Dr Reddys Laboratories Directors Report, Dr Reddys Labs Reports by Directors

Dr Reddys Laboratories

BSE: 500124|NSE: DRREDDY|ISIN: INE089A01023|SECTOR: Pharmaceuticals
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Directors Report Year End : Mar '16    Mar 15
The Directors are pleased to present the 32nd annual report for the
 year ended 31 March 2016.
 Table 1 gives the financial highlights of the Company for FY2016 as
 compared to the previous financial year, on Indian GAAP consolidated
 and standalone basis.
 The Company''s standalone net revenue for the year was Rs.104.53
 billion, up 2% over the previous year. In US$ terms, this amounted to
 .58 billion. Profit before taxes (PBT) was Rs.15.80 billion, a
 decline of 23% over the previous year. In US$ terms, this translates
 into 8 million.
 The Company''s consolidated net revenue for the year was X 159.67
 billion, up 4% over the previous year. In US$ terms, this amounted to
 .4 billion. PBT was X 26.75 billion, a decline of 8% over the
 previous year. In US$ terms, this translates into 4 million.
 Revenue from Global Generics increased by 7% and stood at X 128.06
 billion, driven largely by North America, Europe and India.
 Revenue from North America grew by 19% turning in X 75.45 billion. This
 growth was largely driven by sustained performance by injectable
 franchise and market share gains in some of the key molecules. During
 the year, the Company launched 4 products namely esomeprazole,
 memantine, pramipexole ER and pravastatin. FY2016 also saw 14 product
 fi lings in the USA; 13 Abbreviated New Drug Applications (ANDAs) and 1
 New Drug Application (NDA). Cumulatively, 82 generic fillings (79 ANDAs
 and 3 NDAs under 505(b)(2) route) are currently awaiting approval from
 the U.S. Food and Drug Administration (USFDA). Of these 79 ANDAs, 52
 are Para IVs, out of which the Company believes 18 are potentially
 Revenue from Emerging Markets was X 23.59 billion, decline of 25% on a
 year- on-year basis. Revenue from India stood at X 21.29 billion,
 registering a year-on- year growth of 19%.
 Revenues from PSAI stood at X 22.38 billion, decline of 12% on a
 year-on-year basis. During the year, 50 Drug Master
 TABLE 1 FINANCIAL HIGHLIGHTS                            (Rs. MILLION)
                                   CONSOLIDATED         STANDALONE
                                 FY2016    FY2015    FY2016    FY2015
 Total revenue                  159,671   152,974   104,525   102,338
 Profit before depreciation, 
 amortisation and tax            36,456    36,595    22,291    25,501
 Depreciation and amortisation    9,705     7,599     6,491     4,902
 Profit before tax               26,751    28,996    15,800    20,599
 Tax expense                      5,237     5,632     2,255     3,805
 Net profit for the year         21,514    23,364    13,545    16,794
 Add: Surplus at the 
 beginning of the year           57,467    39,890    67,619    56,599
 Total available for 
 appropriation                   78,981    63,254    81,164    73,393
 Proposed dividend on equity 
 shares                           3,405     3,408     3,405     3,408
 Tax on proposed dividend           693       694       693       694
 Credit of dividend 
 distribution tax                     -         -       (32)      (13)
 Dividend of previous 
 years (including tax)                5         6         5         6
 Transfer to General Reserve      1,355     1,679     1,355     1,679
 Balance carried forward         73,523    57,467    75,738    67,619
 Note: FY2016 represents fiscal year 2015-16, from 1 April 2015 to 31
 March 2016, and analogously for FY2015 and other such labeled years.
 Files (DMFs) were filled globally, including 8 in the US, 3 in Europe
 and 39 in other markets. The cumulative number of DMF fillings as on 31
 March 2016 was 768.
 Your Directors are pleased to recommend a dividend of Rs. 20/- per
 equity share of Rs. 5/- (400%) for FY2016. The dividend, if approved at
 the 32nd Annual General Meeting (AGM), will be paid to those
 shareholders whose names appear on the Register of Members of the
 Company as of the end of the day on 19 July 2016.
