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The Institute of Internal Auditors-India

SEBI- Amendments to Clause 49 of the Listing agreement


The SEBI had constituted a Committee on Corporate Governance under the Chairmanship
of Shri N. R. Narayana Murthy to further improve the standards of corporate governance in

Based on this report, SEBI vide its circular dated 26th August 2003, has introduced some
major amendments to Clause 49 of the Listing Agreement.

The significant features of these amendments may be summarised as under:

Broadening of the definition of independent director

Fixing of norms relating to Non-executive directors' compensation and disclosures
Additional duty on the independent director to periodically review the legal compliance
reports prepared by the Company and steps taken by the Company to improve.
Obligation on the Board of Directors to lay down a Code of Conduct for all Board
members and senior management of the Company.
Fixation of the term of Non-executive Directors to a maximum of nine years
Requirement of all members of the Audit Committee being financially literate
Increase in the powers of the Audit Committee
Additional duty on the Audit Committee to review of certain information by the Audit
Requirements relating to Audit reports and Audit Qualifications
New Requirement of Whistle Blower Policy
Applicability of the requirements to subsidiary companies relating to composition of the
Board of directors, laying of minutes of the Board meeting before the Board of the
holding company and additional requirement to be included in the Board report of the
Holding Company.
Disclosure of contingent liabilities
Additional Disclosures
Certification by CEO/CFO
Change in the Format of reporting to Stock Exchanges relating to Corporate
Entitlement to practising Company secretaries to certify the compliance of the
conditions of corporate governance

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I. Independent Director
Previous Definition Amended Definition

'Independent Director' means apart from Now besides the existing definition
receiving directors remuneration, does not following additional requirements have
have any material pecuniary relationships been introduced:
or transactions with the company, its Independent Director is one who:
promoters, its senior management or its is not related to promoters or
holding company, its subsidiaries and management at the board level or at
associated companies; one level below the board;
has not been an executive of the
company in the immediately preceding
three financial years;
is not a partner or an executive of the
statutory audit firm or the internal audit
firm that is associated with the
company, and has not been a partner
or an executive of any such firm for the
last three years. This will also apply to
legal firm(s) and consulting firm(s) that
have a material association with the
is not a supplier, service provider or
customer of the company. This should
include lessor-lessee type relationships
also; and
is not a substantial shareholder of the
company, i.e. owning two percent or
more of the block of voting shares.

However, the previous guidelines relating to Institutional directors on the boards of

companies being considered as independent directors (whether the institution is an
investing institution or a lending institution).

II. Fixing of norms relating to Non-executive directors' compensation and disclosures

Previous Norms Amended Norms
The company agrees that all pecuniary Compensation paid to non-executive
relationship or transactions of the non- directors shall be fixed by the Board of
executive directors viz-a-viz. the Directors and shall be approved by
company should be disclosed in the shareholders in general meeting.
Annual Report Limits shall be set for the maximum
number of stock options that can be
granted to non-executive directors in
any financial year and in aggregate.
The stock options granted to the non-
executive directors shall vest after a
period of at least one year from the
date such non-executive directors have
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retired from the Board of the Company.

The considerations as regards

compensation paid to an independent
director shall be the same as those
applied to a non-executive director.

The company shall publish its

compensation philosophy and
statement of entitled compensation in
respect of non-executive directors in its
annual report or put up the same on
the companys website and reference
drawn thereto in the annual report.

The details of shares held by non-

executive directors, including on an "if-
converted" basis shall also be

Non-executive directors shall be

required to disclose their stock holding
(both own or held by / for other persons
on a beneficial basis) in the listed
company in which they are proposed to
be appointed as directors, prior to their
appointment. These details should
accompany their notice of appointment

III. Additional duty on the independent director

An independent director would be supposed to periodically review the legal compliance reports
prepared by the Company and steps taken by the Company to improve the taints. Further, in case
of any proceedings against him, defence of ignorance of this responsibility shall not be permitted.

The considerations as regards remuneration paid to an independent director shall be the same as
those applied to a non-executive director.

