a) Basis of preparation
The financial statements of Dr. Reddy''s Laboratories Limited (DRL or
the Company) have been prepared and presented in accordance with the
accounting principles generally accepted in India (Indian GAAP). Indian
GAAP comprises Accounting Standards specified under Section 133 of the
Companies Act, 2013, read with Rule 7 of Companies (Accounts) Rules,
2014, other pronouncements of the Institute of Chartered Accountants of
India, the relevant provisions of the Companies Act, 2013 and
guidelines issued by the Securities and Exchange Board of India (SEBI)
(Collectively referred to as IGAAP). The financial statements are
presented in Indian Rupees rounded off to the nearest million.
b) Use of estimates
The preparation of the financial statements in conformity with IGAAP
requires the Company''s management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities on the date of the financial
statements and reported amounts of revenues and expenses for the year.
Examples of such estimates include estimation of useful lives of
tangible and intangible assets, valuation of inventories, assessment of
recoverable amounts of deferred tax assets and cash generating units,
provision for sales returns, provision for obligations relating to
employees, provisions against litigations and contingencies. Actual
results could differ from these estimates. Estimates and underlying
assumptions are reviewed on an ongoing basis. Any revision to
accounting estimates is recognised prospectively in the current and
c) Current and non current classification
All the assets and liabilities have been classified as current or non
current as per the Company''s normal operating cycle and other criteria
set out in the Schedule III to the Companies Act, 2013.
An asset is classified as current when it satisfies any of the
a) it is expected to be realised in, or is intended for sale or
consumption in, the Company''s normal operating cycle;
b) it is held primarily for the purpose of being traded;
c) it is expected to be realised within twelve months after the
reporting date; or
d) it is cash or cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve months
after the reporting date.
A liability is classified as current when it satisfies any of the
a) it is expected to be settled in the Company''s normal operating
b) it is held primarily for the purpose of being traded;
c) it is due to be settled within twelve months after the reporting
d) the Company does not have an unconditional right to defer settlement
of the liability for at least twelve months after the reporting date.
Terms of a liability that could, at the option of the counterparty,
result in its settlement by the issue of equity instruments do not
affect its classification.
Current assets / liabilities include the current portion of non current
assets / liabilities respectively. All other assets / liabilities are
classified as non current.
d) Tangible fixed assets and depreciation
Tangible fixed assets are carried at the cost of acquisition or
construction less accumulated depreciation. The cost of tangible fixed
assets includes non refundable taxes, duties, freight and other
incidental expenses related to the acquisition and installation of the
When parts of an item of property, plant and equipment have different
useful lives, they are accounted for as separate items (major
components) of property, plant and equipment.
Subsequent expenditure related to an item of tangible fixed asset is
capitalised only if it increases the future benefits from the existing
assets beyond its previously assessed standards of performance.
Depreciation on tangible fixed assets is provided using the
straight-line method based on the useful life of the assets as
estimated by the Company''s management. Depreciation is calculated on a
pro-rata basis from the date of installation till the date the assets
are sold or disposed.
Assets acquired on finance leases and lease hold improvements are
depreciated over the period of the lease agreement or the useful life
whichever is shorter. Land is not depreciated.
Gains or losses from disposal of tangible fixed assets are recognised
in the statement of profit and loss.
Schedule II to the Companies Act, 2013 (Schedule) prescribes the
useful lives for various classes of tangible assets. For certain class
of assets, based on the technical evaluation and assessment, the
Company believes that the useful lives adopted by it best represent the
period over which an asset is expected to be available for use.
Accordingly, for these assets, the useful lives estimated by the
Company are different from those prescribed in the Schedule.
Depreciation methods, useful lives and residual values are reviewed at
each reporting date.
Advances paid towards acquisition of tangible fixed assets outstanding
at each balance sheet date are shown under long term loans and
advances. Cost of assets not ready for intended use, as on the balance
sheet date, is shown as capital work-in-progress.
e) Borrowing costs
General and specific borrowing costs directly attributable to
acquisition or construction of those fixed assets which necessarily
take a substantial period of time to get ready for their intended use
are capitalised. Borrowing costs are interest and other costs incurred
by the Company in connection with the borrowing of funds. All other
borrowing costs are recognised in the statement of profit and loss in
the period in which they are incurred.
f) Intangible assets and amortisation
Intangible assets are recorded at the consideration paid for
acquisition including any import duties and other taxes (other than
those subsequently recoverable by the enterprise from the taxing
authorities), and any directly attributable expenditure in making the
asset ready for its intended use.
