NAME OF THE COMPANY - iias.in · company) under Wockhardt Employee ... According to the auditor’s report FY11, the outstanding liabilities of the company have been substantially

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12 September 2011 Wockhardt Ltd 1 | P a g e

Wockhardt Limited

Sector: Pharmaceuticals Ticker : WOCKHARDT Index: BSE Midcap

Meeting Type: Annual General Meeting Meeting date: 12 September 2011 Meeting Time: 3 PM Proxy deadline: 10 September 2011, 3 PM Notice date: 09 August 2011 Meeting Venue: Y. B. Chavan Auditorium, Gen. Jagannath Bhosale Marg, Mumbai 400 021

Financial Profile (Consolidated) Wockhardt Ltd v/s Sensex v/s Nifty (3 year price performance)

Particulars YE (Rs. Cr) CY08* FY10^ FY11

Net Sales 3,593 4,501 3,751

Growth Y/Y -80.2% 25.3% -16.7%

EBIDTA 844 853 925

Growth Y/Y -82.8% 1.0% 8.4%

EBIDTA margin 23.5% 18.9% 24.6%

PAT (139) (1,001) 91

Growth Y/Y -105.0% 620.6% -109.0%

PAT margin -3.9% -22.2% 2.4%

Gross Cash Accruals (31) (853) 207

ROCE 13.9% 14.5% 16.2%

ROE -13.6% -119.8% 8.0%

CY08* – Period between 1 Jan 08 and 31 Dec 08 FY10^ – Period between 1 Jan 09 and 31 March 10

Source: Company filings and IIAS research Source: Reuters

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EXECUTIVE SUMMARY:

Resolution Brief

Ord/Spl*

Description of resolution IIAS Recommends

1.

Consider and adopt the Financial Statements as of 31 March 2011

Ord.

Consider and adopt: the Audited Balance Sheet as at 31 March 2011; Profit and Loss Account for FY11; and reports of Directors and Auditors thereon

AGAINST

No provisioning for certain derivative losses under dispute with banks

2. Re-appointment of a Director.

Ord. To re-appoint Shekhar Datta, who retires by rotation

AGAINST Tenure served on board

3. Re-appointment of a Director

Ord. To re-appoint Dr. Huzaifa Khorakiwala, who retires by rotation

FOR

4.

Re-appointment and remuneration of Auditors

Ord.

Re-appointment, and remuneration, of M/s Haribhakti & Co to hold office from the conclusion of the Twelfth Annual General Meeting upto the conclusion of the Thirteenth annual general meeting of the Company.

FOR

5.

To approve Wockhardt Employee Stock Option Scheme – 2011

Spl.

To grant approval to the board for issuing options under the Wockhardt Employee Stock Option Scheme – 2011 to permanent employees (present or future) of the company and directors

FOR

1) Minimum vesting period does not serve the purpose of ESOP being a long term incentive plan 2)The ceiling on options to be issued to employees does not cover directors

6.

To approve Wockhardt Employee Stock Option Scheme – 2011

Spl.

To grant approval to the board for issuing options (convertible into equity shares of the company) under Wockhardt Employee Stock Option Scheme – 2011 to employees or directors of the subsidiary companies and/or holding company of the company

FOR

1) Minimum vesting period does not serve the purpose of ESOP being a long term incentive plan 2)The ceiling on options to be issued to employees does not cover directors

*Ord/Spl: Ordinary/Special resolution.

