’s factory in Bangalore is the firstCigarette Filter factory in the world to receive theISO 9001: 2000 series certification. The Companycontinues to focus on business solutions to remaincompetitive in serving the Indian Cigarette Industry.

AUDIT AND SYSTEMS

Your Company believes that internal control is anecessary concomitant of the principle of governancethat freedom of management should be exercisedwithin a framework of appropriate checks andbalances.

Your Company’s well established internal auditprocess continuously monitors the status of operatingsystems and policies and compliance thereof, asalso the quality of the management decision-makingprocess across its businesses. Efforts continue to bedirected at securing adequacy and effectiveness oflaid down systems and policies, particularly in thenewer business initiatives. In the increasinglynetworked IT environment of your Company,validation of IT security received focussed attentionof the internal audit team whose members areregularly trained on contemporary audit techniquesand methodologies.

The Audit Committee of your Board met seventimes during the year. It reviewed the adequacy andeffectiveness of the internal control environmentand monitored implementation of internal audit

recommendations. It also actively engaged inoverseeing financial disclosures and in reviewingyour Company’s risk management policies.

HUMAN RESOURCE DEVELOPMENTIn the multi-business context of your Company,

the focus of human resource development is tocreate world-class distributed leadership within theorganisation as the primary means of bringing abouttransformational change and securing competitiveadvantage. Your Company’s endeavour, therefore,is to nurture an empowering organisation culturethat inspires people to consistently deliver qualityperformance and rewards them with opportunitiesfor learning, competitive remuneration and rapidcareer advancement. As a consequence, appropriatesystems and processes are continuously refurbishedto attract, develop and retain talent. Your Companycontinues to harness opportunities for manpowerdevelopment by networking with national andinternational human resource development agencies.

Your Company also recognises that competitiveadvantage stems from nurturing specialisms uniqueto each business. Specific initiatives are thereforebeing implemented to enhance the quality ofspecialist skills residing in various businesses as wellas to induct such unique skills in identified areas,particularly in respect of new businesses.

The spirit of collaboration, partnership andcommitment to the shared purpose of creatingenduring value for stakeholders enabled yourCompany to achieve improved productivity at alllevels while simultaneously fulfilling employeeaspirations.

Your Company is well resourced with nearly13,000 committed employees. Your Directors recordtheir sincere appreciation of their dedicated efforts.

ENVIRONMENT, OCCUPATIONAL HEALTHAND SAFETY

Your Company continues to accord priority toEnvironment, Occupational Health and Safety (EHS)with a commitment to achieve and sustain thehighest international standards.

Focussed attention to this vital area has resultedin an 80% reduction in the number of Lost TimeAccidents and a 75% reduction in Man-Days Lostover the last five years. Thirteen units of ITC and its

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Group Companies have already been accreditedwith ISO 14001 certification and seven units arecurrently in various stages of the accreditationprocess.

Your Company recognises the importance oftraining and EHS awareness at all levels of theorganisation. Several training programmes wereconducted both by your Company’s own EHSexperts and by outside faculty. Your Companyimplemented a number of significant EHS initiativesduring the year including reduction of CO2 releasesto the atmosphere, harvesting rainwater,conservation of water and energy, and afforestation.

The Legal and Safety Audit Committee of yourCompany closely monitors statutory complianceand that of Company policies on EHS.

In recognition of your Company’s EHS initiativesseveral awards continue to be conferred on its unitsas detailed earlier in this Report.

EXCISE

In the Report & Accounts of the last fifteen years,your Directors had mentioned that, consequentupon a search and seizure conducted by the ExciseAuthorities, a Show Cause Notice dated 27th March,1987 was issued to your Company for allegedevasion of Excise Duty during the period from 1stMarch, 1983 to 28th February, 1987. The chargewas based on the premise that your Companyallegedly colluded with retailers in selling cigarettesat a price higher than that printed on the package,which was the basis of levying duty during theaforesaid period. Your Company and its contractmanufacturers were therefore asked to Show Causeas to why they should not be required to pay dutyat the higher slab corresponding to the actual pricealleged to have been charged by the retailers,amounting to an unprecedented sum of Rs. 803.78crores besides other penalties in law.