Intangible assets are amortised on a systematic basis over the best
estimate of their useful lives, commencing from the date the asset is
available to the Company for its use.
The amortisation period and the amortisation method for intangible
assets are reviewed at least at each financial year end. If the
expected useful life of the asset is significantly different from
previous estimates, the amortisation period is changed accordingly.
An intangible asset is derecognised on disposal or when no future
economic benefits are expected from its use and disposal. Gains or
losses arising from the disposal of intangible assets are recognised in
the statement of profit and loss.
Investments that are readily realisable and are intended to be held for
not more than one year from the date on which such investments are
made, are classified as current investments. All other investments are
classified as non current investments.
Current investments are carried at the lower of cost and fair value.
The comparison of cost and fair value is done separately in respect of
each individual investment.
Non current investments are carried at cost less any
other-than-temporary diminution in value, determined separately for
each individual investment. The reduction in the carrying amount is
reversed when there is a rise in the value of the investment or if the
reasons for the reduction no longer exist. Any reduction in the
carrying amount and any reversal in such reductions are charged or
credited to the statement of profit and loss.
Inventories are valued at the lower of cost and net realisable value
(NRV). Cost of inventories comprises all cost of purchase, production
or conversion costs and other costs incurred in bringing the
inventories to their present location and condition. In the case
of finished goods and work-in-progress, cost includes an appropriate share
of overheads based on normal operating capacity. The cost of all
categories of inventory is determined using weighted average cost
method. NRV is the estimated selling price in the ordinary course of
the business, less the estimated costs of completion and the estimated
costs necessary to make the sale.
i) Research and development
Expenditure on research activities undertaken with the prospect of
gaining new scientific or technical knowledge and understanding is
recognized as expense in the statement of profit and loss when
Development activities involve a plan or design for the production of
new or substantially improved products and processes. Development
expenditure is capitalized only if:
a) the product or the process is technically and commercially feasible;
b) future economic benefits are probable and ascertainable;
c) the Company intends to and has sufficient resources, technical and
financial, to complete development of the product and has the ability
to use or sell the asset; and
d) development costs can be measured reliably.
j) Employee benefits
Defined benefit plans
The liability in respect of defined benefit plans and other
post-employment benefits is calculated using the projected unit credit
method and spread over the period during which the benefit is expected
to be derived from employees''services, consistent with the advice of
qualified actuaries. The long term obligations are measured at present
value of estimated future cash fl ows discounted at rates reflecting
the yields on risk free government bonds that have maturity dates
approximating the terms of the Company''s obligations. Short term
employee benefit obligations are measured on an undiscounted basis and
are expensed as the related service is provided.
All actuarial gains and losses arising during the year are recognized
in the statement of profit and loss.
Other long term employee benefits
The Company''s net obligation in respect of other long term employee
benefits is the amount of future benefit that employees have earned
in return for their service in the current and previous periods. That
benefit is discounted to determine its present value. Re-measurements
are recognized in the statement of profit and loss in the period in
which they arise.
Defined contribution plans
The Company''s contributions to defined contribution plans are
recognized in the statement of profit and loss as and when the
services are received from the employees.
Compensated leave of absence
The Company provides for accumulation of compensated absences by
certain categories of its employees. These employees can carry forward
a portion of the unutilized compensated absences and utilize it in
future periods or receive cash in lieu thereof as per Company policy.
The Company records an obligation for compensated absences in the
period in which the employee renders the services that increases this
entitlement. The measurement of such obligation is based on actuarial
valuation as at the balance sheet date carried out by a qualified
Employee stock option schemes
In accordance with the SEBI guidelines, the cost is calculated based on
intrinsic value method i.e., the excess of the market price of shares,
at the date prior to the day of grant of options under the Employee
stock option schemes, over the exercise price is treated as employee
compensation and amortised over the vesting period.
k) Foreign currency transactions and balances
Foreign currency transactions are recorded using the exchange rates
prevailing on the dates of the respective transactions. Exchange
differences arising on foreign currency transactions settled during the
year are recognised in the statement of profit and loss.
Monetary assets and liabilities denominated in foreign currencies as at
the balance sheet date are reported using the foreign exchange rates as
at the balance sheet date. The resultant exchange differences are
recognised in the statement of profit and loss. Non monetary assets
and liabilities are carried at the rates prevailing on the date of
Exchange differences arising on a monetary item that, in substance,
forms part of the Company''s net investment in a non integral foreign
operation are accumulated in a foreign currency translation reserve in
the Company''s financial statements. Such exchange differences are
recognized in the statement of profit and loss in the event of
disposal of the net investment.
l) Derivative instruments and hedge accounting
The Company uses forward contracts, option contracts and swap contracts
(derivatives) to mitigate its risk of changes in foreign currency
exchange rates and interest rates. The Company does not use derivatives
for trading or speculative purposes.