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SUMMARY The Board of Wockhardt Limited has 8 directors on board. Of these three are whole-time promoter-directors including the Chairman, and five are non-executive and Independent directors. Of the three whole time directors, one is in his sixties, one in forties and one is in thirties. Among the non-executive directors, two are in their eighties and one in seventies. The independent directors: Shekhar Datta, Abid Hussain and RA Shah have been on the board of Wockhardt Ltd. for over 11 years. Bharat Patel has been on the board for just under ten years. RA Shah, 80 is an independent director. He is on the board of 27 companies (18 listed companies, 8 unlisted companies and 1 foreign company). RA Shah has not attended two of the seven board meetings including the last Annual General Meeting for FY11. He is also a member of four and chairman of five committees of other companies. RA Shah and his relatives hold 45,000 equity shares of the company Dr. HF Khorakiwala (executive chairman and promoter) at Wockhardt Ltd was paid a remuneration of Rs.2.12 cr in FY 11 and Rs.2.75 cr for FY10 (- period between 1 Jan 09 and 31 March 10) respectively. At a consolidated level the company made a profit of Rs.91 cr in FY 11 and a loss of Rs.1,001 during FY10. Although there is no statutory limit on the age of directors, IIAS would like Wockhardt Limited to put in place a formal policy for the retirement age of whole-time directors as also non-executive directors, including the Chairman. We would also like the company to announce its policy regarding the number of years its directors will serve on the board (Applicable to resolution 2).

Summary of recent developments

Wockhardt reported a loss of Rs 128 cr for FY08. The loss was due to mark-to-market (MTM) losses of

Rs.525 cr arising out of the derivative positions.

The company approaches corporate debt restructuring cell (CDR) as Rs.1440 cr of debt is due for

repayment before the end of 2009. The move to CDR is underpinned by weak cash flow position (due to

the derivative losses), banks tightening their line of credit policies; and the impact of the global

slowdown.

The company reports a further loss of ~ Rs.1000 cr for FY10 (fifteen Months ended March 31, 2010)

primarily on account of MTM loss.

According to the auditor’s report FY11, the outstanding liabilities of the company have been substantially

restructured under the CDR Scheme, which extends till 2018.

Certain lenders have filed winding up petitions against the Company and the Company has filed affidavit

in reply. In one case, the Hon’ble High Court of Bombay has admitted winding up petition filed by certain

holders of Zero Coupon Foreign Currency Convertible Bonds and the High Court has granted stay

thereon upon appeal by the Company. The matter is sub-judice and outcome cannot be currently

ascertained.

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Resolution and IIAS recommendations: Resolution 1- Adoption of Accounts: To consider and adopt the financial statements for the financial year 2011, and the reports of Board of Directors and Auditors attached thereon Resolution: ABSTAIN The auditor’s statement contains the following qualifications:

In respect of crystallized derivative losses of Rs.184 cr forming part of ‘exceptional items’, the auditors have relied on appropriate written representations.

The company and its Swiss subsidiary had, on certain derivative contracts with banks/financial institutions, stopped payment of margins called by the banks/financial institutions. The banks/financial institutions, based on the early termination clause in the agreement, terminated these contracts and claimed an amount of Rs.332 cr (including a demand of Rs.67 cr as guarantor for derivatives contracts executed by Swiss subsidiary), being the loss incurred on termination of such contracts, which the company and its subsidiary have disputed. No provision has been made in the accounts for above amounts, which have been considered as contingent liabilities. The consequential impact upon relevant assets and liabilities and loss for the year is not ascertainable.

IIAS notes that the company has charged crystalized derivative losses to the profit and loss account amounting to Rs.1130 cr for FY10 and Rs.184 cr for FY11. In light of this, we believe that a more prudent and conservative accounting policy should have called for provisioning for Rs.373 cr (as per the consolidated accounts) under dispute with banks, as on 31 March 2011. The amount under dispute relates to derivative transactions (refer to point e in the table below). Further, the auditor’s opinion -- the scope of an internal audit system needs to be to be enlarged in respect of treasury operations-- merits immediate attention.

The company has Rs.47 cr in dispute with tax authorities. Considering annual sales of Rs.3755 cr for FY11, we

do not consider the disputed amount to be significant.

