Deepak Fertilisers & Petrochemicals Corporation Limited Annual...

Voting Advisory

September 2018 Deepak Fertilisers & Petrochemicals Limited 1

Deepak Fertilisers & Petrochemicals Corporation Limited Annual General Meeting (AGM)

Report Date: 1 September 2018 BSE: 500645 | NSE: DEEPAKFERT Industry: Commodity Chemicals Index: S&P BSE 500/Nifty 500 Face Value: Rs.10.0 Fiscal Year End: March

Meeting Date: 18 September 2018, 11:30 AM Proxy Deadline: 16 September 2018, 11:30 AM E-voting Period: 15 September 2018 (9:00 AM) to 17 September 2018 (5:00 PM) E-Voting Site: https://evoting.karvy.com/

Meeting Venue: Opus 1, The Core Level 1, Creaticity, Opposite Golf course, off Airport Road, Yerawada, Pune- 411006

Agenda Items

# Type1 Description of resolution IiAS

Recommendation See Legend

1 O Adoption of standalone and consolidated financial statements for the year ended 31 March 2018

See Analysis

We believe that a comprehensive review of the financials of a company is a critical exercise which often requires first-hand information and proper due diligence. We do not comment on resolutions for adoption of financial statements, given the limited time between receipt of the annual report and the shareholder meeting, but provide analysis of critical ratios.

2 O Declare final dividend of Rs.6.0 per equity share (FV of Rs.10) FOR The total dividend outflow including dividend tax for FY18 is Rs. 0.6 bn. The dividend payout

ratio for FY18 is 56.4%.

3 O Ratify appointment of B S R & Associates LLP as statutory auditors till the end of their term in the year 2022 FOR

B S R & Associates LLP were appointed as statutory auditors in FY17 AGM for a period of five years. Deepak Fertilisers & Petrochemicals Limited proposes to ratify their appointment till the end of their term in the AGM to be held in the year 2022. This is in line with the Companies Amendment Act, 2017 dated 7 May 2018 which has done away with the requirement of annual ratification for the statutory auditor.

4 O Approval for not filling the casual vacancy caused by retirement of R A Shah who was a director liable to retire by rotation

FOR

R A Shah, 87, was a Non-Executive Non-Independent Director liable to retire by rotation. He retires in the forthcoming AGM but does not offer himself for reappointment. The board seeks approval to not fill up the casual vacancy caused on the board. The company is compliant with the board composition norms even after retirement of R A Shah.

5 O Ratify remuneration of Rs. 300,000 for Y. R. Doshi & Co., as cost auditor for FY19 FOR The proposed remuneration is reasonable compared to the size and scale of operations.

6 O Reappoint S C Mehta as Chairperson and Managing Director for five years, commencing from 1 August 2018, and approve his remuneration

AGAINST

S C Mehta, 57, is the Chairperson and Managing Director of the company and part of the promoter family. His proposed FY19 remuneration estimated at Rs. 124.2 mn is high for the size of the company at 7% of consolidated PAT and is higher than peers. The company must consider putting a cap on the absolute commission payable to directors.

G I F V T R

7 O Pay commission to Non-Executive Directors for five years, commencing from 1 April 2019

FOR

The payments made to non-executive directors have been reasonable. We expect commission to be along similar lines in future. It must consider setting a cap in absolute terms on the commission payable as profits increase.

G I F V T R

8 S Reclassify Authorized Share Capital from Rs. 1350.5 mn divided into 125.05 equity shares of Rs. 10 each, and 1 mn Cumulative Redeemable Preference Shares of Rs. 100 each, to Rs. 1350.5 mn divided into 135.05 mn equity shares of Rs. 10 each.

FOR

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Voting Advisory


# Type1 Description of resolution IiAS

Recommendation See Legend

Presently, the authorised share capital of the company is Rs. 1350.5 mn divided into 125.05 mn equity shares of Rs. 10 each and 1 mn redeemable preference shares of Rs. 100 each. The issued, subscribed and paid up capital is Rs. 882 mn divided into 88.2 mn equity shares of Rs. 10 each. After reclassification, the authorised share capital will comprise of Rs. 1350.5 mn divided into 135.05 mn equity shares of Rs. 10 each.

The company wants to issue additional equity shares by way of a Qualified Institutional Placement and Preferential warrants for the growth and expansion objectives of the company, for which it requires shareholders’ approval by a special resolution

9 S Issue Equity Shares, GDRs, ADRs, FCCBs or Partly Convertible Debentures for an amount not exceeding Rs. 6 bn, by way of a qualified institutional placement

FOR

The company is currently undergoing capex: it is setting up a plant in Taloja for manufacture of ammonia, manufacture of Iso Propyl alcohol and mining ammonium nitrate. Therefore, it needs to raise capital. Assuming that the securities will be issued at the current market price of Rs. 255.6, the company will issue ~ 23.5 mn shares, representing a dilution of ~21%. The proposed QIP will help the company with its expansion activities and achieve its long-term objectives.

G I F V T R

10 S Issue Preferential warrants convertible into equity shares to Robust Marketing Services Private Limited, a promoter group company for an amount not exceeding Rs. 2 bn

AGAINST

Although we support the equity infusion, by issuing warrants, promoters get an option to ride the stock price for 18 months. In case the promoters subsequently decide not to subscribe to the remaining 75%, it could have material implications for the company’s long-term plans.

G I F V T R

11 S Provide guarantee up to Rs. 20.4 bn on behalf of Smartchem Technologies Limited (STL), a wholly owned subsidiary for funding requirements of Performance Chemiserve Private Limited (PCPL), a subsidiary of STL

FOR

The company holds 76% stake in Performance Chemiserve Private Limited (PCPL) through its wholly owned subsidiary, Smartchem Technologies Limited (STL), and the remaining is held by the promoters of PCPL. It is setting up facilities for manufacture of ammonia in Taloja and has commenced work relating to setting up ammonia project. The company is leveraging the strength of its balance sheet to support debt-raising for the Taloja ammonia project.