The hearing of the Show Cause Notice proceededbefore the Commissioner of Central Excise, Delhi,who, by an Order dated 29th December, 1995confirmed a differential excise duty demand ofRs. 681.54 crores against your Company and alsolevied a penalty of Rs. 66.50 crores on it. Personalpenalties aggregating to Rs. 3.15 crores were alsoimposed on six ex-Directors of your Company. TheCommissioner also confirmed a demand of Rs. 118crores on seven Contract Manufacturers of your

Company and levied penalties on them aggregatingto Rs. 7 crores.

Your Company preferred an Appeal to theCustoms Excise and Gold (Control) Appellate Tribunal(CEGAT) against the Commissioner’s Order dated29th December, 1995 as also an Application fordispensing with the pre-deposit of the differentialduty amount of Rs. 681.54 crores and penaltyamount of Rs. 66.50 crores, and for stay. Similarly,all six ex-Directors of your Company, as well as theContract Manufacturers, preferred Appeals to theCEGAT as also Applications for waiver of pre-depositof the differential duty and penalty amounts, andfor stay.

In respect of the Contract Manufacturers theCEGAT directed that the pre-deposit of the entireamounts of differential duty and penalty should bedispensed with in their case. In the case of the sixex-Directors also directions for dispensing with thepre-deposit of the penalties were given by theCEGAT.

Further by its Order dated 15th March, 1996 theCEGAT directed your Company to depositRs. 110 crores on or before 30th April, 1996 and afurther amount of Rs. 240 crores in eight equalmonthly instalments commencing 1st June, 1996.The requirement of pre-deposit of the balancedifferential duty amount of Rs. 331.54 crores andthe entire penalty amount of Rs. 66.50 crores waswaived, subject to the conditions regarding paymentof instalments as indicated above and also furnishingof Bonds. In compliance with the above Order ofthe CEGAT, your Company deposited with the ExciseCollectorates having jurisdiction over five factoriesof your Company, a total amount of Rs. 350 crores,and also furnished a Bond as directed.

Thereafter, the CEGAT heard the appeals betweenFebruary and May 1998, and by its Order dated4th September, 1998 :-

a) set aside the demand of differential exciseduty on the Contract Manufacturers of ITC ;

b) set aside the penalties imposed on ITC, sixof its ex-Directors and its ContractManufacturers ;

c) set aside the quantification of the excise dutydemand on ITC ; and

d) remanded the matter to the AdjudicatingAuthority for fresh quantification of duty

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demand on ITC in accordance with theguidelines provided in the Order and aftergiving ITC an opportunity of personal hearing.

Since your Company believes that it has no legalliability to pay any differential excise duty, and theOrder of the CEGAT is, therefore, unsustainable inlaw, the Company filed an Appeal in the SupremeCourt. The Excise Department also filed Appealschallenging the CEGAT’s Order. At the admissionstage, the Supreme Court, on 15th January, 1999passed an Order to the following effect :-

a) The Appeal filed by the Company againstCEGAT’s Order holding the Company liablefor differential duty has been admitted.

b) The Appeal filed by the Excise Departmentin respect of the Company has been admitted;adjudication proceedings for freshquantification of differential duty inaccordance with CEGAT’s Order maycontinue, but no orders pursuant to suchproceedings shall be passed without the leaveof the Supreme Court.

c) Excise Department’s appeals in respect ofContract Manufacturers have been admittedonly on the limited question of their liability,if any, upto six months preceding the ShowCause Notice.

d) Excise Department’s appeals challenging thequashing of penalties imposed on the formerDirectors have been dismissed.

A few days before the CEGAT passed its Orderon 4th September, 1998 the Excise Departmentfiled criminal complaints on 30th August, 1998 inthe Economic Offences Courts at Meerut, Bangalore,Mumbai, Patna and Kolkata against the Companyand the six ex-Directors on the basis of Order ofthe CCE, Delhi dated 29th December, 1995. Theseprosecutions are being contested by your Companyand the individuals.

On applications moved by the ex-Directors, theproceedings before the Bangalore, Kolkata andMeerut Courts have been stayed by the High Courtof Karnataka, the High Court of Calcutta and theAllahabad High Court respectively.