IV. Code of Conduct for all Board members and senior management of the Company.

The Board shall lay down the code of conduct for all Board members and senior management of a

Here senior management means " personnel of the company who are members of its
management/operating council (i.e. core management team excluding Board of Directors).
Normally, this would comprise all members of management one level below the executive directors

This code of conduct shall be posted on the website of the company. All Board members and
senior management personnel shall affirm compliance with the code on an annual basis. The

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annual report of the company shall contain a declaration to this effect signed by the CEO and

V. Fixation of the term of Non-executive Directors to a maximum of nine years

In order to be eligible for appointment to the office of non-executive Directors, the term of office has
been specified as nine years in three terms of three years each, running continuously.

V. Audit Committee

Through the amendments Audit Committee have been provided with more teeth to become an
integral part of the Corporate Governance.

Following amendments have been made applicable to Audit Committee constituted under the
Listing Agreement:

A. Constitution of Audit Committee

In the earlier Clause 49, there was the requirement of at least one member having financial and
accounting knowledge.

As per the amended definition, all members of the Audit Committee should be being financially
literate with at least one member having accounting or related financial management expertise.

Financially literate as per the explanation means " the ability to read and understand basic
financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.

Further a member will be considered to have accounting or related financial management

expertise if he or she possesses experience in finance or accounting, or requisite professional
certification in accounting, or any other comparable experience or background which results in
the individuals financial sophistication, including being or having been a chief executive officer,
chief financial officer, or other senior officer with financial oversight responsibilities.

B. Increased Role of Audit Committee

C In addition to the existing role of the Audit Committee, following additional points of focus have
been added while reviewing with management the annual financial statements before
submission to the board:

Significant adjustments arising out of audit.

The going concern assumption.
Compliance with accounting standards.

The role of Audit Committee also included reviewing with management related party transaction.
After the amendment the meaning of the term "related party" has been made harmonious with the
meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by The
Institute of Chartered Accountants of India.

Following information has to be mandatorily reviewed by the Audit Committee:

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1. Financial statements and draft audit report, including quarterly / half-yearly financial
2. Management discussion and analysis of financial condition and results of operations;
3. Reports relating to compliance with laws and to risk management;
4. Management letters / letters of internal control weaknesses issued by statutory / internal
auditors; and
5. Records of related party transactions

Further, the appointment, removal and terms of remuneration of the Chief internal auditor shall be
subject to review by the Audit Committee

C. Requirements relating to Audit reports and Audit Qualifications

Disclosure of Accounting Treatment

In case it has followed a treatment different from that prescribed in an Accounting Standards,
management shall justify why they believe such alternative treatment is more representative of the
underlined business transactions. Management shall also clearly explain the alternative accounting
treatment in the footnote of financial statements.

D. Whistle Blower Policy

So as to detect frauds, irregularities and encouraging employees to

come forward to Audit Committee, concept of "Whistle Blower "has
been introduced. The following are the notable features of the 'Whistle Blower Policy" are:
i. Personnel who observe an unethical or improper practice (not necessarily a violation of law)
shall be able to approach the audit committee without necessarily informing their
ii. Companies shall take measures to ensure that this right of access is communicated to all
employees through means of internal circulars, etc. The employment and other personnel
policies of the company shall contain provisions protecting "whistle blowers" from unfair
termination and other unfair prejudicial employment practices.
iii. Company shall annually affirm that it has not denied any personnel access to the audit
committee of the company (in respect of matters involving alleged misconduct) and that it
has provided protection to "whistle blowers" from unfair termination and other unfair or
prejudicial employment practices.
iv. Such affirmation shall form a part of the Board report on Corporate Governance that is
required to be prepared and submitted together with the annual report.

The appointment, removal and terms of remuneration of the chief internal auditor shall be subject
to review by the Audit Committee.

E. Applicability of the requirements to subsidiary companies

(i) Composition the Board of Directors
The provisions relating to composition of the Board of Directors shall also be applicable to the
subsidiary company i.e.
Not less than 50% of the Directors to be non-executive. In case the Chairman is an
executive Director, then at least half of the Board shall comprise of independent directors,

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while in case of non-executive chairman then at least one third should be independent

Further, at least one independent Director who is on the Board of Directors of the holding
company shall also be on the Board of the subsidiary Company.