12 S Provide an option to Banks/ Financial Institutions/ other lenders to convert whole or part of outstanding loans into fully paid up equity shares, in the event of default

FOR

The board proposes this enabling resolution since banks insist for inclusion of an option to convert the outstanding facility into equity in the event of default or upon exercise of an option provided under the lending arrangements. The company is currently not defaulting on its loans. On 31 March 2018, the outstanding borrowings on a consolidated basis were Rs. 6.3 bn.

[1] O/S: Ordinary/Special

Voting Advisory


Company Overview Deepak Fertilizers & Petrochemicals Corporation Ltd. (‘Deepak Fertilizer’ or ‘the company’) is a producer of industrial chemicals and fertilizers. The company’s product portfolio comprises industrial chemicals, bulk and specialty fertilizers, farming diagnostics and solutions, technical ammonium nitrate, mining services and consulting and value-added real estate.

Promoters: Sailesh Chimanlal Mehta Nova Synthetic Ltd Market snapshot Market Price (Rs): 255.6 Market Cap (Rs bn): 22.5 Networth (Rs bn): 20.5 52 week H-L (Rs): 499.8 - 240 Current P/E (x): 12.7 Current P/B (x): 1.1

Previous Advisory PB – 19 December 2017 AGM – 21 September 2017

Price Performance (period ending 1 September 2018)

Source: ACE Equity

Financial performance (Rs.bn) Year ending 31-Mar 2016 2017 2018 Total Income 43.8 41.7 60.2 EBITDA 4.3 4.9 5.7 EBITDA Margin (%) 9.8 11.7 9.5 PBT 1.8 2.3 2.3 PBT Margin (%) 4.0 5.6 3.9 PAT 1.2 1.5 1.6 PAT Margin (%) 2.7 3.7 2.7 EPS (Rs.) 13.2 17.5 18.4 ROANW (%) 7.8 8.8 8.2 ROACE (%) 9.7 9.4 8.5 Debt/EBITDA (x) 4.6 4.1 6.2

[c] – consolidated; FY17 and FY18 financials have been prepared as per Ind-AS; Source: ACE Equity

Trend in Shareholding Pattern (%) On Promoter1 FII DII Others

30-Jun-18 51.2 6.3 4.5 38.1

31-Mar-18 51.1 6.7 4.6 37.6

31-Dec-17 51.1 7.9 3.9 37.1

30-Sep-17 51.1 9.3 4.0 35.6

30-Jun-17 51.1 11.4 3.9 33.6

31-Mar-17 51.1 13.3 3.1 32.6

31-Mar-16 51.1 2.6 15.3 31.0

31-Mar-15 50.0 14.6 4.1 31.3

31-Mar-14 45.5 12.9 4.5 37.2 [1] Pledged Shares: Nil

Top Public Shareholders (On 30 June 2018)

No. Name of the Shareholder Shares held (mn)

Holding as % of total

1 BNP Paribas Multi Cap Fund 1.62 1.84 2 Fidelity Low-Priced Stock Fund 2.00 2.27 3 ICICI Prudential Life Insurance Company Limited 3.84 4.35 Total 7.46 8.46

Source: BSE

106.1%

200.9%

50.1%

137.0%

49.6%

138.9%

3YR 5YR

Deepak Fertilisers &Petrochemicals CorporationLtd.

S&P BSE 500

NIFTY 500

http://iias.in/downloads/IIASreports/F1.0%20Deepak%20Fertilisers%20Petrochemicals%20Limited%20PB%20December%202017_20171204125246.pdf

http://iias.in/downloads/IIASreports/F1.0%20DeepakFertilisers&PetrochemicalsCorpLtd-AGM-21Sep17-IiASVRecommendations_20170906104449.pdf

Voting Advisory


Category: Accounts Resolution 1: Adoption of standalone and consolidated financial statements for the year ended 31 March 2018 IiAS believes that a comprehensive review of the financials of a company is a critical exercise which often requires first-hand information and proper due diligence. IiAS does not comment on resolutions for adoption of financial statements, given the limited time between receipt of the annual report and the shareholder meeting, but provides analysis of critical ratios.

Standalone vs Consolidated (Rs. bn) Revenue by Segment

Inner ring: FY17 data Outer ring: FY18 data

Risk Indicators Leverage Profile

For the year ended 31-Mar 2016 2017 2018

CFO/EBITDA (x) (0.3) 1.6 (0.2) Exceptional items/total income (%) - - -

Interest/Average Debt (%) 7.8 6.1 6.2

Contingent liabilities/networth (%) 26.4 33.6 31.9 Receivables Days 101 119 99

Major Related Party Transactions (RPT) (Rs.bn)

As on 31-Mar 2017 2018 Assessment Receivables 0.6 0.3 Negligible Payables 0.1 0.1 Negligible

Corporate Social Responsibility (CSR) Period ending 31-Mar-2018 Rs.mn % (PAT) Average 3-yr profits 1727.1 - Prescribed CSR expenditure 34.5 2.0 Actual CSR expenditure 17.4 1.0

Liquidity As on 31-Mar-2018 Rs.bn Current Investments 3.8 Cash flow from operations (1.3) Cash and cash equivalents 1.0

Audit Integrity Parameter Result Name of Auditor B S R & Associates LLP Audit Network KPMG Tenure of auditor (yrs)1 1

[1] Audit network Tenure

Cyber security The annual report does not mention the steps taken by the company to resolve cyber security issues. Shareholders should engage with the company to understand how it addresses cyber security issues.