Prior to March, 1983, duty on cigarettes was onad valorem basis. In the light of the decision of theSupreme Court in the case of Voltas in the year

1973, your Company filed Price Lists for cigarettesmanufactured at its various factories claimingabatement of certain Post-Manufacturing Expenses(PME). As disputes arose as to the maintainability ofthe claim for abatement of PME made by theCompany, the Price Lists were approved on aprovisional basis. During the period 1975 to 1985,various Show Cause Notices were issued in respectof Bangalore, Saharanpur and Munger factories ofthe Company alleging inter alia that additionalmargins were given by the Company to the wholesaledealers to meet certain expenses which should formpart of its price to the wholesale dealers. All suchShow Cause Notices were assigned to the DirectorGeneral of Inspection, Customs & Central Excise,New Delhi (‘DG’) who passed his Order on 10thApril, 1986. Although the differential duty payableunder the DG’s Order was determined on anadmitted interpretation of Rule 5 of Central Excise(Valuation) Rules (which interpretation has sincebeen upheld by the CEGAT and affirmed by theSupreme Court), the Excise Department raised doubtson such interpretation and issued revised demandsunder the DG’s Order, in respect of Bangalore,Munger and Saharanpur factories. The Bangaloredemand for Rs. 27.58 crores was set aside by theCommissioner (Appeals), Bangalore, by his Orderdated 22nd November, 1999 against which theDepartment has filed an Appeal in CEGAT, Chennai.The Saharanpur demand of Rs. 80.30 crores wasconfirmed by the Commissioner (Appeals) to theextent of Rs. 76.03 crores as against which yourCompany has filed an Appeal before CEGAT, Delhi,which is pending. Since your Company had to makea pre-deposit of Rs. 20 crores for hearing of its Appealby the Commissioner (Appeals), CEGAT has stayedrecovery of the balance amount of Rs. 56.03 crorespending disposal of Company’s Appeal before it. Byan Order dated 28th November, 2001, a three-member Bench of the CEGAT to whom the Appealwas referred, has answered all questions arising inthe Appeal in favour of your Company and in viewof this decision of the CEGAT the demand for Rs.76.03 crores is no longer sustainable. The formalOrder of the CEGAT is, however, awaited. Meanwhile,the Excise Department has filed an appeal againstthe CEGAT’s Order dated 28th November, 2001,and this appeal is pending admission in the SupremeCourt. As regards the Munger factory the reviseddemand of Rs. 8.29 crores under the DG’s Orderwas dropped by the Commissioner of Central Excise,

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Patna vide his Order dated 20th September, 2001.As mentioned in the Report of the Directors for1987 and thereafter, the Excise Department, during1987 and 1988, again reopened some of the issuesalready settled by the Order of the DG, by issuingfresh Show Cause Notices in respect of the periodupto 28th February, 1983. The Notices proposedto recover differential duties of Rs. 43.88 crores (forMunger factory), Rs. 143.22 crores (for Bangalorefactory), Rs. 31.05 crores (for Kidderpore factory),Rs. 41.51 crores (for Parel factory) and Rs. 26.43crores (for Saharanpur factory). All these Noticeswere assigned to the Commissioner of Central Excise,Delhi, for investigation and adjudication. YourCompany has, apart from denying any liability asclaimed in the Notices, challenged the maintainabilityof all these Show Cause Notices. On an Appeal filedby your Company against an Order of theCommissioner, rejecting the Company’s contentionson the issue of maintainability, the CEGAT, Chennai,by its Judgement dated 13th January, 2000 upheldthe contention of your Company and has set asidethe Bangalore Show Cause Notice for Rs. 143.22crores with the direction, inter alia, that theallegations made therein should be considered bythe Assessing Authority while finalising theassessments in respect of the Bangalore factory,which has been your Company’s contention allalong. By an order dated 21st July, 2000, theSupreme Court has admitted the appeal of theDepartment and stayed the order of CEGAT,Chennai. Your Company’s Appeals against similarOrders relating to the Show Cause Notices issuedin respect of Munger and Parel factories are pendingbefore CEGAT, Kolkata and Mumbai respectively.As regards the Show Cause Notice in respect ofSaharanpur factory, your Company has filed a WritPetition in the Delhi High Court which is pending.In accordance with the law laid down by the CEGATon interpretation of Rule 5 of the Central ExciseValuation Rules, and upheld by the Supreme Court,the exorbitant amounts set out in the pending ShowCause Notices referred to above would stand virtuallyextinguished. In fact while the Company’s appealagainst the Show Cause Notice relating to Parelfactory for Rs. 41.51 crores is pending before CEGAT,Mumbai, the Commissioner of Central Excise, Delhiby his Order dated 29th December, 2000 hasconfirmed the demand for Rs. 5.96 crores or suchhigher or lower amount as may be redeterminedby the jurisdictional officer. By the same Order the

liability of the two Contract Manufacturers wereroughly determined at Rs. 83 lakhs and Rs. 41 lakhsas against the differential duty of Rs. 6.65 croresand Rs. 2.89 crores respectively proposed in thesaid Show Cause Notice. Your Company and alsothe Contract Manufacturers have, however, filedseparate Appeals in CEGAT, Mumbai against thesaid Order of the Commissioner alongwithapplications for stay which are pending. TheDepartment has also filed an Appeal against thesaid Order of the Commissioner, Delhi before CEGAT,Delhi which is pending.

