DIRECTORS' REPORT TO THE MEMBERS Your Directors have pleasure in presenting their report on the business and opérations of your Company for the year ended March 31, 2016. Performance Review Your Company scaled new heights with consolidated sales clocking Rs. 138055.3 million as against Rs. 126932.2 million of the previous year, higher by about 9%. International markets accounted for 73% of sales. Profit before interest, depreciation and tax was Rs. 39411.5 million. Profit before tax was Rs. 34330.3 million. After providing for taxes and minority interest, net profit was Rs. 22706.9 million. Earnings per share was Rs. 50.45. Dividend Your Directors are pleased to recommend dividend at Rs. 7.50 per equity share of Rs. 2/- each, absorbing an amount of Rs. 3379.4 million. Corporate tax on the proposed dividend was Rs. 688.0 million and Rs. 0.6 million on dividend for the previous year Share Capital As approved by the Members at the 33^ Annual General Meeting (AGM) of the Company held on July 23, 2015, the Authorised Share Capital of the Company was increased from Rs. 1,000,000,000 (Rupees One Thousand million) divided into 500,000,000 (Five Hundred million) Equity Shares of Rs. 2/- each to Rs. 2,000,000,000 (Rupees Two Thousand million) divided into 1,000,000,000 (One Thousand million) Equity Shares of Rs. 2/- each. During the year, the paid-up equity share capital of the Company rose by Rs. 2.2 million consequent to the allotment of 1,094,634 equity shares of Rs. 2/- each to eligible employees on exercise of stock options under the 'Lupin Employees Stock Option Plan 2003', 'Lupin Employees Stock Option Plan 2005', 'Lupin Subsidiary Companies Employees Stock Option Plan 2005', 'Lupin Employees Stock Option Plan 2011', 'Lupin Subsidiary Companies Employees Stock Option Plan 2011' and 'Lupin Employees Stock Option Plan 2014.' Credit Rating ICRA Limited (ICRA) has assigned the rating "ICRA A1+" (pronounced 'ICRA A one Plus') for the Company's short-term credit facilities of Rs. 13100 million, indicating very strong degree of safety regarding timely payment of financial obligations and "ICRA AAA" (pronounced 'ICRA triple A') for long-term credit facilities of Rs. 1900 million, indicating highest degree of safety regarding timely servicing of financial obligations. The outlook on the long-term rating is 'Stable'. ICRA has assigned the rating "ICRA AAA" to the Company's Non-Convertible Debenture programme of Rs. 1000 million, indicating highest degree of safety regarding timely servicing of financial obligations. The outlook on the rating is 'Stable'. Indian Accounting Standards [IND AS) - IFRS Converged Standards The Ministry of Corporate Affairs, vide notification dated February 16, 2015, notified the Companies (Indian Accounting Standard Rules), 2015, in pursuance of which, the Company, its subsidiaries and the joint venture shall adopt IND AS with effect from April 1, 2016, with comparatives for the year ended March 31, 2016. The implementation of IND AS is a major change and the Company has planned smooth transition to IND AS. The first IND AS financial results shall be published for the quarter ending June 30, 2016. Acquisitions In pursuit of achieving inorganic growth and with a view to accelerate progress by expanding presence across select geographies, your Company made the following acquisitions: - a) The entire shareholding in Gavis Pharmaceuticals, LLC, USA, Novel Laboratories, Inc., USA, VGS Holdings, Inc., USA, Edison Therapeutics, LLC, USA and Novel Clinical Research (India) Private Limited, India (collectively referred as Gavis), was acquired through Lupin Inc., USA, wholly-owned subsidiary of the Company. The transaction was closed on March 8, 2016, thereby making Gavis, a wholly-owned subsidiary of the Company. Gavis has an impressive portfolio of niche products with limited competition and high barriers to entry. It is a market leader in colonoscopy preparations with over 40% share and a strong pipeline of controlled substances. Gavis has a deep pipeline of several products under development for oral/liquids, dermatology, injectables, ophthalmic, nasal and MDI and has capability to produce tablets, capsules, controlled release product, dry powder suspension, nasal spray and liquid solutions. b) The entire shareholding in Medquimica Industrial Farmaceutica LTDA, Brazil (formerly known as Medquimica Industria Farmaceutica S.A., Brazil) (Medquimica) was acquired through Lupin Farmaceutica do Brasil LTDA, Brazil, a wholly-owned subsidiary of the Company on June 24, 2015. Medquimica, one of the fastest growing broad based pharmaceutical companies in Brazil, is engaged in the development, manufacturing and commercialization of OTC products, branded generics and generics, which are sold through push and pull models. Medquimica is a trusted brand with an established distribution network of medium and small distributors and presence across drug stores. It has a sound manufacturing facility with critical ANVISA-handling skills and experience and requisite approvals are in place. As part of restructuring operations, Lupin Farmaceutica do Brasil LTDA, Brazil, merged with Medquimica and the entire shareholding of Medquimica is now held by Lupin Atlantis Holdings SA, Switzerland, wholly-owned subsidiary of the Company. Subsidiary Companies/Joint Venture As on March 31, 