 The Company proposes to transfer Rs. 1,355 million to the General
 The paid-up share capital of the Company increased by Rs. 1.13 million
 to Rs. 853.04 million in FY2016, due to the allotment of 226,479 equity
 shares, on exercise of stock options by eligible employees of Dr.
 Reddy''s, through the ''Employees Stock Option Scheme, 2002'' and ''Dr.
 Reddy''s Employees ADR Stock Option Scheme, 2007''.
 The Company has not accepted any deposits covered under Chapter V of
 the Companies Act, 2013. Accordingly, no disclosure or reporting is
 required in respect of details relating to deposits covered under this
 During the year, there was no change in the nature of business of the
 Company or any of its subsidiaries.
 However, during the year, the Company adopted a new set of Articles of
 Association in substitution, and to entire exclusion of the regulations
 contained in the existing Articles of Association of the Company. This
 was primarily done to align the Articles with the new Companies Act,
 2013 and rules thereunder.
 Given the Company''s strong cash flow position, its Board of Directors
 at a meeting held on 17 February 2016, approved a proposal to buyback
 equity shares of the Company, subject to approval by the shareholders,
 for an aggregate amount not exceeding Rs. 15.69 billion, at a price not
 exceeding Rs. 3,500 per share. The buyback is open to all shareholders
 including those who become shareholders by cancelling their American
 Depository Receipts and receiving underlying equity shares, but
 excludes the promoters and promoter group of the Company. The buyback
 is being conducted under the open market route according to the
 provisions given in the SEBI (Buy Back of Securities) Regulations,
 The Maximum Buyback price represents 18.6% premium, compared to the
 average of the weekly high and low of the closing share price of the
 Company during the last two weeks up to 16 February 2016.
 Subsequently, the Company received the requisite approval from
 shareholders on 1 April 2016 and the buyback process is in progress.
 The Company has bought and extinguished 350,000 fully paid up equity
 shares for an aggregate amount of Rs. 1.09 billion up to the date of
 this report.
 The Company has 52 subsidiaries and 3 joint venture companies as on 31
 March 2016. During FY2016,
 Dr. Reddy''s Laboratories Japan KK, Japan and Reddy Pharma SAS, France
 have become subsidiary companies and DRES Energy Private Limited has
 become a joint venture company. Further, Reddy Specialties GmbH ceased
 to be a subsidiary of the Company, upon its merger with Reddy Holding
 As per Section 129(3) of the Companies Act, 2013, where the Company has
 one or more subsidiaries, it shall, in addition to its financial
 statements, prepare a consolidated financial statement of the Company
 and of all the subsidiaries in the same form and manner as that of its
 own and also attach along with its financial statement, a separate
 statement containing the salient features of the financial statement
 of its subsidiaries.
 In accordance with the above, the consolidated financial statement of
 the Company and all its subsidiaries and joint ventures, prepared in
 accordance with Accounting Standard 21 and 27 as specified in the
 Companies (Accounts) Rules, 2014, form part of the annual report.
 Further, a statement containing the salient features of the financial
 statements of our subsidiaries and joint ventures in the prescribed
 Form AOC-1, is attached as Annexure I to the Board''s Report. This
 statement also provides the details of the performance and financial
 position of each subsidiary.
 In accordance with Section 136 of the Companies Act, 2013, the audited
 financial statements and related information of the subsidiaries,
 where applicable, will be available for inspection during regular
 business hours at our registered office in Hyderabad, India. These are
 also available on Company''s website
 The Company makes investments or extends loans/guarantees to its wholly
 owned subsidiaries for their business purpose. Details of loans,
 guarantees and investments covered under Section 186 of the Companies
 Act, 2013, along with the purpose for which such loan or guarantee is
 proposed to be utilized by the recipient, form part of the notes to the
 fi nancial statements provided in this annual report.
 A detailed report on the corporate governance systems and practices of
 the Company is given in a separate chapter of this annual report.
 Similarly, other detailed information for shareholders is provided in
 the chapter Additional Shareholders''Information.