32.5 1.1

36.5

27.7 0.5

32.6

0%

20%

40%

60%

80%

100%

Total income PAT Total Assets

Standalone Subsidiaries

73%

27%0%0%

70%

30%

0%0%

Chemicals

Fertilisers

Realty

Others

1.3 1.0 1.7

4.6 4.1

6.2

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0

-

10.0

20.0

30.0

40.0

31-03-16 31-03-17 31-03-18

Debt (Rs.bn) Debt/Equity (x) Debt/EBIDTA (x)

RatiosDebt Rs. bn

Voting Advisory


Category: Dividends

# Type Description of resolution IiAS Recommendation

Indicators See Legend

2 O Declare final dividend of Rs.6.0 per equity share (FV of Rs.10) FOR Discussion IiAS Assessment Parameters for Dividend Payout

Assessment Parameters Comment Details Is growth in dividend higher than growth in profits? No Refer Exhibit 1 Does the company have a stated dividend policy? Yes Dividend payout not provided Does the company have room to pay a higher dividend? No

Discussion The company has proposed a final dividend of Rs.6.0 per equity share of face value Rs.10.0 for the year ended 31 March 2018. The total dividend outflow including dividend tax for FY18 is Rs.0.6 bn. The dividend payout ratio is 56.4%. Although the company has a dividend distribution policy, it does not specify a target payout ratio. As a good practice, we encourage the company to formulate a dividend policy that specifies a target payout ratio. Exhibit 1: Key ratios (standalone)

Period ending 31-Mar-16 31-Mar-17 31-Mar-18

Dividend per share (Rs) 5.0 6.0 6.0

Profit after tax (Rs.bn) 1.2 0.9 1.1

Profit growth y-o-y (%) 52.9 (24.6) 25.0

Total dividend (including DDT) (Rs.bn) 0.5 0.6 0.6

Dividend growth y-o-y (%) 0.3 20.0 -

Payout Ratio (%) 44.3 70.5 56.4 Source: IiAS Research, Company filings

Exhibit 2: IiAS Voting Guidelines – dividend declaration As per Ind AS the liability for final dividend on equity shares is recognized as liability in the period in which dividend is approved by the shareholders. However, IiAS will continue to look at proposed dividend vis-à-vis the applicable year’s PAT to analyse the pay-out for the year.

IiAS recommends voting FOR the resolution.

https://www.dfpcl.com/wp-content/uploads/2017/04/DividendDistributionPolicyDFPCL30June2017.pdf

https://docs.wixstatic.com/ugd/91c61f_805dced9e21042a787078425f2cb4742.pdf

Voting Advisory


Category: Auditors



3 O Ratify appointment of B S R & Associates LLP as statutory auditors till the end of their term in the year 2022 FOR

Discussion B S R & Associates LLP were appointed as statutory auditors in FY17 AGM for a period of five years. Deepak Fertilisers & Petrochemicals Limited proposes to ratify their appointment till the end of their term in the AGM to be held in the year 2022. This is in line with the Companies Amendment Act, 2017 dated 7 May 2018 which has done away with the requirement of annual ratification for the statutory auditor. IiAS recommends voting FOR the resolution. We encourage audit committees to assess audit quality by using tangible metrics while (re)appointing auditors or ratifying their audit appointments. For more details, see our report on Audit Quality Indicators. Exhibit 3: Regulatory snapshot: Auditor appointment under section 139 of the Companies Act, 2013

Approval Process Section 139 of the Companies Act 2013 states that every company shall appoint an auditor for an initial term of five years. Auditor Rotation The Act requires mandatory rotation of individual auditors in every 5 years and of the audit firm in every 10 years (after two terms of 5 years each) in listed companies. A cooling-off period of five years after the stipulated threshold is required to be considered eligible for re-appointment. Eligibility For the purpose of rotation, the incoming auditor or audit firm shall not be eligible if they are part of the same audit network (which includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control) as the outgoing auditor or audit firm. Further, if a partner, who is in charge of an audit firm and certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years. Applicability In the rules notified recently by the Ministry of Corporate Affairs (MCA), it has been clarified that section 139 will be applicable on a retrospective basis - which means the existing term of the current auditors will be taken into account for computing the overall tenure. Commencement Companies will have to comply with the requirements within three years from the date of commencement of the Act.

https://docs.wixstatic.com/ugd/91c61f_d6e2525f5f624076a66064cfce118104.pdf

Voting Advisory


Category: Board Appointments



4 O Approval for not filling up of casual vacancy caused by retirement of R A Shah who was a director liable to retire by rotation FOR

Exhibit 4: Board Composition on 1 September 2018 and Board Meeting Attendance in FY18

*Classified as non-independent due to tenure (>10 years). Company has classified as independent. ED: Executive Director, ID: Independent Director, NED: Non-executive Non-independent director, (P): Promoter, (C): Chairperson; Committees: AC-Audit, NRC-Nomination & Remuneration, SRC-Stakeholders Relationship, CSR-Corporate Social Responsibility;

Seeking reappointment Seeking appointment

S No Name Occupation

Cate

gory

Age (yrs)

Tenure (yrs) AC NRC SRC CSR RMC

Att

enda

nce

(%)

Oth

er

Dir

ecto

rshi

ps

Pay

(Rs.

mn)