So far as the Kidderpore factory is concerned theNotices were set aside and all pre-March 1983valuation disputes stand resolved pursuant to thefinalisation of the provisional assessments.

As mentioned in the Report of the Directors inearlier years, the Excise Authorities were alsopersisting with two more Notices, issued in 1983and 1984 for a total sum of Rs. 57.66 crores by theParel Authorities on the question of treatment ofSecurity Deposit for excise valuation, in spite of thisissue having been concluded by the Order of theDG. By an Order dated 30th September, 1999, theCommissioner of Central Excise, Delhi has confirmedthe demand in respect of these two Notices for onlyRs. 75.27 Lakhs which amount has to be adjustedwith the equivalent amount already paid by yourCompany pursuant to the DG’s Order. By the saidOrder, a penalty of Rs. 5 lakhs has also been imposedon your Company. The Company has filed an Appealbefore CEGAT, Mumbai against the said Order dated30th September, 1999.

As reported in the 1997 Report of the Directors,the Commissioner of Central Excise, Delhi, haddirected the Departmental Authorities to finalise theassessments in respect of Bangalore, Parel andMunger for the pre-March 1983 period. Thepurported Order of finalisation of assessments dated15th January, 1998 relating to the Bangalore factoryfor Rs. 23.82 crores was challenged before theCommissioner (Appeals), Bangalore, who, by hisOrder dated 20.11.99 allowed the Company’sAppeal and remanded the matter for de novoadjudication setting aside the impugned Order.Pursuant to this, the Assistant Commissioner, CentralExcise, Bangalore by his Order dated 26th July, 2001has purported to have finalised the assessment forthe above period and by adding various elements,that too not to price of the cigarettes declared butto the assessable

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value thereof, has demanded differential duty ofabout Rs. 583 crores in disregard of the bindingdirections and judgements of Collector (Appeals),CEGAT and also of the Supreme Court in yourCompany’s own cases. Since no further differentialduty is legally payable for the cigarettesmanufactured and cleared from the Bangalorefactory during the period 01.10.75 to 28.02.83,your Company has filed an Appeal against the saidOrder before the Commissioner (Appeals). On theCompany’s application for stay of the demand, theCommissioner (Appeals) by his Order dated 26thMarch, 2002 has directed a pre-deposit of Rs. 20crores subject to which the recovery of the balanceamount of the differential duty will remain stayedduring the pendency of the Appeal. The Companyhas made the pre-deposit of Rs. 20 crores and thehearing of the Appeal is in progress. Orders offinalisation of assessments were also passed by theDepartmental Authorities in respect of the Mungerand Parel factories, and differential duty of Rs. 9.28crores and Rs. 1.38 crores were demandedrespectively. Your Company’s Appeals against thesaid Orders of finalisation of assessments of Mungerand Parel factories have been disposed of byremanding the matters for fresh hearing. Whileproceedings pursuant to remand have not beencompleted in respect of cigarettes manufacturedand cleared from the Munger factory, the DeputyCommissioner of Central Excise, Mumbai I by hisOrder dated 22nd September, 2000 has finalisedthe assessments relating to Parel factory between1st March, 1973 to 28th February, 1983. In termsof the said order, a sum of Rs. 87.83 lakhs is shownto have been paid in excess upon adjustment ofduty liability for the said period. The Department’sAppeal against the said Order of finalisation ispending before the Commissioner (Appeals),Mumbai.