The premium or discount on foreign exchange forward contracts is
amortized as income or expense over the life of the contract. The
exchange difference is calculated and recorded in accordance with AS 11
(revised) The Effect of Changes in Foreign Exchange Rates in the
statement of profit and loss. The changes in the fair value of foreign
currency option contracts and swap contracts are recognised in the
statement of profit and loss as they arise. Fair value of such option
contracts and swap contracts is determined based on the appropriate
valuation techniques considering the terms of the contract.
Pursuant to ICAI Announcement Accounting for Derivatives on the early
adoption of AS 30 Financial Instruments: Recognition and Measurement,
the Company has adopted the Standard, to the extent that the adoption
does not conflict with existing mandatory accounting standards and
other authoritative pronouncements, the Companies Act, 2013 and other
Cash flow hedges
The Company classifies its derivative contracts that hedge foreign
currency risk associated with highly probable forecasted transactions
as cash flow hedges and measures them at fair value. The effective
portion of such cash flow hedges is recorded as part of reserves and
surplus within the Company''s hedging reserve, and re-classified into
the statement of profit and loss as revenue in the period
corresponding to the occurrence of the forecasted transactions. The
ineffective portion is immediately recorded in the statement of profit
The Company also designates certain non derivative financial
liabilities, such as foreign currency borrowings from banks, as hedging
instruments for the hedge of foreign currency risk associated with
highly probable forecasted transactions and, accordingly, applies cash
fl ow hedge accounting for such relationships. Re-measurement gain/loss
on such non derivative financial liabilities is recorded as part of
reserves and surplus within the Company''s hedging reserve, and
re-classified in the statement of profit and loss as revenue in the
period corresponding to the occurrence of the forecasted transactions.
If the hedging instrument no longer meets the criteria for hedge
accounting, gets expired or is sold, terminated or exercised before the
occurrence of the forecasted transaction, the hedge accounting on such
transaction is discontinued prospectively. The cumulative gain or loss
previously recognized in hedging reserve continues to remain there
until the forecasted transaction occurs. If the forecasted transaction
is no longer expected to occur, the balance in hedging reserve is
recognized immediately in the statement of profit and loss.
m) Revenue recognition
Sale of goods
Revenue is recognized when the significant risks and rewards of
ownership have been transferred to the buyer, recovery of the
consideration is reasonably certain, the associated costs and possible
return of goods can be estimated reliably, there is no continuing
management involvement with the goods and the amount of revenue can be
Revenue from the sale of goods includes excise duty and is net of
returns, sales tax and applicable trade discounts and allowances.
Revenue includes shipping and handling costs billed to the customer.
The Company accounts for sales returns by recording an allowance for
sales returns concurrent with the recognition of revenue at the time of
a product sale. This allowance is based on the Company''s estimate of
expected sales returns. The estimate of sales returns is determined
primarily by the Company''s historical experience in the markets in
which the Company operates.
Profit share revenues
The Company from time to time enters into marketing arrangements with
certain business partners for the sale of its products in certain
markets. Under such arrangements, the Company sells its products to
the business partners at a non-refundable base purchase price agreed
upon in the arrangement and is also entitled to a profit share which
is over and above the base purchase price.
Revenue in an amount equal to the base purchase price is recognized in
these transactions upon delivery of products to the business partners.
An additional amount representing the profit share component is
recognized as revenue in the period which corresponds to the ultimate
sales of the products made by business partners only when the
collectability of the profit share becomes probable and a reliable
measurement of the profit share is available.
Service income is recognised as per the terms of contracts with
customers when the related services are performed, or the agreed
milestones are achieved.
The Company enters into certain dossier sales, licensing and supply
arrangements with various parties. Income from licensing arrangements
is generally recognised over the term of the contract. Some of these
arrangements include certain performance obligations by the Company.
Revenue from such arrangements is recognized in the period in which the
Company completes all its performance obligations.
Dividend and interest income
Dividend income is recognised when the unconditional right to receive
the income is established. Income from interest on deposits, loans and
interest bearing securities is recognised on a time proportion basis.
Export incentives are recognised as reduction from cost of material
consumed when the right to receive credit as per the terms of the
scheme is established in respect of the exports made and where there is
no significant uncertainty regarding the ultimate collection of the
relevant export proceeds.
n) Income tax expense
Income tax expense comprises current tax and deferred tax charge or
The current charge for income taxes is calculated in accordance with
the relevant tax regulations applicable to the Company.