1 S. C. Mehta (P)(C) CMD ED 57 27 88 4 121.8

2 Ms. Parul Mehta (P) Social Worker NED 54 13 M 88 2 0.9

3 Partha Sarathi Bhattacharyya Former ED NED 68 6 M 63 6 1.3

4 Madhumilan P. Shinde

Former Vice-President of Operations, Deepak Fertilisers

NED 64 2 M 1 0.7

5 U. P. Jhaveri Project Management Consultant

NED* 72 14 M M M 100 1 1.6

6 S. R. Wadhwa Director, Smartchem Technologies

NED* 83 13 C M 100 1 2.1

7 Anil Sachdev HR Consultant ID 64 10 M 63 1 1.4

8 Pranay Vakil Chartered Accountant

ID 72 8 M M C 88 2 1.9

9 Anil Singhvi Chairperson, ICAN Investments Advisors

ID 59 1 80 5 0.2

10 Mahesh Chhabria Managing Director, Kirloskar Industries Limited

ID 54 1 M C 100 4 0.5

11 Ashok Kumar Purwaha

Former Managing Director, Engineers International Limited

ID 63 1 100 Nil 0.3

12 Berjis Minoo Desai

Former Managing Partner, J. Sagar Associates, Advocates & Solicitors

ID 63 1 C C 80 9 0.2

Voting Advisory


IiAS Assessment Parameters for Board Appointments Assessment Parameter Comment Regulatory Requirement Is the chairperson of the board an independent director? No Recommended by IiAS

Is there a separation in the roles between the Chairperson and CEO? No Recommended by SEBI LODR

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

Proportion of non-executive directors on the board 92%

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

Is there one woman independent director on the board? No Recommended by IiAS [1] As per IiAS classification Exhibit 5: Committee Composition1on 1 September 2018

Name of Committee

No of directors Chairperson % of

independence Compliance Remarks

Audit 4 Non-

Independent 50 Non-Compliant 67% of the committee to be independent including chairperson

Nomination and Remuneration 3 Independent 100 Compliant 50% of the committee to be

independent including chairperson Stakeholders Relationship 2 Non-Executive 0 Compliant Chairperson should be non-executive

CSR 3 Independent 33 Compliant Minimum three directors; at least one should be independent.

RMC 3 Independent 33 - [1] As per IiAS classification Discussion The board consists of 12 directors, out of which, one is an executive director and 11 are Non-Executive directors. Eight out of the 11 non-executive directors are considered Independent Directors under the regulations and by the company. IiAS classifies U P Jhaveri and S R Wadhwa as non-independent, owing to their tenure of more than 10 years on the board of the company. Consequently, IiAS considers the board to comprise of only six Independent Directors. Given that the board is chaired by an Executive Promoter Director (S. C. Mehta), at least 50% of the board must comprise of independent directors. Therefore, Deepak Fertilizer’s board is compliant with SEBI LODR’s Regulation 17(1). Exhibit 6: IiAS Voting Guidelines snapshot – minimum number of independent directors

Chapter IV, Regulation 17(1) of the SEBI Listing Obligations and Disclosure Requirements (LODR), states that for a company with an executive Chairperson, at least 50% of the board should comprise independent directors. In the case of a company with a non-executive Chairperson, at least one-third of the board should be independent. However, if non-executive Chairperson is a promoter, 50% of the directors have to be independent.

Voting Advisory


Exhibit 7: IiAS Voting Guidelines snapshot – tenure for independent directors IiAS has observed that some directors are independent as per law, but not in spirit. Their proximity to the promoter/management may impede their ability to provide an independent perspective. Accordingly, IiAS will not treat the following directors as independent:

i. Those who do not satisfy the eligibility criteria laid down in Section 149(6) of the Act and Chapter IV, Regulation 16(1)(b) and Regulation 25 of the SEBI Listing Obligations and Disclosure Requirements (LODR).

ii. Directors who have been on the board for more than 10 consecutive years. IiAS makes two important distinctions here: a. Unlike the Act, which computes tenure beginning 1 April 2014, IiAS will compute tenure on a retrospective basis. b. IiAS will apply the 'visa rule' and classify directors, whose reappointment is within six months of completing 10 years

on the board, as non-independent. iii. Directors who have been on the board of the parent/holding company for more than 10 consecutive years. iv. Directors who are simultaneously on the board of a large number of group companies, with a prolonged tenure of >10

years in any of these companies. Representatives of large shareholders (holding >2% stake) or lenders, even if they are not appointed on the board as a nominee. However, former employees of such shareholders may continue to remain on the Board even after they move on from their employment: these directors can be considered as independent. Similarly, directors who were earlier on the board as nominees can be considered independent once the investor has sold its stake.

Partha Sarathi Bhattacharyya and Anil Sachdev have attended 63% (5 out of 8) of the meetings held in FY18. We expect directors to take their responsibilities seriously and attend all meetings. We have a threshold of 75% attendance of the board meetings in the three-years prior to re-appointment. Exhibit 8: IiAS Voting Guidelines snapshot – minimum number of independent directors

Chapter IV, Regulation 17(1) of the SEBI Listing Obligations and Disclosure Requirements (LODR), states that for a company with an executive Chairperson, at least 50% of the board should comprise independent directors. In the case of a company with a non-executive Chairperson, at least one-third of the board should be independent. However, if non-executive Chairperson is a promoter, 50% of the directors have to be independent.

R A Shah, 87, was a Non-Executive Non-Independent Director liable to retire by rotation. He retires in the forthcoming AGM but does not offer himself for reappointment. The board seeks approval to not fill up the casual vacancy caused on the board. Given that the company is compliant with the board composition norms, IiAS recommends voting FOR the resolution.