(ii) The Audit Committee of the holding company shall also review the financial statements, in
particular the investments made by the subsidiary company.

Further, the minutes of the Board meetings of the subsidiary company shall be placed for
review at the Board meeting of the holding company. The Board report of the holding
company should state that they have reviewed the affairs of the subsidiary company also

F. Disclosures

Following disclosures have been made mandatory by way of Clause 49 of the Listing Agreement:

Disclosure of contingent liabilities

(i) The management has to provide description of each material contingent liability and its
risks, which shall be accompanied by the auditors comments on the managements view.
This section shall be highlighted in the significant accounting policies and notes on
accounts, as well as, in the auditors report, where necessary.
(ii) A statement of all transactions with related parties including their basis shall be placed
before the Audit Committee for formal approval/ratification. If any transaction is not on an
arms length basis, management shall provide an explanation to the Audit Committee
justifying the same.

(iii) The Management shall put in place procedures to inform Board members about the risk
assessment and minimization procedures. These procedures shall be periodically reviewed
to ensure that executive management controls risk through means of a properly defined

(iv) Management shall place a report certified by the compliance officer of the company, before
the entire Board of Directors every quarter documenting the business risks faced by the
company, measures to address and minimize such risks, and any limitations to the risk
taking capacity of the corporation. This document shall be formally approved by the Board.

(v) Further in case of proceeds from IPOs disclosures shall be made to the Audit Committee.

VI. CEO/CFO Certification

After the amendment, a certification has to be obtained from either CEO/CFO annually declaring
that :
a. They have reviewed the balance sheet and profit and loss account and all its schedules and
notes on accounts, as well as the cash flow statements and the Directors Report;
b. These statements do not contain any materially untrue statement or omit any material fact nor
do they contain statements that might be misleading;
c. These statements together present a true and fair view of the company, and are in compliance
with the existing accounting standards and / or applicable laws / regulations;

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d. They are responsible for establishing and maintaining internal controls and have evaluated the
effectiveness of internal control systems of the company; and they have also disclosed to the
auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if
any, and what they have done or propose to do to rectify these.
e. They have also disclosed to the auditors as well as the Audit Committee, instances of
significant fraud, if any, that involves management or employees having a significant role in
the companys internal control systems; and
f. They have indicated to the auditors, the Audit Committee and in the notes on accounts,
whether or not there were significant changes in internal control and / or of accounting policies
during the year.

VII. Change in the format for quarterly reporting to the Stock Exchanges

Following the requirement for new disclosures the format in which the compliance certificate has to
be sent to the Stock Exchanges , has been altered.

VII. Additional items to be included in the Report on Corporate Governance

Disclosures have to be made regarding special resolutions passed in the previous 3 AGMs as well
as detailed report on Postal Ballot

Schedule of implementation:

All companies which were required to comply with the requirement of the erstwhile clause 49 i.e. all listed
entities having a paid up share capital of Rs 3 crores and above or net worth of Rs 25 crores or more at any
time in the history of the entity, would be required to comply with the requirement of this clause on or before
March 31, 2004.

The non-mandatory requirement given in Annexure 1C shall be implemented as per the discretion of the
company. However, the disclosures of the adoption/non-adoption of the non-mandatory requirements shall
be made in the section on corporate governance of the Annual Report.

(Note: While every effort is made to provide correct information, readers may refer to the
text of the SEBI circular as

The Perfect Portfolio
As the market edges lower, it's a great time for cherry picking. Let's help you select the really
promising ones.
By Sahad P.V.

So the market is in a correction mode. The BSE Sensex is off by over 10 per cent
from its recently scaled peak of 8,800. Analysts expect the index to consolidate
between 7,600 and 7,800, before beginning to start the climb again.

The correction is excellent news for the average investor. As the market takes time
off, you can pick up your favourite stocks at affordable prices, since they are all
trading now below their all-time highs. For first-time investors, it's a perfect time to
start creating a strong portfolio, while old hands can take this chance to churn their

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selection and get rid of all those laggards.