2016, the Company had 30 subsidiaries and a joint venture. On December 7, 2015, Lupin Atlantis Holdings SA, Switzerland and Lupin Holdings B. V., Netherlands, wholly-owned subsidiaries of the Company, jointly incorporated Lupin Pharma LLC, Russia, as a distribution company. On March 8, 2016, Lupin Inc., USA, wholly-owned subsidiary of the Company, incorporated Lupin Research Inc., USA, for carrying out R&D activities. Pursuant to the first proviso to Section 129(3) of the Companies Act, 2013 ('Act') and Rules 5 and 8(1) of the Companies (Accounts) Rules, 2014, the salient features of the financial statements, performance and financial position of each subsidiary and the joint venture are given in Form AOC - 1 as Annexure 'A' to this Report. The Company has framed a policy for determining material subsidiaries, which has been hosted on the Company's website (web link: <http://www.lupin.com/pdf/Policy_for_determining_material_subsidiaries.pdf>). Management Discussion and Analysis In compliance with Regulation 34(3) read with Schedule V(B) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 ('Listing Regulations'), Management Discussion and Analysis forms part of this Annual Report. Corporate Governance Report In compliance with Regulation 34(3) read with Schedule V(C) of the Listing Regulations, a Report on Corporate Governance forms part of this Annual Report. The Auditors' certificate certifying compliance with the conditions of corporate governance as prescribed under Schedule V(E) of the Listing Regulations is annexed to the Corporate Governance Report. Business Responsibility Report In compliance with Regulation 34(2)(f) of the Listing Regulations, the Business Responsibility Report forms part of this Annual Report. Corporate Social Responsibility (CSR) The Company is one of the pioneers in the CSR field having been engaged in social welfare activities for over 30 years. It has been implementing its CSR activities mainly through the Lupin Human Welfare and Research Foundation (LHWRF). LHWRF has a well-set implementation mechanism at the grass-root level, with an objective of transforming rural lives. LHWRF reaches out to 2.8 million living in 3,500 villages. During the year, a programme was also undertaken to detect Tuberculosis and create awareness in the slum areas of Mumbai. Various CSR activities/initiatives were taken up at select centres with district development oriented approach for rural development in the backward areas as also at Company's plant locations. The Company undertakes the following CSR activities: - • Economic and Social Development and Natural Resource Management; • Rural Infrastructure development at various locations (including areas near the plant locations of the Company); • Learn and Earn programs with a view to provide opportunities and monetary support to needy students, particularly in small towns and rural areas to enable them to pursue higher studies; • Rural Industry and Skill Development; and • Women Health, Empowerment and Education. Pursuant to the provisions of Section 135 of the Companies Act, 2013 ('the Act') read with Companies (Corporate Social Responsibility Policy) Rules, 2014, during the year, the Company ought to have spent Rs. 541.5 million on CSR activities. Of this a sum of Rs. 205.1 million was spent. With a view to further support the poor and marginalised sections of the society, the Company would be accelerating its pace of CSR spend. The Company has set up a Charitable Trust known as 'Lupin Foundation', with a purpose of setting-up deeper sustainable projects like hospitals, educational institutions which will substantially enhance its CSR spend. Details of CSR activities are given in Annexure 'B' to this Report. The policy on CSR as approved by the Board has been hosted on the Company's website www.lupin.com Directors' Responsibility Statement In compliance with the provisions of Section 134(3)(c) read with Section134(5) of the Act, your Directors confirm: - i) that in the preparation of the annual financial statements for the year ended March 31, 2016, the applicable accounting standards have been followed along with proper explanations relating to material departures; ii) they had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of your Company at the end of the financial year March 31, 2016 and of the profit of the Company for that year; iii) that proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; iv) that the annual financial statements have been prepared on a going concern basis; v) that they had laid down proper internal financial controls and that the same are adequate and were operating effectively; and vi) they had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively. Directors Pursuant to the provisions of Section 152 of the Act, Mr. Nilesh Gupta, Managing Director, retires by rotation at the forthcoming AGM and is eligible for re-appointment. Mr. Ramesh Swaminathan, Chief Financial Officer & Executive Director and Mr. Jean-Luc Belingard, an Independent Director, who were appointed as Additional Directors, w.e.f. October 27, 2015, hold office up to the date of the forthcoming AGM. Notices along with requisite deposits under Section 160(1) of the Act, have been received from certain members proposing their names for appointment as Directors. The Company has received declarations from all