Corporate Services Governance Proxy Voting Solutions Vote Recommendations POWER GRID CORPORATION OF INDIA LIMITED VOTE RECOMMENDATIONS FOR 2011 ANNUAL GENERAL MEETING Industry: Power Meeting date & time: September 19, 2011, Monday 11.00 a.m. IST Meeting venue: NDMC Talkatora Indoor Stadium, Talkatora Garden, Park Street, New Delhi- 110001 Stock codes NSE BSE Exchange POWERGRID 532898 Reuters PGRD.NS Bloomberg PWGR:IN September 2011 List of Resolutions Res # Resolution Title Manage ment InGovern 1. Adoption of Accounts For For* 2. Declaration of Dividend For For Reappointment of Directors 3. Mr. V. M. Kaul For For InGovern Mumbai * Bangalore 4. Mr. Rakesh Jain For For 5. Fixation of Remuneration of Auditors For For (For* = Shareholders advised to seek clarifications from the company) 2011-2012 All rights reserved
Resolution No.1: Adoption of Accounts Management Recommendation InGovern Recommendation * Text of Resolution(s) (Item no.1) To receive, consider and adopt the audited Balance Sheet as at 31st March, 2011 and Profit and Loss Account for the financial year ended on that date together with Report of the Board of Directors and Auditors thereon. InGovern Analysis and Recommendation The Report of the Joint Independent Auditors dated 24 May, 2011 from A.R. & Co., Chartered Accountants (registration number: 002744C), S. R. I. Associates, Chartered Accountants (registration number: 305109E), Umamaheshwara Rao & Co., Chartered Accountants (registration number: 004453S) and the Supplementary Audit Report by the Comptroller and Auditor General of India states that the financial statements of the company have been prepared in accordance with the accounting standards that are mandatory in India and it does not contain any qualifications. However, the Auditor s report contains certain notes that: 1) The un-audited financial statements of Joint Venture companies have been incorporated in the accounts. However, they have not provided details such as names, net assets or total revenues of these companies. We would normally vote AGAINST the resolution if the accounts of subsidiaries/associates/joint entities are unaudited and yet consolidated with the holding company s financials and if the assets of these unaudited companies form a substantial part of the total consolidated assets of the holding company. We recommend shareholders raise the concern that the Board ensures that financial statements of all subsidiaries/associates as well as joint ventures are audited and then consolidated, in future. 2) The Company has billed and recognized transmission income as approved by CERC for the block period 2009-14. Where tariff has not been approved under block period 2009-14, in respect of assets commissioned upto 31.03.2009, the Company has billed transmission charges as approved by CERC for the block period 2004-09 as applicable as on 31.03.2009 and recognized revenue as per norms for the block period 2009-14. 3) Where tariff has not been approved by CERC under block period 2009-14 in respect of assets commissioned after 01/04/2009, the Company has recognized revenue of Rs. 1207.39 crores based InGovern 2011-2012 P a g e 2
on Tariff Norms 2009-14 and the same is yet to be billed as issuance of tariff orders by CERC for which petitions have been filed by the Company is pending. 4) Pending certification of monthly transmission system availability by the Regional Power Committee (RPC) of some of the regions, transmission incentive of Rs. 16.14 crores has been recognized provisionally based on latest month s availability. For notes 2 4 as mentioned above, we recommend shareholders raise concern and ensure that Board recognizes the transmission charges only after it is billed and necessary approval obtained from CERC under block period 2009-14. Also it needs to be seen that once approved, what adjustments will be made to the Rs. 1207.39 crores of revenue and Rs. 16.14 crores of transmission incentives that have been provisionally recognized. The Board should maintain adequate provisions for any future revenues accounted on provisional basis, in order to avoid a substantial impact on the financial results post the approval. We also note that as on August 3, 2011, the Audit Committee has 3 members which comprises of 2 Non-Executive Non-Independent (Govt. Nominees) Directors and an Executive Director. Also, the Chairman of the Committee, Mr. Rakesh Jain, is a Non-Executive Non-Independent (Govt. Nominees) Director. This is in violation of Clause 49 II (A) (iii) of Listing Agreement which states that the Chairman of the Audit Committee should be an Independent Director. Also, an Audit Committee should consist of atleast 2 Independent Directors. We recommend shareholders ensure that the composition of the committee complies with Listing Agreement guidelines. However, since no qualifications have been found, we recommend shareholders vote FOR this resolution. InGovern 2011-2012 P a g e 3