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The auditors draw attention to the following issues:

a. The Corporate Debt Restructuring (CDR) Scheme of the company is effective from April 15, 2009. The outstanding liabilities of the company have been substantially restructured under the aegis of CDR Scheme, which extends till 2018. b. Certain lenders have filed winding up petitions against the Company and the Company has filed affidavit in reply. In one case, the Hon’ble High Court of Bombay has admitted winding up petition filed by certain holders of Zero Coupon Foreign Currency Convertible Bonds and the High Court has granted stay thereon upon appeal by the Company. The matter is sub-judice and outcome of which cannot be currently ascertained. The Company’s ability to continue as a going concern is dependent on the successful outcome of the winding up petitions. c. The company has given corporate guarantee for US$ 250 million syndicate loan obtained by its Swiss subsidiary, which is being rescheduled. Terms and conditions for rescheduling of 31% of the loan are still under negotiation. d. The company has an internal audit system commensurate with the size and nature of its business, except that scope needs to be enlarged in respect of treasury operations. e. The accumulated losses of the company are not more than fifty percent of its net worth. The company has incurred cash losses during the current financial year as well as during the preceding financial period. This is without considering the effect of the qualifications (see point d. and e.) on accumulated losses, net worth, and cash losses, as the resulting financial impact of these is not quantifiable. f. According to the information and explanations given to us and on an overall examination of the balance sheet of the Company, funds raised on short-term basis to the tune of Rs.267 cr have been used for long-term investment mainly on account of losses incurred during the year and demerger of nutrition business of wholly owned subsidiary into the company. The auditor’s statement on the consolidated account highlights an additional point: g. Certain French subsidiaries operations have been placed under safeguard proceedings. The subsidiaries have undertaken an overall restructuring initiative including development of a new product and rescheduling of syndicate loan of Euro 88 million obtained by it. The ability of these French subsidiaries to continue as a going concern depends on the successful completion of overall restructuring initiative.

Resolution 2 - Re-appointment of Director, Shekhar Datta (Independent): To re-appoint Shekhar Datta, who retires by rotation

IIAS Recommends: AGAINST Shekhar Datta, a mechanical engineer, has been on the board since 2000.

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Shekhar Datta served as Managing Director and President of Greaves Cotton Ltd. He is on the Board of two listed companies: Vesuvius India Limited and Triveni Engineering & Industries Limited, and is also a member of Audit and Investor Grievance Committee of Vesuvius India Limited. He holds 600 Equity Shares of the Wockhardt Ltd and was paid Rs.2.6 Lakhs as sitting fees for attending 13 meetings including board, audit committee and investor grievance committee meetings. Shekhar Datta, 73 years, has been on the board of Wockhardt Ltd for over 11 years. He physically attended five of the seven board meetings held in FY11. He participated in the balance two through a teleconference. Given his tenure on the board of the company we recommend voting AGAINST this resolution. (Refer to Table 2 for details on directors)

Resolution 3 - Re-appointment of Director, Dr. Huzaifa Khorakiwala (Whole-time): To re-appoint Huzaifa Khorakiwala, who retires by rotation

IIAS Recommends: FOR Dr. Huzaifa Khorakiwala, 40, is an Executive Director at Wockhardt Ltd. since March 2009. He is a Commerce graduate and has a Master’s in Business Administration from the Yale University, USA. Huzaifa Khorakiwala, son of Dr. Habil Fakhruddin Khorakiwala (Executive Chairman at Wockhardt), joined Wockhardt in 2000 as Chief Operating Officer and has handled various Wockhardt functions and businesses such as international business, corporate social responsibility and administration. He is also heading Wockhardt Foundation, an NGO, as its Chief Executive Officer. He is on the Board of Wockhardt Hospitals Limited, Merind Limited Wockhardt Maharashtra Hospital Limited and Inspiration Cafee Private Limited. The Khorakiwala family has significant control on the workings of some of these entities. He attended six of the seven board meetings in FY11 and did not attend the last Annual General Meeting of Wockhardt Ltd. He was paid a remuneration of Rs.24 lakhs for FY11 (excluding contribution to Provident Fund by the Company). He holds 2.16 Lakhs of Equity Shares of the Company. (Refer to Table 2 for details on directors)