Voting Advisory


Category: Cost Auditors



5 O Ratify remuneration of Rs. 300,000 payable to Y. R. Doshi & Co. as cost auditors for FY19 FOR

Discussion As per section 148 of the Companies Act 2013, read with the Companies (Cost Audit Report) Rules, 2013, companies engaged in the production or processing of goods and services (in specified sectors) and having a networth of more than Rs.50 mn or a turnover of more than Rs.1 bn will need to undergo a cost audit. The board has approved the appointment of Y. R. Doshi & Co., as cost auditors for the year ended 31 March 2019 on a remuneration of Rs. 300,000 plus applicable taxes and out-of-pocket expenses. The total remuneration proposed to be paid to the cost auditor is reasonable compared to the size and scale of operations. IiAS recommends voting FOR the resolution.

Voting Advisory


Category: Remuneration



6 O Reappoint S C Mehta as Chairperson and Managing Director for five years, commencing from 1 August 2018, and approve his remuneration

AGAINST G I F V T R

IiAS Assessment Parameters for Managerial Remuneration

Assessment Parameter S C Mehta Is the remuneration for promoter? Yes Is the current remuneration higher than peers? Yes

Is the proposed remuneration in line with industry peers? No Is there a significant hike in remuneration from previous term/year? Yes Is the remuneration commensurate with the growth in profits/operations? Yes Is the proposed resolution open-ended? Yes Is there a component of performance-linked pay in the proposed salary? Yes

Does the person have the requisite qualifications? Yes Has the company disclosed a clear remuneration policy to the shareholders? No

Discussion S C Mehta, 57, is the Chairperson and Managing Director of the company and part of the promoter family. He has been a part of the company for 27 years. The board proposes to reappoint him as Chairperson and MD, not liable to retire by rotation, for 5 years, commencing from 1 August 2018 and seek approval for his remuneration. Exhibit 9: Details of present and proposed remuneration of S C Mehta (Rs. mn)

Particulars Remuneration for FY18

Estimated Proposed remuneration Remarks

Salary 25.5 36.0

In the range of Rs. 2.1 mn to Rs. 3.0 mn per month

(Rs. 1.2 to Rs.1.8 per month as per previous terms)

Perquisites 6.3 9.0 Assumed at 25% of basic salary based on FY18

Commission 83.5 [1] 75.3 [1]

PF and Superannuation 2.7 3.9 Assumed at 11% of basic salary based on FY18

Total 118.0 124.2 Assumed at 10% of estimated FY19

Standalone PAT; FY19 PAT is assumed at 10% over FY18

[1] Commission for the current year is paid in subsequent year and the FY18 commission has not been explicitly provided in the annual report. The FY18 commission we have used is the balancing figure obtained by reducing other components of remuneration from total remuneration. FY18 total remuneration is provided by company to IiAS. FY19 commission is obtained similarly. Source: IiAS research, Company filings He is entitled to HRA, re-imbursement of medical expenses, leave travel concession, club fees, medical insurance, contribution to PF, gratuity, superannuation fund or annuity fund, leave encashment and other retirement benefits. The above amount of remuneration approved will be considered as ‘minimum remuneration’ in the event of absence or inadequacy of profits in the company.

Voting Advisory


Although the company mentions that the overall remuneration paid to S C Mehta will not exceed 10% of the net profit, it does not mention the amount or percentage of commission to which he will be entitled to. The company must consider putting a cap on the absolute commission payable to directors. Exhibit 10: Remuneration paid in the past (Rs. mn)

Particulars FY14 FY15 FY16 FY17 FY18 Salary (Rs. mn) 14.5 18.6 21.6 26.2 25.5 Perquisites (Rs. mn) 4.3 4.0 5.2 6.4 6.3 Commission (Rs. mn) 104.7 60.4 64.3 87.3 83.5 Others (Rs. mn) 3.7 - - - 2.7 Total Remuneration 127.2 83.0 91.1 119.9 118.0 Total Income (Rs. bn) 39.6 38.4 44.2 43.9 60.9 PAT (Rs. bn) 2.4 0.7 1.2 1.5 1.6

Source: Company filings

Exhibit 12: Peer Remuneration (latest data available)

Company Name of Director Designation Total Income

(Rs. bn) PAT (Rs. bn) Remuneration

(Rs. mn) India Glycols Ltd Uma Shankar Bhartia CMD 41.9 0.9 24.4 Aarti Industries Rajendra V. Gogri CMD 38.1 3.3 31.6 Tata Chemicals R. Mukundan MD, CEO 105.0 27.0 58.4 Nagarjuna Fertilizers and Chemicals Ltd K Rahul Raju MD 39.7 (0.2) 6.9

Deepak Fertilizers S C Mehta CMD 60.9 1.6 124.2 [1] Source: Annual Reports; IiAS comPAYre; [1] – IiAS estimate of FY19 remuneration

According to the Companies (Appointment and Remuneration of Managerial Personnel), Rules, 2014, the company must disclose the ratio of the remuneration of each director to the median remuneration of the employees of the company, in the board’s report for the financial year. Deepak Fertilizers’ FY18 annual report does not carry this information.

The total FY18 remuneration for S C Mehta is 7% of the consolidated PAT. We believe the proposed remuneration is high for the size of the company and is higher than peers. IiAS recommends voting AGAINST resolution #6.