Resolution No.2: Declaration of Dividend Management Recommendation InGovern Recommendation Text of Resolution(s) (Item no.2) To note the payment of interim dividend and declare Final Dividend for the Financial Year 2010-11. InGovern Analysis and Recommendation The details of dividend in the last 2 years are: Year Ended 31 st March Unit 2011 2010 Interim Dividend per share Rs. 0.50 0.50 Proposed Final Dividend per share Rs. 1.25 1.00 Total Dividend per share Rs. 1.75 1.50 Total Dividend payout Rs. Crore 810.23 631.34 Dividend Tax Rs. Crore 140.76 105.67 Dividend and Tax as % of Profit After Tax % 35.60 36.11 The company does not have a stated dividend policy with any ceiling on the dividend to be paid as a percentage of the profits. The debt-equity ratio of the Company is at 1.94:1 which is at par with industry peers. We note that a payout of 35.60% (Dividend and Tax as % of the net profits) will not result in a strain on its financials. Hence, we recommend that shareholders vote FOR this proposal. InGovern 2011-2012 P a g e 4
Resolution No.3 to No.4: Reappointment of Directors Management Recommendation InGovern Recommendation Text of Resolution(s) (Item no.3) To appoint a Director in place of Shri V. M. Kaul, who retires by rotation and being eligible, offers himself for re-appointment. (Item no.4) To appoint a Director in place of Shri Rakesh Jain, who retires by rotation and being eligible, offers himself for re-appointment. InGovern Analysis and Recommendation We note that the candidates seeking re-election are eminently qualified persons with extensive experience that is relevant for serving on the Board of this Company. We would normally recommend that shareholders vote AGAINST reappointment of directors who attend less than 75% of Board Meetings, or have not discharged their duties as directors. Also we check the compliance with Clause 49, Annexure ID (1) of the Listing Agreement requiring that no Independent Director has served on the Board for a period of more than 9 years in aggregate. Though the guideline in Clause 49 is non mandatory, in our opinion, serving as an Independent Director on the Board of the Company beyond the duration of 9 years is likely to affect the Director s independence. Also, the Voluntary Guidelines of MCA in, VG I B.2 (i) require that no Independent Director serves on the Board of the Company for more than 6 years consecutively. The details of Directors of Power Grid Corporation of India Ltd. are given in table below: InGovern 2011-2012 P a g e 5
Name Status Committees Chair man Execut MD ive Wholetime Non - Exec utive Indepe ndent Audit Shareho lder/in vestor Grievan ce Share Trans fer Award of Contracts Relating to RE, APDRP & Others Award of Contra cts Bon ds Invest ment on Projec ts Mr. S. K. Chaturvedi c x x x c c c Mr. J. Sridharan x x x x x x x x Mr. V. M. Kaul x x x x Mr. R. N. Nayak x x x x x c Mr. I. S. Jha x x x x x x x Dr. M. Ravi Kanth x x x x Mr. Rakesh Jain x x x Mr. F. A. Vandrevala x x x Mr. Anil K. Agarwal x x c x Dr. A. S. Narag x x x Dr. P. K. Shetty x x Mr. S. C. Tripathi x x c Mr. Ashok Khanna x x x x Mrs. Sarita Prasad x x x x x: Member; c: Chairman Name Other Directorships & Committee Meetings Indian Public Comp anies Other Membe rships Other Chairp ersons hips AGM Board Audit Shareholder /Investor Grievance H A % H A % H A % Mr. S. K. Chaturvedi 8 0 0 Yes 16 16 100% Mr. J. Sridharan 2 1 0 Yes 16 15 94% 2 2 100% Mr. V. M. Kaul 2 2 0 Yes 16 16 100% Mr. R. N. Nayak 2 0 0 Yes 16 16 100% Mr. I. S. Jha 2 0 0 Yes 16 16 100% Dr. M. Ravi Kanth 0 0 0 Yes 16 14 88% 2 0 0% Mr. Rakesh Jain 4 3 2 Yes 16 15 94% 6 6 100% Mr. F. A. Vandrevala 1 0 0 NA 14 8 57% Mr. Anil K. Agarwal 3 1 1 NA 14 6 43% 2 1 50% Dr. A. S. Narag 0 1 0 NA 14 14 100% 2 2 100% Dr. P. K. Shetty 0 0 0 NA 14 14 100% Mr. S. C. Tripathi 7 6 1 Yes 16 15 94% 4 4 100% Mr. Ashok Khanna 7 2 0 Yes 16 14 88% 4 4 100% Mrs. Sarita Prasad 0 2 0 No 16 15 94% 4 3 75% 2 2 100% H: Held; A: Attended; NA: Not Applicable InGovern 2011-2012 P a g e 6
Mr. V. M. Kaul, aged 59, is an Executive Whole-time Director designated as Director (Personnel) of the Company. He was appointed in 2009 and has been on the Board for a period of 2 plus years. He is on the Board of 2 other companies in India. He is a member of Share Transfer Committee as well as the Committee for Award of Contracts relating to RE, APDRP and other Deposit Works. He has attended all the 16 Board meetings held during the year. We would normally recommend that shareholders vote AGAINST reappointment of directors who attend less than 75% of Board and/or Committee meetings, or have seen not to have contributed to the meetings. Since he has complied with all the guidelines regarding re-appointment of Directors, we recommend shareholders vote FOR the re-appointment. Mr. Rakesh Jain, aged 54, is a Non-Executive Non-Independent (Govt. Nominee) Director. He was appointed in 2009 and has been on the Board for a period of 2 plus years. He is on the Board of 4 other companies in India. He is a member of the Audit Committee as well as the Committee on Investment on Projects. He has attended all 6 meetings of the Audit Committee held during the year. He has also attended 15 out of 16 (i.e., 94%) Board meetings held during the year. We would normally recommend that shareholders vote AGAINST reappointment of directors who attend less than 75% of Board and/or Committee meetings, or have seen not to have contributed to the meetings. Since he has complied with all the guidelines regarding reappointment of Directors, we recommend shareholders vote FOR the re-appointment. We note that Mr. Anil K. Agarwal, an Independent Director, is the Chairman of the Shareholder/Investor Grievance Committee of which he has attended only 1 out of the 2 (i.e., 50%) meetings held during the year. He has