Deferred tax charge or credit reflects the tax effects of timing
differences between accounting income and taxable income for the
period. The deferred tax charge or credit and the corresponding
deferred tax liabilities or assets are recognised using the tax rates
that have been enacted or substantially enacted by the balance sheet
date. Deferred tax assets are recognised only to the extent there is
reasonable certainty that the assets can be realised in future;
however, where there is unabsorbed depreciation or carry forward of
losses, deferred tax assets are recognised only if there is a virtual
certainty of realisation of such assets.
Deferred tax assets are reviewed at each balance sheet date and are
written-down or written-up to reflect the amount that is
reasonably/virtually certain (as the case may be) to be realised.
Minimum Alternate Tax
Minimum Alternate Tax (MAT) credit is recognized as an asset only
when and to the extent there is convincing evidence that the Company
will pay normal income tax during the specified period. Such asset is
reviewed at each balance sheet date and the carrying amount of the MAT
credit asset is written down to the extent there is no longer
convincing evidence to the effect that the Company will pay normal
income tax during the specified period.
o) Earnings per share
The basic earnings per share (EPS) is computed by dividing the net
profit after tax for the year by the weighted average number of equity
shares outstanding during the year. For the purpose of calculating
diluted earnings per share, net profit after tax for the year and the
weighted average number of shares outstanding during the year are
adjusted for the effects of all dilutive potential equity shares. The
dilutive potential equity shares are deemed converted as of the
beginning of the period, unless they have been issued at a later date.
The diluted potential equity shares have been adjusted for the proceeds
receivable had the shares been actually issued at fair value (i.e., the
average market value of the outstanding shares).
p) Provisions and contingent liabilities and contingent assets
A provision is recognised when the Company has a present obligation as
a result of past events and it is probable that an outflow of
resources embodying economic benefits will be required to settle the
obligation. Provisions are measured at the best estimate of the
expenditure required to settle the present obligation at the balance
A disclosure for a contingent liability is made when there is a
possible obligation or a present obligation that may, but probably will
not, require an outflow of resources. Where there is a possible
obligation or a present obligation in respect of which the likelihood
of outflow of resources is remote, no provision or disclosure is made.
Contingent assets are not recognised in the financial statements.
However, contingent assets are assessed continually and if it is
virtually certain that an inflow of economic benefits will arise, the
asset and related income are recognised in the period in which the
q) Impairment of assets
The Company assesses at each balance sheet date whether there is any
indication that an asset may be impaired. If any such indication
exists, the Company estimates the recoverable amount of the asset.
For the purpose of impairment testing, assets are grouped together into
the smallest group of assets (Cash Generating Unit or CGU) that
generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or CGUs.
The recoverable amount of an asset or CGU is the greater of its value
in use and its net selling price. Value in use is the present value of
the estimated future cash flows expected to arise from the continuing
use of an asset and from its disposal at the end of its useful life.
If such recoverable amount of the asset or the recoverable amount of
the CGU to which the asset belongs is less than its carrying amount,
the carrying amount is reduced to its recoverable amount. The reduction
is treated as an impairment loss and is recognised in the statement of
profit and loss. If at the balance sheet date there is an indication
that if a previously assessed impairment loss no longer exists, the
recoverable amount is reassessed and the asset is reflected at the
recoverable amount subject to a maximum of amortised historical cost.
At the inception of the lease, a lease arrangement is classified as
either a finance lease or an operating lease, based on the substance
of the lease arrangement.
A finance lease is a lease that transfers substantially all the risks
and rewards incident to ownership of an asset. A finance lease is
recognized as an asset and a liability at the commencement of the
lease, at the lower of the fair value of the asset and the present
value of the minimum lease payments. Initial direct costs, if any, are
also capitalized and, subsequent to initial recognition, the asset is
accounted for in accordance with the accounting policy applicable to
that asset. Minimum lease payments made under finance leases are
apportioned between the finance expense and the reduction of the
outstanding liability. The finance expense is allocated to each period
during the lease term so as to produce a constant periodic rate of
interest on the remaining balance of the liability.
Other leases are operating leases, and the leased assets are not
recognized on the Company''s balance sheet. Payments made under
operating leases are recognized in the statement of profit and loss on
a straight-line basis over the term of the lease.
s) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, demand deposits and
short term, highly liquid investments that are readily convertible into
known amounts of cash and which are subject to insignificant risk of
changes in value. For this purpose, short term means investments
having maturity of three months or less from the date of investment.