FY14 FY15 FY16 FY17 FY18

Exhibit 11: Pay vs Performance of S C Mehta (Normalized)

Total Income PAT S C Mehta

Voting Advisory


Category: Remuneration



7 O Pay commission to Non-Executive Directors for five years, commencing from 1 April 2019 FOR G I F V T R

Discussion The board seeks shareholders’ approval to pay commission, subject to prescribed limit as per Companies Act 2013, to non-executive directors for five years, commencing from 1 April 2019. This excludes sitting fees being paid to the non-executive directors for attending board and committee meetings. Presently, the company has 11 non-executive directors on its board. The details of the commission paid to non-executive directors during the last five years are shown in the table below. Exhibit 13: Commission paid to non-executive directors

Particulars FY14 FY15 FY16 FY17 FY18 Commission paid (Rs. mn) 9.7 8.1 7.7 8.8 11.8 Standalone Net profit (Rs. mn) * 2,438.8 783.5 1,211.3 903.0 1,128.9 Commission as %age of net profit 0.4% 1.0% 0.6% 1.0% 1.0%

*Calculation of profits is different as per Section 198 of the Companies Act, 2013. Commission paid is within the overall ceiling as per the Act.; Source: Company filings, IiAS research As per section 197 of the Companies Act 2013, commission payable to non-executive directors must not exceed 1% of net profits of the company, if the company has a Managing Director. Although the company does not specify this limit, it has clarified that the remuneration would be within the overall ceiling as per the Act. The payments made to non-executive directors have been reasonable. We expect commission to be along similar lines in future. As its profits grow, the company must consider setting a cap in absolute terms on the commission payable. IiAS recommends voting FOR the resolution. Exhibit 14: Regulation Snapshot – Remuneration to Non-Executive Directors

Sec. 197(1)(ii) the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed, -

(A) one per cent. of the net profits of the company, if there is a managing or whole-time director or manager; (B) three per cent. of the net profits in any other case.

(2) The percentages aforesaid shall be exclusive of any fees payable to directors under sub-section (5) (5) A director may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose whatsoever as may be decided by the Board

Voting Advisory


Category: Alteration to Charter Documents



8 S Reclassify Authorized Share Capital from Rs. 1350.5 mn divided into 125.05 equity shares of Rs. 10 each, and 1 mn Cumulative Redeemable Preference Shares of Rs. 100 each, to Rs. 1350.5 mn divided into 135.05 mn equity shares of Rs. 10 each.

FOR

Discussion Presently, the authorised share capital of the company is Rs. 1350.5 mn divided into 125.05 mn equity shares of Rs. 10 each and 1 mn redeemable preference shares of Rs. 100 each. The issued, subscribed and paid up capital is Rs. 882 mn divided into 88.2 mn equity shares of Rs. 10 each.

After reclassification, the authorised share capital will comprise of Rs. 1350.5 mn divided into 135.05 mn equity shares of Rs. 10 each.

The company wants to issue additional equity shares by way of a Qualified Institutional Placement and Preferential warrants for the growth and expansion objectives of the company, for which it requires shareholders’ approval by a special resolution. IiAS recommends voting FOR the resolution.

Modified Clause V of the MoA:

V. The Authorised Share Capital of the Company shall be Rs. 135,05,00,000/- (Rupees One Hundred Thirty five Crores and Five Lakhs) divided into 13,50,50,000 (Thirteen Crore Fifty Lacs and Fifty Thousand) Equity shares of Rs. 10/- (Rupees Ten) each with power to the Company to increase or decrease such capital, and to issue any part of its capital, original, increased with or without any preference, priority or special privilege, or subject to any postponement of rights or to any conditions or restrictions; and so that unless the conditions of issue shall otherwise expressly declare, every issue of shares, whether declared to be preferential or otherwise, shall be subject to Articles of Association of the Company.

Voting Advisory


Category: Issuance of Securities



9 S Issuance of securities for an amount not exceeding Rs. 6 bn, by way of a qualified institutional placement (QIP) FOR G I F V T R

Discussion The company proposes to issue securities for an amount not exceeding Rs. 6 bn by way of a QIP in one or more tranches. According to the clarification received from the company, the funds are intended to be utilised for three projects undertaken by the company, which require a total outlay of ~Rs. 50 bn. These projects pertain to:

• Setting up a plant in Taloja for manufacture of ammonia, which is a key ingredient in the manufacture of fertilizers.

• Manufacture of Iso Propyl alcohol and increase its supply to pharmaceutical companies in India. • Mining ammonium nitrate, an ingredient widely used in fertilizers and explosives.

The securities which could be issued include – • Equity Shares • GDRs • ADRs • Foreign Currency Convertible Bonds (FCCB) • Convertible or Partly Convertible Debentures • Any other financial instrument convertible into equity shares

The price at which the securities will be issued to Qualified Institutional Buyers (QIBs) will not be less than the price calculated in accordance with Chapter VIII of the SEBI (ICDR) Regulations (QIP Floor Price). Further, the board may also offer a discount of not more than 5% in accordance with the pricing formula provided under SEBI Regulations.

Since the company has not disclosed the quantum of shares to be issued, we assume that the securities will be issued at its current market price of Rs. 255.6. Therefore, it can issue ~ 23.5 mn shares, which leads to a dilution of ~21%. The proposed QIP will help the company with its expansion activities and achieve its long-term objectives. IiAS recommends voting FOR the resolution.

Voting Advisory


Category: Issue of Preferential Warrants



10 S Issue Preferential warrants convertible into equity shares to Robust Marketing Services Private Limited, a promoter group company for an amount not exceeding Rs. 2 bn

AGAINST G I F V T R

Discussion The company proposes to raise an amount not exceeding Rs. 2 bn, via ~6.5 mn convertible warrants at a price of ~Rs.308.65 per equity share on a preferential basis to Robust Marketing Services Private Limited, a promoter group company. The ultimate beneficial owners of Robust Marketing Services Private Limited are S. C. Mehta (Chairperson and MD) and Parul S Mehta (Non-Executive director), being the shareholders and directors of Robust Marketing Services Private Limited. The funds are intended to be utilised for:

• Capital expenditure • Cost of construction and development of ongoing and new projects • Investment in subsidiaries, joint ventures and affiliates • Repayment of debt • Meeting working capital requirement of the company • Permissible general corporate purposes.