the Independent Directors that they meet the criteria of independence prescribed by Section 149(6) of the Act. During the year, five Board meetings were held on May 13, 2015, June 22, 2015, July 23, 2015, October 27, 2015 and February 5, 2016, the details of which are given in the Corporate Governance Report forming part of the Annual Report. Board Evaluation Pursuant to the provisions of Section 134(3)(p) of the Act read with Rule 8(4) of the Companies (Accounts) Rules, 2014, the Board carried out an annual evaluation of its own performance and that of its Committees and individual directors. The performance of the Board and Committees were evaluated by the Board after seeking inputs from all the directors on the basis of the prescribed criteria, such as the composition and structure of the Board, quality of deliberations, effectiveness of the procedures adopted by the Board, participation at the Board and Committee meetings, governance reviews etc. The performance of individual Directors was evaluated on the basis of criteria like transparency, analytical abilities, qualifications, leadership qualities, experience, participation in the long-term strategic planning and responsibilities shouldered. Audit Committee The Audit Committee comprises Dr. K. U. Mada, Chairman, and Mr. Dileep C. Choksi, independent directors, and Dr. Kamal K. Sharma, Vice Chairman of the Company. The functions performed by the Audit Committee, particulars of meetings held and attendance thereat is given in the Corporate Governance Report which forms part of the Annual Report. Nomination and Remuneration Policy The Board has, on the recommendation of the Nomination and Remuneration Committee, framed a Policy relating to the remuneration of directors, key managerial personnel and other employees. The Policy includes criteria for determining qualifications, positive attributes and independence of a director. The functions of the Nomination and Remuneration Committee are disclosed in the Corporate Governance Report, which forms part of the Annual Report. Related Party Transactions All transactions entered into by the Company with related parties during the financial year were in the ordinary course of business and on an arm's length pricing basis. No transaction with any related party was in conflict with the interest of the Company. The Company did not enter into any related party transaction with its Key Managerial Personnel. Material related party transactions were entered into by the Company only with its subsidiaries. In terms of the provisions of Section 134(3)(h) of the Companies Act, 2013 and Rule 8(2) of the Companies (Accounts) Rules, 2014, particulars of related party transactions are given in Form AOC - 2, as Annexure 'C' to this Report. The policy on Related Party Transactions as approved by the Board has been hosted on the Company's website www.lupin.com <http://www.lupin.com> and web link for which is Risk Management Services of Ernst & Young LLP were engaged for framing, monitoring and implementing the risk management plan of the Company. The said firm is in the process of reviewing the existing risk management process and structure including roles and responsibilities, risk rating criteria for assessing impact and the likelihood of risks and effectiveness of mitigation plans. The process includes documentation of risk prioritization and obtaining the Management's assessments on 'risks that matter' and assessing mitigation readiness for the 'risks that matter'. The Risk Management Committee constituted by the Board, pursuant to Regulation 21 of the Listing Regulations, monitors and reviews the risk management plan. The details of the Committee and its terms of reference are set out in the Corporate Governance Report. The functions of the Risk Management Committee are disclosed in the Corporate Governance Report, which forms part of the Annual Report. Particulars of loans/guarantees/investments/securities Particulars of loans, guarantees, investments and securities pursuant to the provisions of Section 186 of the Act are given in the notes to the Financial Statements forming part of the Annual Report. Conservation of Energy, Technology Absorption and Foreign Exchange Earnings and Outgo The particulars as prescribed by Section 134(3)(m) of the Companies Act, 2013 read with Rule 8 of the Companies (Accounts) Rules, 2014, relating to conservation of energy, technology absorption and foreign exchange earnings and outgo are given in Annexure 'D' to this Report. Human Resources There has been a steady rise in the ranking of the Company on a pan-industry basis in the surveys jointly conducted by 'Great Places to Work Institute' and 'The Economic Times'. The Company has been consistently ranked No. 1 or 2 in the Pharmaceutical and Biotech sector and it has also featured in the Golden List of India's Top 50 companies to work for. The Company was ranked 15th best company to work for in Asia by the survey conducted by the 'Great Places to Work Institute'. Aon Hewitt, in collaboration with Business World magazine, through a detailed process, ranks the top 25 companies across all sectors/industries. There is no ranking among these companies. The Company has featured in the coveted list. The Company's endeavor has been to provide its employées the best value proposition and expérience. It meaningfully