(b) Terms / rights attached to equity shares
The Company has only one class of equity shares having a par value of
Rs. 5 per share. Each holder of equity shares is entitled to one vote
per share. The Company declares and pays dividends in Indian rupees.
During the year ended 31 March 2016, the amount of per share dividend
recognized as distributions to equity shareholders is Rs. 20 (previous
year: Rs. 20). The dividend proposed by the Board of Directors is
subject to the approval of the shareholders in the ensuing Annual
General Meeting. Further, the total number of shares considered for
dividend is after giving effect to the number of shares that are bought
back by the Company pursuant to the share buyback scheme commenced on
18 April 2016 (Refer note 2.45). In the event of liquidation, the
equity shareholders are eligible to receive the remaining assets of the
Company after distribution of all preferential amounts, in proportion
to their shareholding.
(d) 427,348 (previous year: 585,454) stock options are outstanding and
are to be issued by the Company upon exercise of the same in accordance
with the terms of exercise under the Dr. Reddy''s Employees Stock
Option Plan 2002 and 92,043 (previous year: 98,350) stock options are
outstanding and are to be issued by the Company upon exercise of the
same in accordance with the terms of exercise under the Dr. Reddy''s
Employees ADR Stock Option Plan 2007. (Refer note 2.30)
(e) Represents 200 (previous year: 200) equity shares of Rs. 5/- each,
amount paid-up Rs. 500/- (rounded off in millions in the note above)
forfeited due to non-payment of allotment money.
(a) Effective 1 October 2015, the Company applied Securities and
Exchange Board of India (Share Based Employee Benefits) Regulations,
2014, which require the employee share based payments to be accounted
under the Guidance note on Accounting for Employee Share-based Payments
issued by the Institute of Chartered Accountants of India (ICAI).
Consequent to such change, deferred employee stock compensation account
has been de-recognised to conform to the new accounting pronouncement.
(b) The foreign currency translation reserve comprises exchange
difference on loans and advances that in substance form part of net
investment in Industrias Quimicas Falcon de Mexico S.A. de C.V.
(Mexico), a non-integral foreign operation as defined in AS 11
(Revised 2003) on The Effects of Changes in Foreign Exchange Rates.
These exchange differences will be recognised in the statement of
profit and loss in the event of disposal of such net investments.
(c) Credit of dividend distribution tax pertains to the availment of
dividend distribution tax paid by Aurigene Discovery Technologies
Limited, a subsidiary company on payment of dividend to the Company.
(a) Finance lease obligations are towards lease rentals payable for the
vehicles leased by the Company. Lease rentals are paid in monthly
installment, with the last installment due in April 2017.
(b) Sales tax deferment loan is repayable in 4 installments, with the
last installment due on 31 March 2019.
(c) External Commercial Borrowing of USD 150 million carrying interest
rate of LIBOR plus 125 bps is repayable in five equal quarterly
installments ending in February 2019. As part of the loan arrangement,
the Company is required to comply with certain financial covenants and
the Company was in compliance with such covenants as at 31 March 2016
and 31 March 2015.
(d) Packing credit loans for the current year comprised of USD and EUR
denominated loans carrying interest rates of LIBOR minus 5 to plus 15
bps and RUB denominated loans carrying fixed interest rate of 10.65% -
11.57%, and are repayable within 6 to 12 months from the date of
drawdown. Packing Credit loans for the previous year comprised of USD
and EUR denominated loans carrying interest rates of LIBOR plus 7.5 -
40 bps and RUB denominated loans carrying fixed interest rate of 9.80%
- 22.30%, and are repayable within 3 to 12 months from the date of
(e) Other short term borrowing as at 31 March 2015 comprised of INR
denominated loan of Rs. 1,000 carrying fixed interest rate of 10.00%,
which has been repaid in April 2015.
(a) The principal amount remaining unpaid as at 31 March 2016 in
respect of enterprises covered under the Micro, Small and Medium
Enterprises Development Act, 2006 (MSMDA) is Rs. 20 (previous year:
Rs. 79). The interest amount computed based on the provisions under
Section 16 of the MSMDA of Rs. 0.11 (previous year: Rs. 0.09) is
remaining unpaid as of 31 March 2016. The interest amount of Rs. 0.06
that remained unpaid as at 31 March 2015 was paid fully during the
(b) The amount of interest due and payable for the period of delay in
making payment (which have been paid but beyond the appointed day
during the year) but without adding the interest specified under this
Act is Rs. Nil (previous year: Rs. Nil).