Each warrant gives the right to the promoter to apply and get allotted one equity share of Rs. 10/- each within a period of 18 months from the date of allotment to raise funds. The issue price will not be lower than the minimum issue price, calculated as per SEBI Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2009.

The warrant holder will be required to pay an amount equivalent to 25% of the price fixed as per warrant on or before allotment of warrants, as required under Chapter VII of SEBI Issue of Capital and Disclosure Requirements (ICDR) Regulation. The allotment of warrants is proposed to be made within fifteen days from the date of completion of the passing of the special resolution. Further, there will be lock-in period of six months from the date of receiving trading approval for such equity shares.

Exhibit 15: Change in shareholding pattern post conversion of warrants

S. No. Category

Pre-allotment Warrants allotted to promoters

(mn)

QIP (mn)

Post conversion No. of Shares (mn)

% of total No. of Shares (mn)

% of total

1 Promoter and Promoter group 45.2 51.2 6.5 51.7 43.7

2 Institutional Investors 9.4 10.7 23.5 32.9 27.8

3 Non-Institutional Investors 33.6 38.1 33.6 28.4

Source: Company filings, IiAS research

Voting Advisory


Exhibit 16: IiAS voting guidelines on preferential issue of warrants Existing regulations permit companies to make preferential allotment of warrants to the promoter group or other strategic investors, subject to the approval of shareholders. 25% of the conversion price is paid up front, with an option to convert the warrants into equity shares anytime during the next 18 months. The balance 75% is paid upon conversion. If the warrants are allowed to lapse, the initial upfront amount of 25% is forfeited by option holders.

Based on our analysis, promoters often let the warrants lapse whenever the market price of the share is lower than the warrant exercise price after 18 months (exercise period of warrants). Not only does this affect the company’s capex plans, it also brings into question the reasons for trying to dilute the minority shareholding in the first place.

IiAS generally recommends voting AGAINST preferential issue of warrants. As an exception, IiAS may vote FOR the following issues: • Made to a government- controlled entity (in case of PSUs) • Made to technical collaborators, wherein the preferential allotment may be required to bring in technical expertise. • In which exercise period is less than 18 months • In which the upfront payment is greater than 25% • If the company’s financial health is deteriorating and there is a need for urgent fund infusion.

The company has clarified to IiAS that since it needs funds for its growth plan, promoters have the intent to exercise the warrants and bring in entire Rs.2.0 bn. The issue of warrants as against preferential shares, is to allow promoters to arrange the funds over a period of time (while committing 25% upfront). Further, the funds are required over a period of time as environmental approvals are received (which have not yet been secured). Notwithstanding, we believe that the promoters could have undertaken equity infusions at regular periods in time as and when capital is required, instead of utilizing warrants.

Therefore, although we support the equity infusion, by issuing warrants, we believe promoters get an option to ride the stock price for 18 months. In case the promoters subsequently decide not to subscribe to the remaining 75%, it could have material implications for the company’s long-term plans. We recommend voting AGAINST the resolution.

Voting Advisory


Category: Inter-Corporate Transactions



11 S

Provide guarantee up to Rs. 20.4 bn on behalf of Smartchem Technologies Limited (STL), a wholly owned subsidiary for funding requirements of Performance Chemiserve Private Limited (PCPL), a subsidiary of STL

FOR

Discussion On 13 April 2017, the company acquired 76% stake in Performance Chemiserve Private Limited (PCPL) through its wholly owned subsidiary, Smartchem Technologies Limited (STL), and the remaining balance is held by the promoters of PCPL. PCPL is engaged in the business of drumming of chemicals, Iso Propyl Alcohol and Methanol.

It is setting up facilities for manufacture of Ammonia in Taloja and has commenced work relating to setting up an Ammonia Project. Therefore, it requires funding by way of Term Loan of Rs.20.4 bn. It has received sanction of Rs. 1 bn from State Bank of India and in addition, it has received in principle sanction of Rs. 0.5 bn from Exim Bank. Bank of Baroda (BOB) is considering underwriting of the entire Rs. 20.4 bn term loan, for which it requires a Comfort Letter from STL. However, in light of the current risk aversion towards corporate credit, the company anticipates that BOB may stipulate credit support from the company in form of a Comfort letter/ Undertaking or Corporate Guarantee for a period up to the time of issuance of Environment Clearance / Project Completion/ PCPL attaining investment grade rating. Exhibit 17: Financial highlights of STL and PCPL in FY18

Particulars STL PCPL Total Income (Rs. mn) 30,707.0 28.5 PAT (Rs. mn) 5,45.9 16.3 Total Assets (Rs. bn) 50.2 6.8 Total Liabilities (Rs. bn) 24.2 5.5

Exhibit 18: Transactions with PCPL (Rs. mn)

Particulars FY18 Rendering of services/reimbursement of expense incurred on behalf of related party 13.0 Receiving of services/reimbursement of expenses on behalf of the Company 28.5

The company is leveraging the strength of its balance sheet to support debt-raising for the Taloja ammonia project. IiAS recommends voting FOR the resolution.

Voting Advisory


Category: Issue of Securities



12 S Provide an option to Banks/ Financial Institutions/ other lenders to convert whole or part of outstanding loans into equity shares, in case of default

FOR

Discussion The company avails financial assistance by way of Rupee Term Loans, NCDs, Foreign Currency Loans, FCCB, corporate loans etc., from banks, financial institutions or any other lender. One of the terms of sanction stipulated by most banks is that, in the event of default by the company, the banks have an option to convert whole or part of their outstanding facility into fully paid up ordinary equity shares of the company. Allotment of equity shares requires prior approval of the members by way of Special Resolution.