BT spoke to Dalal Street's shrewdest analysts to pick 20 stocks that can make up a
dream portfolio today. The investment horizon is long-term, between two and five
years. The risk appetite is moderate; we have taken only those stocks where the
downside is low and the upside moderately high. All told, the portfolio we have
picked will protect your capital and give you 25-35 per cent returns per annum-
nothing to sneeze at.

First, some broad tips. Don't put all your money in one basket. Tejas Joshi, Head of
Research at Mumbai-based Sushil Finance, has a formula: 40 per cent of your
capital should go to very liquid large-cap stocks like Infosys, Reliance Industries,
Tata Steel, ITC and SBI; 30 per cent to the next tier in large-cap stocks like
Container Corp., BHEL, Honeywell, Gokaldas Exports and Cipla; 20 per cent
should be in mid-cap stocks like Amtek India and Mawana Sugar, while 10 per cent
goes to semi-liquid mid-caps or small-cap scrips.

The portfolio created here is a multi-cap one, with good picks from sectors where
India has a long-term growth story to tell. Besides, the companies we have
favoured are those with an edge over their peers in the same sector. For instance,
we chose ITC over HLL in fast moving consumer goods. "ITC is in direct
competition to HLL, and we prefer the former," says Shahina Mukadam, Research
Head at IDBI Capital. It is a market leader in its traditional businesses of cigarettes,
hotels, paperboards, packaging and agri-exports, and is rapidly gaining market
share in new businesses like packaged foods, confectionery, branded apparel and
greeting cards. In it, Infosys is the best bet and a proxy for the sector. If you want a
second pick, TCS is promising, as its valuation at 27x looks cheaper than the 30x
of Infosys. "Over a period of time, I don't see any difference between Infosys and
TCS," says Mukadam. An added bonus is that Tata Infotech is going to be merged
into TCS.

Pharma is another sector where India has a long-term competitive advantage.

Here, we have stayed away from risky plays like Ranbaxy and Dr Reddy's and
instead chosen Dishman Pharma (contract research and manufacturing company
with good global presence) and Cipla (has the less riskier model of supplying to
litigators rather than litigating itself). In textiles and garments, the best plays today
are Aarvee Denim (valued at only one-third of competitor Arvind Mills, while in two
years it will come close to Arvind's capacity) and Gokaldas Exports (restrictions on
Chinese garment exports will earn it orders and good prices).

Finally, why Tata Teleservices (Maharashtra) and not Bharti Tele-Ventures?

Analysts view the latter as fairly valued while the former (which has a restructuring
exercise and a consolidation with Tata Teleservices on the cards) is yet to unlock
its value. So, over to you. Take a look at our perfect portfolio, and see if you can
spin some great returns out of it.

Don't Lose Out On Capital Gains

Sure, there's no escaping taxes, but you can park any long-term capital gains
you've earned in the last six months from sale of property or jewellery into capital
gain bonds from financial institutions like NABARD, REC and NHB. Not only do you
escape tax (Section 54EC), you also earn a decent interest. The caveat: the
proceeds have to be invested within six months of the sale, plus your funds are
locked in for three years. And in that period, you cannot raise a loan or other
encumbrance on the bonds. But for 5.5 per cent assured returns and tax savings,
who's complaining? Also check out SIDBI and NHAI bonds.

-Anand Adhikari

Women In The Markets

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Traditionally, women have shunned the stock market. which is surprising given that
one more survey (this from Merrill Lynch) finds that women make better investors.
The survey points out that women take a "very deliberate approach to finances,
need to understand how their money is being invested, and want to be actively
involved in the process of building and executing a financial plan". It goes on to add
that women aren't afraid of turning to professional advisors. Which is probably why
securities company Geojit Financial Services has started branch offices exclusively
for women (and manned by women) in Kochi, Mumbai and Chennai. Women can
start investing with as little as Rs 5,000. If exclusivity is what it takes to encourage
more women to bet on equity, may their tribe increase.

-Nitya Varadarajan

Bima Gold: All That Glitters...