(c) The list of undertakings covered under MSMDA was determined by the
Company on the basis of information available with the Company and has
been relied upon by the auditors.
(d) DPCO matters
The Company is contesting various demands for payment to the credit of
the Drug Prices Equalisation Account under Drugs (Price Control) Order
(DPCO), 1995 for few of its products, including norfloxacin. Based on
its best estimate, the Company has made a provision for the potential
liability related to the allegedly overcharged amount including the
interest thereon and believes that the possibility of any liability
that may arise on account of penalty on this demand is not probable. In
the event the Company is unsuccessful in its litigation in the Supreme
Court, it will be required to remit the sale proceeds in excess of the
notifi ed selling prices to the Government of India with interest and
including penalties, if any, which amounts are not readily
(e) Fuel surcharge adjustment
The Andhra Pradesh Electricity Regulatory Commission (the APERC)
passed various orders approving the levy of Fuel Surcharge Adjustment
(FSA) charges for the period from 1 April 2008 to 31 March 2013 by
power distribution companies from all the consumers of electricity in
the then existing undivided state of Andhra Pradesh, India where the
Company''s headquarters and principal manufacturing facilities are
located. Separate writ petitions fi led by the Company for various
periods, challenging and questioning the validity and legality of this
levy of FSA charges by the APERC, are pending before the High Court of
Andhra Pradesh and the Supreme Court of India.
After taking into account all of the available information and legal
provisions, the Company has recorded an amount of Rs. 219 as the
potential liability towards FSA charges. The total amount approved by
APERC for collection by the power distribution companies from the
Company in respect of FSA charges for the period from 1 April 2008 to
31 March 2013 is Rs. 482. As of 31 March 2016, the Company has made
payments under protest of Rs. 354 as demanded by the power
distribution companies as part of monthly electricity bills. The
Company remains exposed to additional financial liability should the
orders passed by the APERC be upheld by the Courts.
(f) Land pollution
The Indian Council for Environmental Legal Action fi led a writ in 1989
under Article 32 of the Constitution of India against the Union of
India and others in the Supreme Court of India for the safety of people
living in the Patancheru and Bollarum areas of Medak district of the
then existing undivided state of Andhra Pradesh. The Company has been
named in the list of polluting industries. In 1996, the Andhra Pradesh
District Judge proposed that the polluting industries compensate
farmers in the Patancheru, Bollarum and Jeedimetla areas for
discharging effluents which damaged the farmers'' agricultural land.
The compensation was fixed at Rs. 0.0013 per acre for dry land and Rs.
0.0017 per acre for wet land. Accordingly, the Company has paid a total
compensation of Rs. 3. The Company believes that the possibility of
additional liability is remote. The Andhra Pradesh High Court disposed
of the writ petition on 12 February 2013 and transferred the case to
the National Green Tribunal (NGT), Chennai, India. The interim orders
passed in the writ petitions will continue until the matter is decided
by the NGT. The NGT has, through its order dated 30 October 2015,
constituted a Fact Finding Committee. The NGT has also permitted the
alleged polluting industries to appoint a person on their behalf in the
Fact Finding Committee. However, the Company along with the alleged
polluting industries have challenged the constitution and composition
of the Fact Finding Committee. The NGT has directed that until all the
applications challenging the constitution and composition of the Fact
Finding Committee are disposed of, the Fact Finding Committee shall not
commence its operation.
(g) Water pollution and air pollution
During the year ended 31 March 2012, the Company, along-with 14 other
companies, received a notice from the Andhra Pradesh Pollution Control
Board (APP Control Board) to show cause as to why action should not
be initiated against them for violations under the Indian Water
Pollution Act and the Indian Air Pollution Act. Furthermore, the APP
Control Board issued orders to the Company to (i) stop production of
all new products at the Company''s manufacturing facilities in
Hyderabad, India without obtaining a Consent for Establishment, (ii)
cease manufacturing products at such facilities in excess of certain
quantities specified by the APP Control Board and (iii) furnish a bank
guarantee to assure compliance with the APP Control Board''s orders.
The Company appealed the APP Control Board orders to the Andhra Pradesh
Pollution Appellate Board (the APP Appellate Board). The APP
Appellate Board, on the basis of a report of a fact-finding advisory
committee, recommended to the Andhra Pradesh Government to allow
expansion of units fully equipped with Zero-Liquid Discharge (ZLD)
facilities and otherwise found no fault with the Company (on certain
conditions). The APP Appellate Board''s decision was challenged by one
of the petitioners in the National Green Tribunal and the matter is
currently pending before it.