Although your Company in a spirit of settlement,paid the differential Excise Duty that arose out ofthe Order of the Director General as early as inMarch, 1987, and although the Excise Department’saforesaid Demands had either been quashed orstayed, the Collectorates in Meerut, Patna andBangalore, during the year 1995, filed criminalcomplaints in the Special Court for EconomicOffences at Kanpur, Patna and Bangalore, chargingyour Company and some of its Directors andemployees who were employed with your Companyduring the period 1975 to 1983 with offences under

the Central Excises & Salt Act, 1944, purportedlyon the basis of the Order of the Director Generaldated 10th April, 1986. Your Directors are advisedthat no prosecution would lie on the basis of theaforesaid Order of the Director General dated 10thApril, 1986. In fact, the Special Court in Kanpur,which initially took cognisance of the complaints,subsequently, on applications filed by the individualsconcerned, discharged them. Similar applicationswere filed by the individuals in the Special Courtin Patna, which are pending. On applicationsmoved by the individuals concerned, the KarnatakaHigh Court, by its Order dated 31st August,2001 quashed the complaint in so far as the saidindividuals are concerned. Following the Orderpassed by the Karnataka High Court, the Magistratehas quashed the Complaint by his Order dated28.9.01.

The Collector of Central Excise, Bangalore hadissued a Show Cause Notice and after adjudicationa Demand Notice was received on 12th August,1988 for Rs. 2.4 crores, including a penalty of Rs.1.2 crores, on account of alleged variation from theapproved surface design of one of your Company’sbrand packs. On Appeal, the CEGAT, Delhi, passedan Order effectively bringing down the duty liabilityto Rs.1.5 lakhs and the penalty to Rs.1 lakh. In theopinion of your Directors even this Order isunsustainable. Your Company, therefore, filed anAppeal in the Supreme Court against the aboveOrder, which was admitted and is now pending.While the appeal before CEGAT was pending, theDepartment filed a criminal complaint against theCompany and some of its Directors and Managersbefore the Magistrate Court, Bangalore. By hisOrders dated 27th July, 2001 and 15th February,2002 the Magistrate discharged the Company andthe individuals.

In all the above instances, your Directors are ofthe view that your Company has a strong case andthe Show Cause, the Demand Notices and theComplaints are not sustainable.

Since your Company is contesting the abovecases and contending that the Show Cause, theDemand Notices and the Complaints are notsustainable, it does not accept any liability in thisbehalf. Your attention is drawn to the Note 19(vii)in the Schedules to the Accounts and Note 19(v)in the Schedules to the Consolidated FinancialStatements.

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RECOVERY OF DUES FROM THE CHITALIASAND ENQUIRY BY THE ENFORCEMENTDIRECTORATE

You are aware that your Company had securedfrom the District Court of New Jersey, U.S.A., adecree for US$ 12.19 million together with interestand costs against Suresh and Devang Chitalia ofU.S.A. and their companies, and that the Chitaliashad filed Bankruptcy Petitions before the BankruptcyCourt, Orlando, Florida, which are being contestedby your Company.

As detailed in the Report of the Directors lastyear, the Chitalias made an Offer of Judgementproposing that they would submit to a judgementof the Bankruptcy Court disallowing theirapplications to be discharged as bankrupt providedyour Company withdrew its objections to theirclaims for exemption in respect of some of theirassets. Based on the advice of your Company’s U.S.Counsel that the Chitalias' Offer be accepted since,under the U.S. law, they would be entitled to theseexemptions, your Company accepted the Offer andthe Bankruptcy Court ordered accordingly, therebydefeating the objective of the Chitalias to getthemselves discharged as bankrupt.

The Bankruptcy proceedings before the FloridaCourt are, however, continuing for the purpose ofcollecting and distributing the property of thebankruptcy estate and your Company continueswith its efforts for recovery of its dues from theChitalias. In this process, your Company discoveredcertain documents evidencing possible transfer ofassets/funds by the Chitalias to their associates inIndia. Your Company obtained the permission ofthe Florida Court and the Reserve Bank of India topursue these assets/funds and has recently filed asuit in Mumbai, on behalf of the Trustees of thebankruptcy estate of the Chitalias, against theChitalia associates. The suit is in progress.

Meanwhile, the process of inspection of thevoluminous documents relating to the Show CauseNotices by the Company and the concernedindividuals are yet to be completed since theEnforcement Directorate has suspended inspection.Your Company has requested the Directorate topermit resumption of inspection and their responseis awaited. Recently, the Directorate issuedOpportunity Notices to the Company and theconcerned individuals seeking details of

permissions/exemptions obtained from theGovernment and/or the Reserve Bank of India, inrespect of the transactions alleged in the ShowCause Notices, and in the absence of suchpermissions/exemptions, threatening initiation ofprosecution. Your Company has filed appropriatereplies to these Notices explaining that the launchingof such proceedings is not warranted.

