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Dr Reddys Laboratories

BSE: 500124|NSE: DRREDDY|ISIN: INE089A01023|SECTOR: Pharmaceuticals
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« Mar 15
Accounting Policy Year : Mar '16
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
 future periods.
 
 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.
 
 Assets:
 
 An asset is classified as current when it satisfies any of the
 following criteria:
 
 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.
 
 Liabilities:
 
 A liability is classified as current when it satisfies any of the
 following criteria:
 
 a) it is expected to be settled in the Company''s normal operating
 cycle;
 
 b) it is held primarily for the purpose of being traded;
 
 c) it is due to be settled within twelve months after the reporting
 date; or
 
 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
 respective assets.
 
 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.
 
 g) Investments
 
 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.
 
 h) Inventories
 
 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
 incurred.
 
 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
 actuary.
 
 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
 transaction.
 
 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
 regulatory requirements.
 
 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
 and loss.
 
 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
 measured reliably.
 
 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.
 
 Sales returns
 
 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
 
 Service income is recognised as per the terms of contracts with
 customers when the related services are performed, or the agreed
 milestones are achieved.
 
 License fee
 
 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
 
 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
 credit.
 
 Current tax
 
 The current charge for income taxes is calculated in accordance with
 the relevant tax regulations applicable to the Company.
 
 Deferred tax
 
 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
 sheet date.
 
 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
 change occurs.
 
 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.
 
 r) Leases
 
 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.
 
 Finance leases
 
 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.
 
 Operating leases
 
 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
 drawdown.
 
 (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
 current year.
 
 (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
 ascertainable.
 
 (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
 Delhi.
 
 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
 Company.
 
 (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
 ve years.
 
 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;
 and
 
 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
 2007 Plan.
 
 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.
Source : Dion Global Solutions Limited
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