Separately, the Andhra Pradesh Government, following recommendations of
the APP Appellate Board, published a notification in July 2013 that
allowed expansion of production of all types of existing bulk drug and
bulk drug intermediate manufacturing units subject to the installation
of ZLD facilities and the outcome of cases pending in the National
Green Tribunal. Importantly, the notification directed pollution load
of industrial units to be assessed at the point of discharge (if any)
as opposed to point of generation.
In September 2013, the Ministry of Environment and Forests, based on
the revised Comprehensive Environment Pollution Index, issued a
notification that re-imposed a moratorium on expansion of industries in
certain areas where some of the Company''s manufacturing facilities are
located. This notification overrides the Andhra Pradesh Government''s
notification that conditionally permitted expansion.
(h) Assessable value of products supplied by a vendor to the Company
During the year ended 31 March 2003, the Central Excise Authorities of
India (the Central Excise Authorities) issued a demand notice to a
vendor of the Company regarding the assessable value of products
supplied by this vendor to the Company. The Company has been named as a
co-defendant in this demand notice. The Central Excise Authorities
demanded payment of Rs. 176 from the vendor, including penalties of Rs.
90. Through the same notice, the Central Excise Authorities issued a
penalty claim of Rs. 70 against the Company. During the year ended 31
March 2005, the Central Excise Authorities issued an additional notice
to this vendor demanding Rs. 226 from the vendor, including a penalty
of Rs. 51. Through the same notice, the Central Excise Authorities
issued a penalty claim of Rs. 7 against the Company. Furthermore,
during the year ended 31 March 2006, the Central Excise Authorities
issued an additional notice to this vendor demanding Rs. 34. The
Company filled appeals against these notices with the Customs, Excise
and Service Tax Appellate Tribunal (the CESTAT). In October 2006, the
CESTAT passed an order in favor of the Company setting aside all of the
above demand notices. In July 2007, the Central Excise Authorities
appealed against CESTAT''s order in the Supreme Court of India, New
On 27 November 2015, the Supreme Court of India dismissed the appeal of
the Central Excise Authorities and passed an order in favor of the
(k) Direct tax matter
During the year ended 31 March 2014, the Indian Income Tax authorities
disallowed for tax purposes certain business transactions entered into
by the parent company with its wholly-owned subsidiaries. The
associated tax impact is Rs. 570. The Company believes that such
business transactions are allowed for tax deduction under Indian Income
Tax laws and has accordingly filled an appeal with the Income Tax
Appellate Authorities. The Company further believes that the
probability of succeeding in this matter is more likely than not and
therefore no provision was made in respect of this matter in the
Company''s financial statements as at 31 March 2016.
Additionally, the Company is contesting various other disallowances by
the Indian Income Tax authorities. The associated tax impact is Rs.
845. The Company believes that the chances of an unfavourable outcome
in each of such disallowances are less than probable and accordingly,
no provision was made in respect of these matters in the Company''s
financial statements as at 31 March 2016.
Dr. Reddy''s Employees Stock Option Plan-2002 (the DRL 2002 Plan):
The Company instituted the DRL 2002 Plan for all eligible employees in
pursuance of the special resolution approved by the shareholders in the
Annual General Meeting held on 24 September 2001. The DRL 2002 Plan
covers all employees of DRL and its subsidiaries and directors
(excluding promoter directors) of DRL and its subsidiaries
(collectively, eligible employees). Under the Scheme, the Nomination,
Governance and Compensation Committee of the Board (''the Committee'')
shall administer the Scheme and grant stock options to eligible
directors and employees of the Company and its subsidiaries. The
Committee shall determine the employees eligible for receiving the
options, the number of options to be granted, the exercise price, the
vesting period and the exercise period. The vesting period is
determined for the options issued on the date of the grant. The options
issued under the DRL 2002 Plan options vest in periods ranging between
one and four years and generally have a maximum contractual term of fi
The DRL 2002 Plan, as amended at Annual General Meetings of
shareholders held on 28July 2004 and on 27July 2005, provides for stock
option grants in two categories:
Category A: 300,000 stock options out of the total of 2,295,478
reserved for grant of options having an exercise price equal to the
fair market value of the underlying equity shares on the date of grant;
Category B: 1,995,478 stock options out of the total of 2,295,478
reserved for grant of options having an exercise price equal to the par
value of the underlying equity shares (i.e., Rs.5 per option).
The fair market value of a share on each grant date falling under
Category A above is defined as the average closing price (after
adjustment of Bonus issue) for 30 days prior to the grant, in the stock
exchange where there was highest trading volume during that period.
