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Your 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 $1.58 billion. Profit before taxes (PBT) was Rs. 15.80 billion, a decline of 23% over the previous year. In US$ terms, this translates into $238 million.
The Company's consolidated net revenue for the year was Rs. into $404 million. Revenue from Global Generics increased by 7% and stood at Rs. 128.06 billion, driven largely by North America, Europe and India.
Revenue from North America grew by 19% turning in Rs. 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 filings in the USA; 13 Abbreviated New Drug Applications (ANDAs) and 1 New Drug Application (NDA). Cumulatively, 82 generic filings (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 'First–to–File' status.
Revenue from Emerging Markets was Rs. 23.59 billion, decline of 25% on a year–on–year basis. Revenue from India stood at Rs. 21.29 billion, registering a year–on–year growth of 19%.
Revenues from PSAI stood at Rs. 22.38 billion, decline of 12% on a year–on–year basis. During the year, 50 Drug Master
Files (DMFs) were filed globally, including 8 in the US, 3 in Europe and 39 in other markets. The cumulative number of DMF filings 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.
TRANSFER TO RESERVES
The Company proposes to transfer Rs. 1,355 million to the General Reserve
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 Chapter.
CHANGE IN THE NATURE OF BUSINESS, IF ANY
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 there under.
MATERIAL CHANGES AND COMMITMENTS AFFECTING THE FINANCIAL POSITION OF THE COMPANY
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, 1998.
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.
SUBSIDIARIES AND ASSOCIATES
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 GmbH.
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 www.drreddys.com
PARTICULARS OF LOANS, GUARANTEES OR INVESTMENTS
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 financial statements provided in this annual report.
CORPORATE GOVERNANCE AND ADDITIONAL SHAREHOLDERS' INFORMATION
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.
MANAGEMENT DISCUSSIONAND ANALYSIS
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.
BOARD OF DIRECTORS AND KEY MANAGERIAL PERSONNEL
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 five 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 place.
APPOINTMENT OF DIRECTORS AND REMUNERATION POLICY
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.
NUMBER OF BOARD MEETINGS
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.
BUSINESS RISK MANAGEMENT
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.
ADEQUACY OF INTERNAL FINANCIAL CONTROL SYSTEMS
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.
DIRECTORS' RESPONSIBILITY STATEMENT
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 effectively.
RELATED PARTY TRANSACTIONS
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.
VIGIL MECHANISM/WHISTLE–BLOWER POLICY
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 www.drreddys.com/ media/21 1046/cobe_booklet.pdf
AUDITORS STATUTORY AUDITORS
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 firm 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 filed on 29 September 2015, within the stipulated timeline. The cost audit report for FY2016 will be filed with the Central Government within the stipulated timeline.
BOARD'S RESPONSE ON AUDITOR'S QUALIFICATION, RESERVATION OR ADVERSE REMARK OR DISCLAIMER MADE
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.
SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE COURTS/REGULATORS
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 additional 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 significant 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.
INFORMATION REQUIRED UNDER SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTION, PROHIBITION & REDRESSAL) ACT, 2013
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.
CORPORATE SOCIAL RESPONSIBILITY INITIATIVES
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 collaborations
Details about the CSR policy and initiatives taken by the Company during the year are available on Company's website www.drreddys.com. The report on CSR activities of the Company is attached as Annexure IV.
BUSINESS RESPONSIBILITY REPORT
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.
TRANSFER OF UNPAID AND UNCLAIMED AMOUNTS TO INVESTOR EDUCATION AND PROTECTION FUND (IEPF)
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.
EMPLOYEES STOCK OPTION SCHEMES
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 www.drreddys.com/ pdf/ESOP_details.pdf
The said details also form part of the note 2.30 of the Notes to the standalone financial statements.
PARTICULARS OF EMPLOYEES
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 regard.
CONSERVATION OF ENERGY, RESEARCH AND DEVELOPMENT, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO
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.
EXTRACT OF THE ANNUAL RETURN
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
Date 12 May 2016