 A certificate from the Auditors of the Company confirming compliance
 with the conditions of corporate governance is attached to the report
 on corporate governance.
 A detailed report on the Management Discussion and Analysis in terms of
 the provisions of Regulation 34 of the SEBI (Listing Regulations and
 Disclosure Requirements) Regulations, 2015 (Listing Regulations), is
 provided as a separate chapter in the annual report.
 The term of Dr. J P Moreau as an Independent Director of the Company
 ended on 31 July 2015. The Board places on record its appreciation for
 the services rendered by Dr. J P Moreau, during his tenure as a member
 of the Board and its Committees.
 During the year, the Board of Directors at its meeting held on 29
 October 2015, had re-appointed Mr. G V Prasad as Whole-time Director
 designated as Co- Chairman, Managing Director and CEO of the Company,
 for a further period of five years with effect from 30 January 2016,
 subject to approval of the shareholders at the forthcoming 32nd AGM
 scheduled on 27 July 2016.
 The Board of Directors appointed Mr. Bharat Narotam Doshi and Mr. Hans
 Peter Hasler as Additional Directors of the Company, categorized as
 Independent. The Board recommends appointment of Mr. Doshi and Mr.
 Hasler as Independent Directors under Section 149 of the Companies Act,
 2013 for a term of fi ve years each, with effect from 11 May 2016 and
 17 June 2016, respectively for approval of the shareholders at the
 forthcoming 32nd AGM.
 In accordance with Section 149(7) of the Companies Act, 2013, each
 Independent Director has confirmed to the Company that he or she meets
 the criteria of independence as laid down in Section 149(6) of the
 Companies Act, 2013 and Regulation 16(1)(b) of the Listing Regulations.
 Mr. K Satish Reddy, retires by rotation at the forthcoming 32nd AGM and
 being eligible, seeks re-appointment.
 Brief profiles of Mr. G V Prasad, Mr. Bharat Narotam Doshi, Mr. Hans
 Peter Hasler and Mr. K Satish Reddy are given in the Corporate
 Governance section of the annual report and notice convening the 32nd
 AGM, for reference of the shareholders.
 As per provisions of the Companies Act, 2013 and Regulation 17(10) of
 the Listing Regulations, an evaluation of the performance of the Board
 and members was undertaken. The evaluation process was carried out
 internally in FY2016, each Board member completed a questionnaire on
 the other Board members for peer evaluation and a questionnaire to
 provide feedback on Board, its Committees and their functioning. The
 contribution and impact of individual Directors were reviewed through a
 peer evaluation on parameters such as level of engagement and
 participation, flow of information, independence of judgment, 
 conflicts resolution and their contribution in enhancing the Board''s overall
 effectiveness. A 360 degrees feedback- cum-assessment of individual
 Directors, the functioning of the Board as a whole and its Committees
 was conducted. The peer ratings on certain parameters, positive
 attributes and improvement areas for each Board member was also
 provided to them in a confidential manner. The feedback obtained from
 the interventions was discussed in detail and, where required,
 independent and collective action points for improvement were put in
 The assessment and appointment of members to the Board is based on a
 combination of criterion that includes ethics, personal and
 professional stature, domain expertise, gender diversity and specific
 qualifications required for the position. The potential Board member
 is also assessed on the basis of independence criteria as defined in
 Section 149(6) of the Companies Act, 2013 and Regulation 16(1)(b) of
 the Listing Regulations.
 In accordance with Section 178(3) of the Companies Act, 2013,
 Regulation 9(4) of the Listing Regulations and on recommendations of
 the Nomination, Governance & Compensation Committee, the Board adopted
 a Remuneration Policy for Directors, Key Managerial Personnel (KMPs)
 and senior management. The policy is attached as an annexure to the
 Corporate Governance report.
 The Board of Directors met six times during the year. In addition, an
 annual Board Retreat was held to discuss strategic matters. Details of
 Board meetings are laid out in Corporate Governance report, which forms
 a part of this annual report.
 The Audit Committee of the Board of Directors consists entirely of
 Independent Directors. Presently, the Committee comprises of Mr. Sridar
 Iyengar (Chairman), Mr. Ravi Bhoothalingam, Ms. Kalpana Morparia, Dr.