LIC's new money-back policy, launched to celebrate its golden jubilee, is being
touted as an economical one, with customers urged to buy in before the offer is
withdrawn in March 2006. Should you hurry to get it? Not really. Take premiums: a
35-year-old will pay roughly Rs 3,800 per annum (for sum assured Rs 1 lakh and a
20-year term). True, this is much lower than the Rs 6,000-odd she will pay for
similar money-back plans even from LIC, but that's because Bima Gold does not
give a bonus, offering instead a loyalty-sum that's not guaranteed. Even after
factoring in this loyalty addition and the periodic 10 per cent survival benefit
payouts, the returns don't look hot; the overall figure the same policyholder can
look at after 20 years is a little over Rs 1,10,000. If the argument is cheap cover,
then term plans make more sense; and if the argument is investment, the returns
don't seem worth it.

-Vaishna Roy

Money In The Safe
Banks are riding high on a wave of strong credit

If you dig out the roots of Dalal Street's runaway

growth today, you'll be surprised to find that it
was banking that actually fuelled the stock rally in
2002. Banking stocks haven't lost steam since.
Retail banking: Now non-urban
The P-E (price-earning) multiple in the sector has India will drive growth
grown from 3.5 in 2002-03 to 6.5 in 2003-04, moving up to around 8 in 2004-05
and, as analysts point out, is still low while below 10. In comparison, the Sensex's
trailing P-E is 16. What's keeping interest alive is banks' eagerness to acquire size,
their booming retail business and the accelerated recovery of NPAs (non-
performing assets) post the securitisation ordinance.

Credit growth has increased manifold, from 17.30 per cent in the quarter ended
March 2004 to 30.60 per cent in the quarter ended March 2005. The credit-to-
deposit ratio has risen from 53.5 per cent in March 2000 to 64.7 per cent in March
2005, while doubtful debts have fallen from 7.1 per cent in March 2000 to 3.1 per
cent in March 2005. Banks are spreading to non-metro areas and players such as
HDFC Bank are banking on this to fuel retail credit growth. "The explosion is going
to come from non-urban India," confirms Aditya Puri, Managing Director, HDFC
Bank. Deutsche Bank's re-entry into retail strengthens the belief in retail credit
growth. "India is the only country in Asia Pacific where we are launching retail
banking services," says Gunit Chadha, CEO, Deutsche Bank India.

The RBI's recent decision to allow banks to include securities in the Investment
Fluctuation Reserve (IFR) as Tier-I capital will go a long way towards enhancing
banks' capacity to lend more in a growing economy. "PNB has emerged as the
biggest gainer due to this measure, which will result in a 240 basis points
improvement in the bank's Tier-I capital," says an analyst at J.P. Morgan.
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According to ICICI Securities, SBI is the top pick in the

sector, while J.P. Morgan sets a 12-month price target of Rs
1,223 for it and Rs 757 for hdfc Bank.

One word of caution: "In a rising interest rate scenario,

banks may take a hit on their government securities
portfolio," warns V.K. Sharma, Investment Analyst at
Anagram Securities.

-Anand Adhikari

Dictate Your Terms

Step-up, step-down, accelerated EMIs... are the variants on loan repayment worth a look?

Brij Patil is 28 and has heard that he can save a packet on rent, not to mention on
taxes, by buying a house on loan. The bad news: his salary isn't good enough yet
for him to afford the equated monthly instalments (EMIs) on the loan he wants. The
good news: loan products now have so many variants that he could still get the

Banks are increasingly offering the step-up loan, which offers variable EMIs based
on payback capacity. You would be wise to first check out if it is really worth your

Take Patil's case. For a Rs 10-lakh loan on a 20-year tenure, he is now offered the
chance to pay a low initial EMI of about Rs 6,670 per month for the first two years,
going up to about Rs 8,370 over the next five years. Then, since Patil's salary will
presumably grow over time, his EMI will be increased to about Rs 9,000 for the
final period. The step-up loan raises EMIs periodically, with a 20-year term typically
divided into three stages.