TAXATION

As mentioned in the Report of the Directors forthe last four years, the Company had obtained stayorders from the Hon’ble Calcutta High Court inrespect of the notices served by the Income TaxDepartment for re-opening the past assessmentsfor the period 1st July, 1983 to 30th June, 1986.This status remains unchanged.

As also stated in the Report of the Directors forthe last four years, in respect of similar notices fromthe Income Tax Department for re-opening the pastassessments for the period 1st April, 1990 to 31stMarch, 1993, the Hon’ble Calcutta High Court hadadmitted the Writ Petitions and ordered that nofinal assessment orders be passed without the leaveof the Court. This status also remains unchanged.

PUBLIC DEPOSITS

As at March 31, 2002 your Company had FixedDeposits of Rs. 50.55 crores including Rs. 4.64 croresfollowing amalgamation of ITC BhadrachalamPaperboards Limited. No fresh / renewal of depositswere accepted during the financial year. There wasno failure to make repayments of fixed deposits onmaturity and the interest due thereon in terms ofthe conditions of your Company’s Schemes.Reminders have been sent to 800 persons who didnot claim repayment of their deposits which hadbecome due, amounting to Rs. 94.65 lakhs. Thecases of fraudulent encashments as reported inprevious years, continue to be under investigationby the police authorities.

INVESTOR SERVICE CENTRE

The Investor Service Centre (ISC) of yourCompany continues to invest in upgrading itsinfrastructure and systems to provide best-in-classservice. Already a benchmark in-house Registrar ininvestor servicing, ISC consistently strives to cater

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to the increasing expectations of the investorsthrough a trained and dedicated team ofprofessionals.

Investors’ response to the section on ‘InvestorRelations’ in your Company’s website has beenencouraging and the number of visitors to thissection has been rising steadily. This section, interalia, serves as a user-friendly online guide to theinvestors.

DIRECTORS

Shri Avinash Chander Ahuja ceased to be a Non-Executive Director of your Company with effectfrom 21st September, 2001, as a consequence ofIFCI Limited advising your Company of its freshnomination. Shri Brij Gopal Daga, who representedthe Unit Trust of India, resigned as Non-ExecutiveDirector of your Company with effect from 31stOctober, 2001. Shri Antonio Americo de FigueiredoRodrigues also resigned as Non-Executive Directorof your Company with effect from 18th January,2002.

Your Directors would like to record theirappreciation of the services rendered by SarvashriAhuja, Daga and Rodrigues.

Shri Ajeet Prasad was appointed by the Board ofDirectors as Additional Non-Executive Director ofyour Company with effect from 7th December,2001, as a representative of Unit Trust of India. ShriJohn Benedict Stevens was also appointed by theBoard of Directors as Additional Non-ExecutiveDirector of your Company with effect from 18thJanuary, 2002.

IFCI Limited appointed Shri Mudambai V. Muthuas its nominee on the Board of Directors of yourCompany with effect from 21st September, 2001.

By virtue of the provisions of Article 96 of theArticles of Association of the Company and Section260 of the Companies Act, 1956, Sarvashri Prasadand Stevens, Additional Non-Executive Directors,will vacate office at the ensuing Annual GeneralMeeting of your Company and have filed theirconsent to act as Directors of the Company, ifappointed. The Board of Directors of your Companyat its meeting held on 22nd May, 2002,recommended for the approval of the Members,the appointment of Sarvashri Prasad and Stevensas Non-Executive Directors of your Company, liable

to retire by rotation, for a period of five years fromthe date of the ensuing Annual General Meeting ofthe Company.

Notices have been received from Members ofthe Company under Section 257 of the CompaniesAct, 1956 for the appointment of Sarvashri Prasadand Stevens as Directors. Appropriate resolutionsseeking your approval to their appointment areappearing in the Notice convening the 91st AnnualGeneral Meeting of the Company.

Sarvashri Pillappakkam Bahukutumbi Ramanujamand Charles Richard Green were appointed as Non-Executive Directors of your Company at the AnnualGeneral Meeting of the Company held on 30th July,1999, for a period of three years and accordinglytheir present term of appointment will expire on29th July, 2002. The Board of Directors of yourCompany at its meeting held on 22nd May, 2002,also recommended for the approval of the Members,their re-appointment as Non-Executive Directors ofyour Company, for a further period of five yearswith effect from 30th July, 2002.