Notwithstanding the foregoing, the Committee may, after getting the
approval of the shareholders in the Annual General Meeting, grant
options with a per share exercise price other than fair market value
and par value of the equity shares.
Dr. Reddy''s Employees ADR Stock Option Plan-2007 (the DRL 2007 Plan):
The Company instituted the DRL 2007 Plan for all eligible employees in
pursuance of the special resolution approved by the shareholders in the
Annual General Meeting held on 27 July 2005. The DRL 2007 Plan came into
effect on approval of the Board of Directors on 22 January 2007. The
DRL 2007 Plan covers all employees of DRL and its subsidiaries and
directors (excluding promoter directors) of DRL and its subsidiaries
(collectively, eligible employees). Under the DRL 2007 Plan, the
Nomination, Governance and Compensation Committee of the Board (the
''Committee'') shall administer the DRL 2007 Plan and grant stock options
to eligible employees of the Company and its subsidiaries. The
Nomination, Governance and Compensation Committee shall determine the
employees eligible for receiving the options, the number of options to
be granted, the exercise price, the vesting period and the exercise
period. The vesting period is determined for all options issued on the
date of the grant. The options issued under the DRL 2007 Plan vest in
periods ranging between one and four years and generally have a maximum
contractual term of five years.
The Committee may, after obtaining the approval of the shareholders in
the Annual General Meeting, grant options with a per share exercise
price other than fair market value and par value of the equity shares.
During the year ended 31 March 2016, the Company has issued 40,184
Category B options to eligible employees under the DRL 2007 Plan. The
vesting period for the options granted varies from 12 to 48 months.
The Company has not granted any options under Category A of the DRL
In addition to the above, during the year ended 31 March 2015, the
Company adopted a new program to grant performance linked stock options
to certain employees under the DRL 2002 Plan and the DRL 2007 Plan.
Under this program, performance targets are measured each year against
pre-defined interim targets over the three year period ending on 31
March 2017 and eligible employees are granted stock options upon
meeting such targets. The stock options so granted are ultimately
vested with the employees who meet subsequent service vesting
conditions which range from 1 to 4 years. After vesting, such stock
options generally have a maximum contractual term of fi ve years. The
details of grants made under this program are included in the above
tables under the respective plans.
Till 30 September 2015, the Company accounted for employee stock
options using the intrinsic method of accounting available under
Securities and Exchange Board of India (Employee Stock Option Scheme
and Employee Stock Purchase Scheme) Guidelines, 1999. Effective 1
October 2015, the Company applied Securities and Exchange Board of
India (Share Based Employee Benefits) Regulations, 2014, which require
the employee stock options to be accounted under the Guidance note on
Accounting for Employee Share-based Payments issued by the Institute of
Chartered Accountants of India (ICAI). Consequent to such change,
deferred employee stock compensation account has been de-recognised to
confirm to the new accounting pronouncement.
The Company followed intrinsic method of accounting based on which a
compensation expense of Rs.455 (previous year: Rs.519) was recognized
in the statement of profit and loss. Had the Company used the fair
value method, the compensation expense would have been Rs.471. The
differential stock compensation expense of Rs.16 does not have any
significant effect on the net results and EPS of the Company for the
year ended 31 March 2016.
Valuation of stock options under fair value method:
The fair value of stock options granted under the DRL 2002 Plan and the
DRL 2007 Plan has been measured using the Black-Scholes-Merton model at
the date of the grant.
The Black-Scholes-Merton model includes assumptions regarding dividend
yields, expected volatility, expected terms and risk free interest
rates. In respect of par value options granted under category B, the
expected term of an option (or option life) is estimated based on the
vesting term, contractual term, as well as expected exercise behavior of
the employees receiving the option. In respect of fair market value
options granted under category A, the option life is estimated based on
the simplified method. Expected volatility of the option is based on
historical volatility, during a period equivalent to the option life,
of the observed market prices of the Company''s publicly traded equity
shares. Dividend yield of the options is based on recent dividend
activity. Risk-free interest rates are based on the government
securities yield in effect at the time of the grant. These assumptions
reflect management''s best estimates, but these assumptions involve
inherent market uncertainties based on market conditions generally
outside of the Company''s control. As a result, if other assumptions had
been used in the current period, stock-based compensation expense could
have been materially impacted. Further, if management uses different
assumptions in future periods, stock based compensation expense could
be materially impacted in future years.
The estimated fair value of stock options is charged to income on a
straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was,
in-substance, multiple awards.