But just what is Patil really gaining? For an ordinary Rs 10 lakh loan at the same 8
per cent interest, Patil would have paid EMIs of about Rs 8,400 for 20 years. The
step-up loan reduces his EMIs for the first two years by a meagre Rs 1,700, but
increases the cost of his loan to Rs 20,72,520-that's about Rs 65,000 extra (see
table above). Despite his low payback capacity, Patil is able to get a higher loan
because of the initially low EMIs. However, if he can stretch his EMIs those first two
years, he can save a hefty Rs 65,000 overall.

Banks are fairly choosy about extending this facility and it's usually offered only to
professionals whose earning potential they expect will grow exponentially, for
instance an MBA or a ca graduate, or a salaried executive in a good position
whose income can be predicted to grow at a CAGR of 10-15 per cent.

Loan variants come in other forms as well. Take the step-down loan, offered by
some banks on a case-to-case basis, which works in exactly the opposite way, with
EMIs high in the initial stage and getting progressively lower. For instance, if you
are nearing retirement, but your spouse or adult children are working, banks could
offer you the step-down option as part of a joint loan. Says Rajan Ghotgalkar,
Corporate Head (Retail Banking), IDBI Bank: "The most important aspect in loan
repayment, apart from the ability and willingness of the borrower to pay, is how
much surplus income the customer will have, after subtracting emergency funds, to
repay his loan."

Options like HDFC's accelerated repayment scheme, which allows you to repay the
loan faster by increasing the EMI after a certain period, make more sense. If you
get an increment or a hike in disposable income, you can opt to pay higher EMIs,
thus accelerating the repayment and saving on interest costs. This option helps you
avoid the 2 per cent foreclosure charge, which most banks charge on full
prepayment. According to Ghotgalkar, research shows that borrowers tend to repay
home loans in half the total tenure. Thus, if someone takes a loan for 20 years, she
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usually repays it by the 10th or the 12th year.

Before you choose a loan, explore all the options and decide if you want to make
the pay-off in terms of a slightly costlier loan. Your first move right now, with
interest rates looking set to rise, should be to lock in to a fixed rate loan.

-Mahesh Nayak

Surprising Zs
Dig. There might be gems in the dirt.

Imagine suggesting that you buy z group stocks. Are we quite insane? Not really-
we snooped around and found that they are not all bad apples. Although stocks are
categorised Z when they breach provisions of the listing agreement, a couple of
them have landed here on technical issues. Both Tamil Nadu-based Karur KCP
Packaging and Pune-based Sudarshan Chemicals are in the Z group because
although BSE stipulates connectivity with both the National Securities Depository
and the Central Depository Services, they had connectivity with only one. Karur
KCP's fundamentals are strong. Net profits for 2004-05 were Rs 5.07 on revenues
of Rs 205 crore and it paid a 5 per cent dividend. The company recently joined
CDSL and is contemplating an NSE listing. It will likely exit the Z group when BSE
next revises the list. Says Ashish Chugh, Stock Analyst, "Once
Karur KCP is off the Z list, it's going to be a multibagger." The stock trades at Rs 55
levels (equal to its book value of Rs 55). Sudarshan Chemicals (Japan's Dainippon
Ink & Chemicals has a 10 per cent stake) has reported revenues of Rs 370 crore
and net profits of Rs 14.79 crore for 2004-05. Says Tejas Doshi, Research Head,
Sushil Finance: "It has put up consistent performance and paid 30 per cent
dividend." Increased pigment exports and product ramp-up make it worth a look at
Rs 208. Both are good picks, but only if you have a strong heart and have a long-
term horizon.

-Sahad P.V.

Value-picker's Corner

Minda industries is a leader in automotive switches and lighting with a 60 per cent
market share. With major two-wheeler and tractor OEMs among its clients,
revenues should surge following the recovery in the tractor and two-wheeler
market. Minda's JV with global automotive horn leader Fiamm SpAv of Italy should
see exports rise. Net profit rose 145 per cent over the previous corresponding
period to touch Rs 2.47 crore in the first quarter this fiscal, while revenues at Rs
56.27 crore gained 47 per cent. On a trailing 12 month basis, Minda's EPS is Rs
11.2, with P-E multiple of 16.9 (industry average: 19.3). A good long-term buy.

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