also attended only 6 out of the 14 (i.e., 43%) Board meetings held during the year. Also, Mr. F. A. Vandrevala, an Independent Director, has attended only 8 out of 14 (i.e., 57%) Board meetings held during the year. We would recommend that shareholders vote AGAINST reappointment of directors who attend less than 75% of Board and/or Committee meetings, or have seen not to have contributed to the meetings. So if these Directors had been seeking re-appointment, then we would have recommended to vote AGAINST the proposal. The company doesn t have any Nomination Committee. According to VG I A.3 (i) of Voluntary Guidelines issued by Ministry of Corporate Affairs in 2009, the company should have a Nomination Committee comprising of majority of Independent Directors, including its Chairman. Hence, we recommend that shareholders should insist that a Nomination Committee is constituted. Also, the committee membership details of the Remuneration Committee and individual attendance details of each of the members of Share Transfer Committee, Committee for Award of Contracts relating to RE, APDRP and other Deposit Works, Committee on Investment on Projects, Committee for Bonds and Committee on Award of Contracts has not been disclosed in the Annual Report. We recommend that the Board should disclose the attendance of each of the InGovern 2011-2012 P a g e 7
members in each of the committees separately, so that contribution of each member can be known to shareholders. InGovern 2011-2012 P a g e 8
Resolution No.5: Fixation of Remuneration of Auditors Management Recommendation InGovern Recommendation Text of Resolution(s) (Item no.5) To fix the remuneration of the Auditors for the Financial Year 2011-12. InGovern Analysis and Recommendation As per section 619 of the Companies Act, 1956, the Statutory Auditors of a Government Company are appointed by the Comptroller and Auditor General of India (C&AG). The subsection 8(aa) to section 224 of the Companies Act, 1956 requires that the remuneration of an auditor appointed under section 619 of the Companies Act, 1956 shall be fixed by the Company in general meeting or in such manner as the Company in general meeting may determine. In terms of the authorization by the members to the Board of Directors of the Company, in the last Annual General Meeting of the Company, the Board of Directors had approved the remuneration of Rs. 32.40 lakhs plus applicable taxes for the Statutory Audit and supplementary report under Section 619(3) of the Companies Act,1956; in addition, Rs. 2.25 lakhs plus applicable taxes for Statutory Audit of Consolidated Financial statement as per the requirement of AS-21 & AS-27; and reimbursement of actual travelling and out of pocket expenses, to the three joint statutory Auditors for the Financial Year 2010-11. We note that a total auditor s remuneration of Rs. 1.86 crores was paid in FY 2010-11 which included the Audit fees, Tax Audit fees, Quarterly Review fees as per SEBI, Annual Review fees as per DOT, Travelling Expenses, Reimbursement of Service Tax and Other services. The component of other services is about 11.80% of the total remuneration, which is not significant. Necessary resolution has been placed before the members for authorizing the Board of Directors to fix the remuneration to the Joint Statutory Auditors of the Company for the financial year 2011-2012, as and when the appointment is made by the C&AG. We would recommend that such fixation of remuneration be made after consulting the Audit Committee as well. Also the remuneration to be paid to such auditors should be disclosed to shareholders so as to ensure that it consists of remuneration mainly for Audit services. We recommend shareholder vote FOR the resolution since all guidelines regarding fixation of remuneration of Auditor(s) have been followed. InGovern 2011-2012 P a g e 9
About InGovern InGovern Research Services assists financial institutions and investors that have financial, investment or reputational exposure to public-listed companies in India by providing our clients with corporate governance reports and proxy voting solutions. Our clients rely on our independent analysis and insights. Our services include: Corporate Governance Research Proxy Voting Solutions Our research includes: Proxy Voting Season Primer AGM Calendar Proxy Vote Recommendations Quarterly Newsletter For the analysis, InGovern uses its proprietary framework Governance Radar that has over 400 criteria drawn from Indian and international laws, regulations and guidelines and best practices. Disclaimer This note is confidential and may not be reproduced in any manner without the written permission of InGovern Research Services Pvt. Ltd. ( InGovern ). This analysis does not constitute investment advice and investors should not rely on it for investment or other purposes. No warranty is made as to the completeness, accuracy or utility of this analysis. InGovern does not provide consulting services to issuers. Some institutional investor affiliates of issuers may have purchased a subscription to InGovern services, which is disclosed on relevant reports. In addition, advisors to issuers such as law firms, accounting firms, rating agencies or others may subscribe to InGovern services. InGovern does not discuss our analysis or reports with any entity prior to publication. InGovern 2011-2012 P a g e 10