engages them to deliver their best, which ultimately results in superior business performance and building a competitive work environment. With a view to enthuse a vibrant work culture, the Company instituted various employee-friendly policies and manpower development programs across all levels, which ensured that employees remain motivated and invigorated. Employées Stock Options Pursuant to the provisions of the Securities and Exchange Board of India (Share-Based Employee Benefits) Regulations, 2014, the details of stock options during the year ended March 31, 2016 are given in Annexure 'E' to this Report. Vigil Mechanism/Whistleblower Policy In order to promote a culture of honesty and fairness in its operations and in compliance with the provisions of Section 177(9) of the Act read with Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014 and Regulation 22 of the Listing Regulations, the Company has instituted P.L.E.D.G.E. (Preparing Lupin Employees to Demonstrate Governance and Ethical Conduct). The P.L.E.D.G.E. initiative encompasses three important policies viz. Code of Conduct, Whistleblower Policy and Prevention of Workplace Harassment. The Whistleblower Policy provides an opportunity to the directors and all employees of the Company to raise concerns about unethical and improper practices or any suspected wrongdoings in relation to the Company. The details of Code of Conduct, Whistleblower Policy and Prevention of Workplace Harassment Policy are stated in the Corporate Governance Report, which forms part of the Annual Report. Whistleblower Policy has been hosted on the Company's website www.lupin.com The Policies on Code of Conduct and Prevention of Workplace Harassment are on the Lupin Intranet. Particulars of Employees Particulars of remuneration required to be furnished in terms of the provisions of Section 197(12) of the Act read with Rules 5(1), 5(2) and 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are given in Annexure 'F' to this Report. Auditors At the 32nd AGM, the Members had appointed Deloitte Haskins & Sells LLP, Chartered Accountants (Firm Registration No. 117366W/W-100018), as Statutory Auditors of the Company, for a period of two years from the conclusion of the 32nd AGM till the conclusion of the forthcoming AGM. In view of completion of the prescribed term of Deloitte Haskins & Sells LLP, on the recommendation of the Audit Committee, the Board of Directors, appointed BSR & Co. LLP, Chartered Accountants (Firm Registration No. 101248W/W-100022), as the Statutory Auditors of the Company, for a period of five years from conclusion of the 34th AGM till the conclusion of 39th AGM of the Company, subject to ratification by Members at every AGM. Pursuant to the provisions of Section 139(1) and Section 141 of the Act, the Company has received a Certificate from BSR & Co. LLP, certifying that if they are appointed as Auditors, their appointment would be as per the conditions prescribed by the said Sections. The Board records its sincere appreciation of the valuable services rendered by Deloitte Haskins & Sells LLP during its long association with the Company. Internal Audit Ernst & Young LLP and KPMG are the Internal Auditors of the Company for the domestic and international operations respectively. The Company appointed local Chartered Accountants firms as Internal Auditors to conduct audit of Carrying & Forwarding Agents and Central Warehouses located in various parts of the country. Cost Auditors The cost audit records maintained by the Company are required to be audited pursuant to the provisions of Section 148 of the Act read with the Companies (Cost Records and Audit) Amendment Rules, 2014. On the recommendation of the Audit Committee, Mr. S. D. Shenoy, practising Cost Accountant (FCMA, Membership No.8318), was appointed to conduct cost audit for the year ended March 31, 2016. Pursuant to Section 148(6) of the Act and Rule 6(6) of the Companies (Cost Records and Audit) Rules, 2014, the Cost Audit Report, in Form CRA-4 (in XBRL mode), for the year ended March 31, 2015, under the head 'Drugs and Pharmaceuticals Industry' was filed with the Central Government on October 16, 2015, well within the prescribed time. Secretarial Audit Pursuant to the provisions of Section 204 of the Act and Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, Ms. Neena Bhatia, Company Secretary in Practice, was appointed to undertake the Secretarial Audit of the Company for the year ended March 31, 2016. There is no qualification in the Secretarial Audit Report which is given in Annexure 'G' to this Report. Extract of Annual Return Pursuant to the provisions of Section 92(3) of the Act and the Rules made thereunder, extract of the Annual Return in prescribed Form MGT-9 is given in Annexure 'H' to this Report. Acknowledgements Your Directors commend the commitment, dedication, contributions and hard work of all employees of the Company across the globe. They express their deep gratitude to the various departments of the Central and State governments, banks, financial institutions, customers, medical professionals, business associates, analysts, members, suppliers and distributors for their whole-hearted and continuous support. For and on behalf of the Board of Directors Dr. Desh Bandhu Gupta Chairman (DIN: 00209378) Place : Mumbai, date : May 19, 2016 |