Notices have also been received from Membersof the Company under Section 257 of the CompaniesAct, 1956 for the re-appointment of SarvashriRamanujam and Green as Directors. Appropriateresolutions seeking your approval to their re-appointment are appearing in the Notice conveningthe 91st Annual General Meeting of the Company.

The Board of Directors, at its meeting held on19th October, 2001, extended the term of ShriSahibzada Syed Habib-ur-Rehman as WholetimeDirector of the Company by a further period of twoyears from 21st March, 2002 to 20th March, 2004.Appropriate resolution seeking your approval tosuch extension of term of Shri Rehman is appearingin the Notice convening the 91st Annual GeneralMeeting of the Company.

Shri Nigel Timothy Gourlay ceased to be AlternateDirector to Shri Green with effect from 18th October,2001 in terms of Section 313 of the Companies Act,1956. Shri Rodrigues, who was appointed by theBoard of Directors of your Company as AlternateDirector to Shri Green with effect from 23rd January,2002, has also ceased to be Alternate Director witheffect from 22nd May, 2002.

In accordance with the provisions of Article 91of the Articles of Association of the Company,

Shri Charles Richard Green, Dr. Basudeb Sen andShri Balakrishnan Vijayaraghavan will retireby rotation at the ensuing Annual GeneralMeeting of your Company and, being eligible,offer themselves for re-election. Your Boardof Directors has also recommended theirre-appointment.

AUDITORS

The Auditors, Messrs. A. F. Ferguson & Co., retireat the ensuing Annual General Meeting and, beingeligible, offer themselves for re-appointment. Sincenot less than 25% of the subscribed Share Capitalof your Company is held collectively by PublicFinancial Institutions, the re-appointment of Auditorsis being proposed as a Special Resolution inaccordance with Section 224A of the CompaniesAct, 1956.

EMPLOYEE STOCK OPTION SCHEME

Pursuant to the Employee Stock Option Schemeof your Company introduced during the last financialyear, 3,39,119 Options were granted for the financialyear 2000-01 to the eligible employees of yourCompany and those of the Company’s subsidiarycompanies.

Details of the Options granted, as required underClause 12 of the Securities and Exchange Board ofIndia (Employee Stock Option Scheme and EmployeeStock Purchase Scheme) Guidelines, 1999, are setout in the Annexure to this Report.

DIRECTORS’ RESPONSIBILITY STATEMENT

As required under Section 217 (2AA) of theCompanies Act, 1956, your Directors confirm having:

a) followed in the preparation of the AnnualAccounts, the applicable accounting standardswith proper explanation relating to materialdepartures;

b) selected such accounting policies and appliedthem consistently and made judgements andestimates that are reasonable and prudentso as to give a true and fair view of the stateof affairs of your Company at the end of thefinancial year and of the profit of yourCompany for that period;

c) taken proper and sufficient care for themaintenance of adequate accounting recordsin accordance with the provisions of theCompanies Act, 1956 for safeguarding theassets of your Company and for preventingand detecting fraud and other irregularities;and

d) prepared the Annual Accounts on a goingconcern basis.

CONSOLIDATED FINANCIAL STATEMENTSIn accordance with Accounting Standard 21 -

Consolidated Financial Statements, ITC GroupAccounts form part of this Report & Accounts. TheseGroup accounts have been prepared on the basisof audited financial statements received fromSubsidiary Companies, as approved by theirrespective Boards.

OTHER INFORMATIONThe certificate of the Auditors, Messrs. A. F.

Ferguson & Co. confirming compliance of conditionsof Corporate Governance as stipulated under Clause49 of the Listing Agreement with the StockExchanges in India, is annexed. Particulars as requiredunder Section 217(1)(e) of the Companies Act,1956 relating to Conservation of Energy andTechnology Absorption are also provided in theAnnexure to this Report together with particularsof Employees as required under Section 217(2A) ofthe Companies Act, 1956.

CONCLUSIONYour Company continues its relentless focus on

strengthening competitiveness in all its businesses.It is the endeavour of your Company to deployresources in a balanced manner so as to secure theinterest of the shareholders in the short, mediumand long terms.

Your Directors look forward to the future withconfidence.