Hence, the board proposes this enabling resolution since banks insist for inclusion of an option to convert the outstanding facility into equity in the event of default or upon exercise of an option provided under the lending arrangements.

On 31 March 2018, the outstanding borrowings on a consolidated basis were Rs. 6.3 bn.

Exhibit 19: Lenders from whom loans are outstanding Name of Lender FY18

State Bank of India 3,857.0 Export Import Bank of India 857.2 Bank of Baroda (Dahej) 900.0 Export Import Bank of India (Dahej) 1,040.0 Westpac (PBSPL) 29.3 Term Loan - State Bank of India, Sydney 245.2 Less: current maturities (673.5) Total 6,255.2

Source: Company filings

IiAS recommends voting FOR the resolution.

Voting Advisory


Legend IiAS recommendations are based on IiAS’ Voting Guidelines, which are published on our website. The data and regulations reviewed while arriving at a recommendation are disclosed to market participants. This gives investors and companies clarity regarding the basis for our recommendations. IiAS recommendations are non-binding in nature. Investors may have their own voting rationale which may, on aspects, differ from those of IiAS. On such occasions, investors must use these recommendations as a guiding tool. Our voting recommendations do not constitute advice to buy, sell or hold securities. To allow for a more nuanced discussion on resolutions, IiAS recommendations may be supplemented with a risk or a transparency indicator (refer table below). This helps balance the narrative for proposals which have multiple connotations in terms of their implications for the company and its stakeholders.

Risk Indicator Coverage Description

G

Governance Matters

This symbol is used for resolutions which in IiAS’ opinion indicate corporate governance practices that have room for improvement or are non-compliant with regulations or their intent.

I

Inequitable Treatment

This symbol is used for resolutions which in IiAS’ opinion benefit the controlling shareholders (or any other class of shareholders) at the expense of the public shareholders. This also includes resolutions which may result in excessive dilution or disproportionate voting powers.

F

Financial Impact

This symbol is used for resolutions which, as per IiAS, will have a negative impact on the company’s financials.

V

Valuation Divergence

This symbol is generally used for resolutions associated with corporate restructurings, which include schemes of arrangement, and slump sales, where a fair valuation cannot be ascertained or where IiAS believes the valuation is prejudicial to the interests of public shareholders.

R

Other Risks

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

Transparency Indicator

Quality of Disclosure Description

T

Leadership Indicates that the disclosures on the resolution are significantly superior to other similar resolutions. IiAS encourages other companies to emulate such disclosure levels.

T

Weak Indicates lack of adequate disclosures supporting the resolution. Investors are advised to seek further clarifications from the company to make a more informed decision.

https://www.iiasadvisory.com/voting-guidelines

Voting Advisory


Disclaimer This document has been prepared by Institutional Investor Advisory Services India Limited (IiAS). The information contained herein is solely from publicly available data, but we do not represent that it is accurate or complete and it should not be relied on as such. IiAS shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not be taken as the basis for any voting or investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of the individual resolutions referred to in this document (including the merits and risks involved). The discussions or views expressed may not be suitable for all investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. IiAS reserves the right to make modifications and alterations to this statement as may be required from time to time. However, IiAS is under no obligation to update or keep the information current. Nevertheless, IiAS is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither IiAS nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Confidentiality This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject IiAS to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information provided in these reports remains, unless otherwise stated, the copyright of IiAS. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of IiAS and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.

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

Analyst Certification The research analyst(s) for this report certify/ies that no part of his/her/their compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. IiAS’ internal policies and control procedures governing the dealing and trading in securities by employees are available at https://www.iiasadvisory.com/about. Conflict Management IiAS and its research analysts may hold a nominal number of shares in the companies that IiAS covers (including the subject company), as on the date of this report. A list of IiAS’ shareholding in companies is available at https://www.iiasadvisory.com/about. However, IiAS, the research analyst(s) responsible for this report, and their associates or relatives, do not have actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the date of publication of this report. A list of shareholders of IiAS as of the date of this report is available at https://www.iiasadvisory.com/about. However, the preparation of this report is monitored by an internal Review and Oversight Committee (ROC) of IiAS and is not subject to the control of any company to which such report may relate and which may be a shareholder of IiAS.

https://www.iiasadvisory.com/voting-guidelines

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Voting Advisory


Other Disclosures IiAS is a SEBI registered research entity (proxy advisor registration number: INH000000024).

IiAS further confirms that, save as otherwise set out above or disclosed on IiAS’ website (www.iias.in): • IiAS, the research analyst(s) responsible for this report, and their associates or relatives, do not have any financial interest in the subject

company. • IiAS, the research analyst(s) responsible for this report, and their associates or relatives, do not have any other material conflict of

interest at the time of publication of this report. • As a proxy advisory firm, IiAS provides subscription, databased and other related services to various Indian and international customers

(which could include the subject company). IiAS generally receives between INR 10,000 and INR 25,00,000 for such services from its customers. Other than compensation that it may have received for providing such services to the subject company in the ordinary course, none of IiAS, the research analyst(s) responsible for this report, and their associates or relatives, has received any compensation from the subject company or any third party for this report.

• None of IiAS, the research analyst(s) responsible for this report, and their associates or relatives, has received any compensation from the subject company or any third party in the past 12 months in connection with the provision of services of products (including investment banking or merchant banking or brokerage services or any other products and services), or managed or co-managed public offering of securities of the subject company.

• The research analyst(s) responsible for this report has not served as an officer, director or employee of the subject company. • None of IiAS or the research analyst(s) responsible for this report has been engaged in market making activity for the subject company. • Anil Singhvi, who is a director on the board of Deepak Fertilizers and Petrochemicals Limited, is also a non-executive director on the

board of IiAS

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