 Omkar Goswami and Mr. Bharat Narotam Doshi (effective 11 May 2016).
 The Board has accepted all recommendations made by the Audit Committee
 during the year.
 The Company has a Risk Management Committee of the Board, consisting
 entirely of Independent Directors. The details of the Committee and its
 terms of reference are set out in the Corporate Governance section,
 which forms a part of the Board''s report.
 The Audit and Risk Management Committees review the key elements of the
 Company''s business, finance, operations and compliance risk(s) and
 respective mitigation strategies. The Risk Management Committee reviews
 key strategic, business, compliance and operational risks, while issues
 around ethics & fraud, Internal Control over Financial Reporting
 (ICOFR), as well as process risks and their mitigation are reviewed by
 the Audit Committee.
 The Company''s ''Finance Investment and Risk Management Council''
 (FIRM Council) is a management level committee which operates under a
 charter and focusses on risks associated with the Company''s business
 and investments. The FIRM Council and management, periodically review
 matters pertaining to ethics & fraud, compliance and internal audit.
 Additionally, the Enterprise-wide Risk Management (ERM) function helps
 the management and the Board to periodically prioritise, review and
 measure business risks against a pre-determined risk appetite and to
 suitably respond, depending on whether the risks are internal,
 strategic or external.
 During FY2016, focus areas of the management and the Board included
 progress on strategy execution, quality and regulatory, geo-political,
 compliance and patent infringement risk exposures, while safety and
 health continued to remain a priority for the Company.
 The Company has in place adequate internal financial controls with
 reference to financial statements. These controls ensure the accuracy
 and completeness of the accounting records and preparation of reliable
 financial statements.
 In terms of Section 134(5) of the Companies Act, 2013 (''the Act''), your
 Directors state that:
 1.  applicable accounting standards have been followed in the
 preparation of the annual accounts;
 2.  accounting policies have been selected and applied consistently.
 Judgments and estimates made are reasonable and prudent, so as to give
 a true and fair view of the state of affairs of the Company at the end
 of the FY2016 and of the profit of the Company for that period;
 3.  proper and sufficient care has been taken to maintain adequate
 accounting records in accordance with the provisions of this Act for
 safeguarding the assets of the Company and for preventing and detecting
 fraud and other irregularities;
 4.  annual accounts have been prepared on a going concern basis;
 5.  adequate internal financial controls for the Company to follow,
 have been laid down and these are operating effectively; and 6.  proper
 and adequate systems have been devised to ensure compliance with the
 provisions of all applicable laws and these systems are operating
 In accordance with Section 134(3) (h) of the Companies Act, 2013 and
 Rule 8(2) of the Companies (Accounts) Rules, 2014, the particulars of
 contract or arrangement entered into by the Company with related
 parties referred to in Section 188(1) in Form AOC-2 is attached as
 Annexure II. All such contracts or arrangements are in the interest of
 the Company.
 The details of related party disclosures form part of the notes to the
 financial statements provided in this annual report.
 The Company has an Ombudsperson policy (Vigil Mechanism/Whistle-Blower)
 to report concerns. Accordingly, the Vigil Mechanism consists of a
 hotline (both email ID and phone number) to report concerns. The
 Company''s Ombudsperson policy outlines provisions to safeguard persons,
 who use this mechanism, from victimization. An Audit Committee member
 is the Chief Ombudsperson.  The policy also provides access to the
 chairperson of the Audit Committee under certain circumstances. The
 details of the procedure are also available on the Company''s website media/211046/cobe_booklet.pdf
 M/s. B S R & Co. LLP, Chartered Accountants (Firm Registration No.
 101248W/W-100022) were first appointed as auditors at Company''s 18th
 AGM held on 26 August 2002. Currently, they are holding office of the
 auditors up to the conclusion of the 32nd AGM.
 As per second proviso to Section 139(2) of the Companies Act, 2013,
 (the Act), a transition period of three years from the commencement of
 the Act is provided to appoint a new auditor if the existing auditor''s
 fi rm has completed two terms of five consecutive years.