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Resolution 4: Re-appointment and remuneration of Auditors, Haribhakti & Co., Re-appointment and remuneration of M/s Haribhakti & Co to hold office from the conclusion of the 12th annual general meeting upto the conclusion of the 13th annual general meeting of the Company at a remuneration to be fixed by the board and reimbursement of out of pocket expenses incurred in connection with the audit. IIAS Recommends: FOR Haribhakti & Co has been auditors for Wockhardt Limited since FY10. The analysis of the fees paid to Auditors for FY10 and FY11 shows that the Audit fees as a percentage of Total fees is 43% and 31% respectively (Refer table 1). Non audit fees accounts to two thirds of the total fees paid to Auditors for FY11. Table 1: Fees paid to auditor

Audit and Audit related fees (Rs. cr) FY 10 FY 11

Audit fees 0.30 0.30

Tax Audit Fees 0.18 0.18

Other services 0.21 0.41

Out of pocket expenses - 0.07

Total payment to auditors 0.69 0.96

Audit fees to Total fees 43% 31%

Source: Company filings, IIAS research.

Notwithstanding the above, given the recent history of the company (- described in the summary section above), its ongoing disputes with lenders, the investors would benefit from some continuity with an audit firm who has a good understanding of the issues. We therefore support the re-appointment of the auditors.

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Table 2: Details of the Board of Directors:

Sl. Name of Director

Director Type/

Designation on the Board

Independent Director

Relationship, with another Director

(Yes/No) Age Occupation

First Date of Appointment as

a Director

No.of meetings attended

% of meetings attended

No. of Directorships in

Listed Companies

1

Habil Fakhruddin Khorakiwala

(Dr.)

Executive Chairman, Promoter-Director

No Yes 68 Industrialist 08/07/1999 7 100% 2

2 Shekhar Datta Non-

Executive Director

Yes No 73 Industrialist 25/02/2000 5* 71% 3

3 Abid Hussain Non-

Executive Director

Yes No 84

Chancellor at Rai

University, IAS (Retd.)

25/02/2000 5^ 71% 5

4 Aman Mehta Non-

Executive Director

Yes No 65

Chairman (Retd.),

HSBC Bank, Malaysia.

12/02/2004 4 57% 6

5 Bharat

Vithalbhai Patel

Non-Executive Director

Yes No 66 Business 30/10/2001 6^ 86% 4

6 Rajendra

Ambalal Shah

Non-Executive Director

Yes No 80 Solicitor 25/02/2000 6 86% 18

7 Huzaifa

Khorakiwala Executive Director

No Yes 40 Promoter – Wockhardt

31/03/2009 6 86% 1

8 Murtaza

Khorakiwala Executive Director

No Yes 38 Promoter – Wockhardt

31/03/2009 7 100% NA

In addition to physical attendance mentioned above: *Shekhar Datta participated through teleconference at the Board Meetings held on January 12, 2011 and March 14, 2011. ^Dr. Abid Hussain and Bharat Patel participated through teleconference at the Board Meeting held on January 12, 2011.

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12 September 2011 Wockhardt Limited 9 | P a g e