22nd May, 2002Virginia House On behalf of the Board37 J L Nehru RoadKolkata 700 071 A. SINGH DirectorIndia K. VAIDYANATH Director

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48

Name Designation No. of Options granted

1 Y. C. Deveshwar Chairman & Wholetime Director 27,694

2 S. S. H. Rehman Wholetime Director 11,539

3 A. Singh Wholetime Director 11,539

4 K. Vaidyanath Wholetime Director 9,231

5 A. C. Ahuja Non-Executive Director 7,692

6 B. G. Daga Non-Executive Director 7,692

7 C. R. Green Non-Executive Director 7,692

8 Y. P. Gupta Non-Executive Director 7,692

9 P. B. Ramanujam Non-Executive Director 7,692

10 A. A. F. Rodrigues Non-Executive Director 7,692

11 B. Sen Non-Executive Director 7,692

12 Ram S. Tarneja Non-Executive Director 7,692

13 R. Vasudevan Non-Executive Director 7,692

14 B. Vijayaraghavan Non-Executive Director 7,692

15 K. S. Vaidyanathan Senior Vice President, Corporate Affairs 6,923

16 A. Nayak Executive Vice President - 6,923 Corporate Human Resources

17 R. Srinivasan Divisional Chief Executive, PPD 6,923

18 K. N. Grant Divisional Chief Executive, ITD 6,923

19 R. G. Jacob Divisional Chief Executive, TTD 6,923

20 B. B. Chatterjee Executive Vice President & 4,074Company Secretary

Statement for the financial year ended 31st March, 2002, pursuant to Clause 12 (Disclosure in the Directors’ Report)of the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme)Guidelines, 1999, and forming part of the Report of the Directors.

a) Options granted : 3,39,119

b) Pricing formula : Rs. 779.95 per Option, being the closing market price of theOrdinary Shares of the Company on the National StockExchange of India Limited on the date of grant of Options.

c) Options vested : Nil

d) Options exercised : Nil

e) The total number of Ordinary : NilShares arising as a result ofexercise of Options

f) Options lapsed : 23,076*

g) Variation of terms of Options : Nil

h) Money realised by exercise of : NilOptions

i) Total number of Options in force : 3,16,043

j) i. Details of Options granted to :senior managerial personnel

ANNEXURES TO THE REPORT OF THE DIRECTORSFOR THE FINANCIAL YEAR ENDED 31ST MARCH, 2002

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ii. Any other employee who receives a grant : Nonein any one year of Options amounting to5% or more of Options granted duringthat year.

iii. Identified employees who were granted : NoneOptions, during any one year, equal to orexceeding 1% of the issued capital (excludingoutstanding warrants and conversions) of theCompany at the time of grant.

k) Diluted Earnings per Share (EPS) pursuant to : NAissue of shares on exercise of Options calculatedin accordance with International AccountingStandard (IAS) 33.

* Represents Options granted to Sarvashri A. C. Ahuja, B. G. Daga and A. A. F. Rodrigues, Non-Executive Directorsof the Company, which have lapsed consequent upon cessation of their Directorship.

CERTIFICATE OF COMPLIANCE FROM AUDITORS AS STIPULATED UNDER CLAUSE 49 OF THE LISTING AGREEMENTOF THE STOCK EXCHANGES IN INDIA

CERTIFICATE

To the Shareholders

We have examined the compliance of conditions of Corporate Governance by ITC Limited for the year ended on 31stMarch, 2002, as stipulated in clause 49 of the Listing Agreement of the said Company with stock exchanges in India.

The compliance of conditions of Corporate Governance is the responsibility of the management. Our examinationwas limited to procedures and implementation thereof, adopted by the Company for ensuring the compliance ofthe conditions of Corporate Governance. It is neither an audit nor an expression of opinion on the financial statementsof the Company.

In our opinion and to the best of our information and according to the explanations given to us, we certify that theCompany has complied with the conditions of Corporate Governance as stipulated in the above mentioned ListingAgreement.

We state that in respect of investor grievances received during the year ended 31st March, 2002, no investor grievancesare pending against the company as per the records maintained by the company and presented to the InvestorServices Committee.

We further state that such compliance is neither an assurance as to the future viability of the Company nor theefficiency or effectiveness with which the management has conducted the affairs of the Company.

For A.F. FERGUSON & CO.Chartered Accountants

A.K. MAHINDRAKolkata, 22nd May, 2002 Partner