 Accordingly, as per the said requirements of the Act, M/s. S R Batliboi
 & Associates LLP, Chartered Accountants (Firm Registration No.
 101049W/E300004) are proposed to be appointed as auditors for a period
 of 5 years commencing from the conclusion of 32nd AGM till the
 conclusion of the 37th AGM, subject to ratification by shareholders
 every year, as may be applicable, in place of M/s. B S R & Co. LLP,
 Chartered Accountants.
 M/s. S R Batliboi & Associates LLP, Chartered Accountants, have
 consented to the said appointment, and confirmed that their
 appointment, if made, would be within the limits specified under
 Section 141(3)(g) of the Act. They have further confirmed that they
 are not disqualified to be appointed as statutory auditor in terms of
 the provisions of the proviso to Section 139(1), Section 141(2) and
 Section 141(3) of the Act and the provisions of the Companies (Audit
 and Auditors) Rules, 2014.
 The Audit Committee and the Board of Directors recommend the
 appointment of M/s. S R Batliboi & Associates LLP, Chartered
 Accountants, as statutory auditors of the Company from the conclusion
 of the 32nd AGM till the conclusion of 37th AGM, to the shareholders.
 Pursuant to Section 204 of the Companies Act, 2013 and the Companies
 (Appointment & Remuneration of Managerial Personnel) Rules, 2014, Dr. K
 R Chandratre, Practicing Company Secretary (Membership No. FCS 1370 and
 Certificate of Practice No. 5144) was appointed to conduct the
 secretarial audit of the Company for FY2016. The secretarial audit
 report for FY2016 is attached as Annexure III.
 Based on the consent received from Dr. K R Chandratre, Practicing
 Company Secretary and on the recommendations of the Audit Committee,
 the Board has appointed Dr. K R Chandratre, Practicing Company
 Secretary, as secretarial auditor of the Company for FY2017.
 Pursuant to Section 148 of the Companies Act, 2013 read with the
 Companies (Audit and Auditors) Rules, 2014 and the Companies (Cost
 Records and Audit) Amendment Rules, 2014, the Company maintains the
 cost audit records in respect of its pharmaceutical business. Your
 Board has, on the recommendation of the Audit Committee, appointed M/s.
 Sagar & Associates, Cost Accountants (Firm Registration No. 000118) as
 cost auditors of the Company for the FY2017 at a remuneration of Rs.7
 lacs plus reimbursement of out of pocket expenses at actuals and
 applicable taxes. The provisions also require that the remuneration of
 the cost auditors be ratified by the shareholders.
 As a matter of record, relevant cost audit reports for FY2015 were 
 filled on 29 September 2015, within the stipulated timeline. The cost
 audit report for FY2016 will be filled with the Central Government
 within the stipulated timeline.
 There are no qualifications, reservations or adverse remarks made by
 the statutory auditors in their report or by the Practicing Company
 Secretary in the secretarial audit report.
 During the year, there were no instances of frauds reported by auditors
 under Section 143(12) of the Companies Act, 2013.
 During FY2016, the Company received a warning letter dated 5 November
 2015 from the USFDA relating to cGMP deviations at its API
 manufacturing facilities at Srikakulam, Andhra Pradesh and Miryalaguda,
 Telangana, as well as its oncology formulation manufacturing facility
 at Duvvada, Visakhapatnam, Andhra Pradesh, following inspections of
 these sites by the USFDA in November 2014, January 2015 and
 February-March 2015, respectively. The warning letter does not restrict
 production or shipment of Company''s products from these facilities.
 However, unless and until the Company correct these outstanding issues
 to the USFDA''s satisfaction, the USFDA may withhold approval of the
 Company''s new products and new drug applications, refuse admission of
 products manufactured at these facilities into the US and/or take
 additiona regulatory/legal action. Any such action may have a material
 and negative impact on Company''s ongoing business and operations.
 The Company continue to develop and implement corrective action plans
 relating to the warning letter. The response to the warning letter was
 submitted on 7 December 2015 and further updates on the progress of the
 corrective actions were provided to the USFDA in January 2016, March
 2016 and May 2016.