Resolution 5: To grant approval to the board to issue options under the Wockhardt Employee Stock Option Scheme – 2011. To grant approval to the board to issue options under the Wockhardt Employee Stock Option Scheme – 2011. The options would be convertible into equity shares of the company and shall not exceed 2,500,000. The issue could be made to, or to the benefit of, permanent employees (present or future) of the company and directors. Further, the issue can be made under one or more tranches. The maximum number of stock option that can be granted under the said ESOP scheme to any employee in any financial year shall not amount to or exceed 1% of the issued Equity Share Capital of the company at the date of grant. Further, to authorize the board to make modifications to the said ESOP scheme as it may deem fit from time to time in its absolute discretion in conformity with the provision of the act, MOU of the company, ESOP guidelines and any other applicable laws. Resolution 6: To grant approval to the board to issue options (convertible into equity shares of the company) under Wockhardt Employee Stock Option Scheme – 2011. The issue of options could be made to or to the benefit of eligible employees or directors of the subsidiary companies and/or holding company of the company. (As per the SEBI ESOP Guidelines, a separate resolution is required to be passed if the benefits of the Employee Stock Option Plan are to be extended to the employees and directors of the subsidiary companies and/or holding company of the Company in the same manner and subject to the terms and conditions mentioned herein.) IIAS Recommends: FOR The total numbers of options, which could be issued under the ESOP plan, is 2.3% of the total paid up equity capital as on 31 March 2011. Hence, we believe the likely dilution out of the plan is not material. Further, as has been proposed in the case of employees, we would have appreciated the ceiling on number of options which could be granted to directors in a single financial year. (The maximum number of stock option that can be granted under the said ESOP scheme to any employee in any financial year shall not amount to or exceed 1% of the issued Equity Share Capital of the company at the date of grant) Further, the below mentioned points merit attention:

The remuneration committee deciding the grant of ESOPs consists of 3 independent Directors: Bharat

Patel (Chairman), Shekhar Datta and RA Shah (- who holds 45000 shares in Wockhardt).

An employee who is a promoter or a part of the promoter group shall not be eligible to participate in the

Employee Stock Option Plan of the company.

A director who either by himself or through his family or through any investment company, directly or

indirectly holds more than 10% of the outstanding equity shares of the company shall not be eligible to

participate in the Employee Stock Option Plan

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The main features of the ESOP scheme are as under: Total number of options to be granted: The total number of options that may be granted in one or more tranches shall not exceed 2,500,000 in aggregate. Classes of employees entitled to participate in the Employee Stock Option Scheme: Employees in the grades currently called M1 and above; employees of those departments not categorized in accordance with the above mentioned grades but whose designation is equivalent to such grades. Requirements of vesting and period of vesting: There shall be a lock-in period of one year between the date of grant of options and the vesting of options. The options granted under the ESOP Scheme would vest after the expiry of one year form the date of grant of options and not later than the expiry of ten years from the date of grant of the options. Maximum period within which the options shall be vested: Ten years from the date of grant of options. Ten years from the date of grant of options: The Exercise Price shall be at such discount, if any, to the market price on the date of grant as may be decided by the Compensation Committee at the time of each grant and the price shall not be less than the face value of shares. Exercise Period and the process of exercise: Options granted under the ESOP Scheme can be exercised within a period not exceeding seven years from the date of vesting of the options granted. Appraisal process for determining the eligibility of the employees to ESOP: The appraisal process for determining the eligibility of the employees will be decided by the Compensation Committee from time to time. Maximum number of options to be issued per employee and in aggregate: The number of options that may be granted to any specific employee, during any one year under the ESOP Scheme shall not amount to or exceed more than 1% of the issued share capital of the Company at the time of grant of options. The aggregate number of options to be granted under the ESOP Scheme shall not exceed 2,500,000. Method of option valuation: The company shall use intrinsic value method for valuation of the options granted under the ESOP Scheme. The difference between the market price and grant price shall be recognized in the profit and loss account over the period of vesting. The difference between the employee compensation cost computed using the intrinsic value method and the cost that shall have been recognized if it had used the fair value method, shall be disclosed in the Directors’ Report.

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Disclaimer

This document has been prepared by Institutional Investor Advisory Services India Limited (IIAS). The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be 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 alone 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 which may affect their investment in the securities of companies referred to in this document (including the merits and risks involved). The discussions or views expressed may not be suitable for all investors. 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 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. IIAS generally prohibits its analysts, persons reporting to analysts and their dependents from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. .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.

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Annexure

Notice as given by the company:

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Documents

NAME OF THE COMPANY - iias.in · company) under Wockhardt Employee ... According to the auditor’s report FY11, the outstanding liabilities of the company have been substantially