 Apart from the above, there were no signifi cant and/or material
 orders, passed by any Court or Regulator or Tribunal, which may impact
 the going concern status or the Company''s operations in future.
 The Company has an Apex Complaints Committee and Internal Complaints
 Committees (ICCs) which operates under a defined Redressal System for
 complaints pertaining to Sexual Harassment of Women at Workplace.
 The details of concerns raised and resolved regarding sexual harassment
 of women at the workplace are available in the Principle 3 under
 Section 7 of the Business Responsibility Report.
 As per Section 135 of the Companies Act, 2013, the Company has a
 Corporate Social Responsibility (CSR) Committee of its Board of
 Directors. The Committee comprises of Mr. Ravi Bhoothalingam
 (Chairman), Mr. G V Prasad and Mr. K Satish Reddy.
 During the year, the Committee monitored the implementation and
 adherence to the CSR policy. The CSR policy provides a constructive
 framework to review and organize our social outreach programs in the
 areas of health, livelihood and education. The policy enables a deeper
 understanding of outcome-focused social development through diverse
 Details about the CSR policy and initiatives taken by the Company
 during the year are available on Company''s website
 The report on CSR activities of the Company is attached as Annexure IV.
 A detailed Business Responsibility Report in terms of the provisions of
 Regulation 34 of the Listing Regulations, is available as a separate
 section in this annual report.
 Pursuant to the provisions of Section 205A(5) of the Companies
 Act,1956, the declared dividends, which remained unpaid or unclaimed
 for a period of seven years, have been transferred by the Company to
 the IEPF established by the Central Government pursuant to Section 205C
 of the said Act.
 During the year, there has been no material change in the ''Dr. Reddy''s
 Employees Stock Option Scheme, 2002''and the ''Dr. Reddy''s Employees ADR
 Stock Option Scheme, 2007''(both collectively referred as ''the
 Schemes'').  The Schemes are in compliance with the SEBI (Share Based
 Employee Benefits) Regulations, 2014 and the details as required under
 the said Regulations are available on website
 The said details also form part of the note 2.30 of the Notes to the
 standalone financial statements.
 Disclosures pertaining to remuneration and other details as required
 under Section 197(12) of the Companies Act, 2013, read with Rule 5(1)
 of the Companies (Appointment and Remuneration of Managerial Personnel)
 Rules, 2014 are attached as Annexure V.
 In terms of Section 197(12) of the Companies Act, 2013, read with Rule
 5(2) and 5(3) of the Companies (Appointment and Remuneration of
 Managerial Personnel) Rules, 2014, a statement showing the names and
 other particulars of the employees drawing remuneration in excess of
 limits set out in said rules forms part of the annual report.
 Considering the first proviso to Section 136(1) of the Companies Act,
 2013, the annual report, excluding the aforesaid information, is being
 sent to the shareholders of the Company and others entitled thereto.
 The said information is available for inspection at the registered 
 office of the Company during business hours on working days of the Company
 up to the date of the forthcoming 32nd AGM. Any shareholder interested
 in obtaining a copy thereof, may write to the Company Secretary in this
 The particulars as prescribed under Section 134(3)(m) of the Companies
 Act, 2013, read with Rule 8(3) of the Companies (Accounts) Rules, 2014
 are attached as Annexure VI.
 The details forming part of the extract of the Annual Return in Form
 MGT-9 are attached as Annexure VII.
 Your Directors place on record their sincere appreciation for the
 significant contribution made by our employees through their
 dedication, hard work and commitment, as also for the trust reposed on
 us by the medical fraternity and patients. We also acknowledge the
 support extended to us by the analysts, bankers, government agencies,
 media, customers, suppliers, shareholders and investors at large. We
 look forward to continued support in our endeavor to accelerate access
 to innovative and affordable medicines because Good Health Can''t Wait.
                           for and on behalf of the Board of Directors
                                                        K Satish Reddy
 Place Hyderabad 
 Date 12 May 2016
Source :
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