Report of the Directors Your Directors have pleasure in presenting the 53rd Annual Report and Audited Accounts for the 15 months period ended March 31, 2014. CHANGE IN FINANCIAL YEAR The Board of Directors of the Company approved change in the financial year of the Company from January-December to April-March effective April 1, 2014. In view of this, the current financial year is for a period of 15 months i.e. January 1, 2013 to March 31, 2014. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements for the 15 months period ended March 31, 2014, under Indian GAAP form part of the Annual Report. OPERATIONS The Company continued to be among the top pharmaceutical companies from India with consolidated global sales of Rs.130,403.24 million for the period of fifteen months ended March 31, 2014. Profit before exceptional items, tax, share in loss of associates (net) and minority interest stood at Rs.1,225.75 million. However, the Company incurred a loss of Rs.10,852.52 million primarily due to provision for diminution in the value of investments, impairment of goodwill, stock provision/write off due to inclusion of Mohali and Toansa plants to certain terms of the Consent Decree by the US FDA and loss on foreign currency option derivatives. During the period, in terms of the settlement with the US DOJ, the Group paid the settlement amount of US$ 515.40 million (including interest expense and other related cost) towards resolution of civil and criminal allegations. During the period, US FDA issued import alerts for the Company's plants at Mohali and Toansa and advised that both these plants will be subject to certain terms of the Consent Decree earlier entered into by the Company. The Company proactively, temporarily stopped API supplies from Toansa and Dewas facilities to the rest of the world pending further internal review. This voluntary decision was taken as a precautionary measure and out of abundant caution to better allow the Company to assess and review the processes and controls at these sites. In March 2014, US DOJ, United States Attorney's Office for the District of New Jersey has issued an administrative subpoena seeking information primarily related to the Company's API manufacturing facility at Toansa. The Company is fully cooperating with this information request. The Company is continuing its focus for improving margins through innovative product development, better product mix, emphasis on branded products and control on cost. Significant measures have been taken for simplification of processes and structures which will result in improvement in productivity and efficiency across the organisation. DIVIDEND In view of the loss incurred by the Company, no dividend has been proposed for the 15 months period ended March 31, 2014. SCHEME OF ARRANGEMENT BETWEEN THE COMPANY AND SUN PHARMACEUTICAL INDUSTRIES LIMITED The Board of Directors at its meeting held on April 6, 2014 approved the Scheme of Arrangement for merger of the Company with Sun Pharmaceutical Industries Ltd. (SPIL) with an Appointed Date of April 1, 2014 at a Share Exchange Ratio of 4 Equity Shares of SPIL of Re.1 each fully paid-up for every 5 Equity Shares of the Company of Rs.5 each fully paid-up subject to requisite regulatory approvals in India and overseas as well as the approval of shareholders, creditors and the Courts in India. The transaction will be beneficial to all the stakeholders of the Company. Post-merger, the combined entity is expected to have a leadership position in the Indian Pharmaceutical Market with about 9.2% market share and No.1 Indian pharma company in the USA market, with more than $2 billion in sales. The combined entity will have operations in 65 countries and 47 manufacturing facilities across the globe. CHANGES IN CAPITAL STRUCTURE Allotment of shares on exercise of Stock Options by the Employees During the period, the ESOPs Allotment Committee allotted Equity Shares (on pari-passu basis) pursuant to exercise of stock options granted prior to 2011 The Allotment Committee of Directors on December 11, 2013, allotted 600,000 Equity Shares of Rs.5 each for cash at par to Ranbaxy ESOP Trust (Trust), set up to administer Ranbaxy Employee Stock Option Plan-2011 (ESOP-2011). The Trust allocates the shares to the employees of the Company and of its subsidiaries on exercise of stock options from time to time under ESOP-2011. SUBSIDIARIES AND JOINT VENTURES In December 2012, the Company had approved the proposal to integrate the business operations and management of Ranbaxy Unichem Co. Ltd. ('Unichem'), its subsidiary, with Daiichi Sankyo (Thailand) Ltd., a subsidiary of Daiichi Sankyo Company Limited, Japan. The said integration has been completed with effect from October 1, 2013. Pursuant to this, Unichem had become an associate of the Company. During the period, a new wholly owned subsidiary company was incorporated in Thailand by the name of Ranbaxy (Thailand) Co. Ltd. Ranbaxy Pharma AB, Sweden and Ranbaxy (Hong Kong) Limited, non-operating entities were liquidated during the period. The Hon'ble High Courts of Delhi and Punjab & Haryana vide their orders dated 7 December 2012 and 6 February 2013 respectively had approved the scheme of merger of Rexcel Pharmaceuticals Limited, Solus Pharmaceuticals Limited, Ranbaxy Drugs and Chemicals Company, Ranbaxy Life Sciences Research Limited and Ranbaxy SEZ Limited, subsidiaries of the Company with Ranbaxy Drugs Limited another subsidiary of the Company, with an Appointed Date of April 1, 2012. The Scheme became effective on 9 May 2013 upon filing of the Order of the Hon'ble High Court of Delhi and Punjab & Haryana with the Registrar of Companies at Chandigarh, India. A statement pursuant to Section 212 of the Companies Act, 1956, relating to subsidiary companies is attached to the accounts. In terms of the general exemption granted by the Ministry of Corporate Affairs vide its circular no. 02/2011 dated February 8, 2011, the Audited Accounts and Reports of Board of Directors and Auditors of the Company's subsidiaries have not been annexed to this Annual Report. The Company has complied with the requirements as prescribed under the said circular. The consolidated financial statements prepared in accordance with Accounting Standard - 21 issued by the Institute of Chartered Accountants of India forming part of this Annual Report include the financial information of the subsidiary companies. MANAGEMENT DISCUSSION AND ANALYSIS REPORT Management Discussion and Analysis Report, as required under the Listing Agreements with the Stock Exchanges, is enclosed at Annexure 'A'. EMPLOYEES' STOCK OPTION SCHEMES Information regarding the Employees' Stock Option Schemes is enclosed at Annexure 'B'. LISTING AT STOCK EXCHANGE The Equity Shares of the Company continue to be listed on Bombay Stock Exchange Ltd. and The National Stock Exchange of India Ltd. Global Depository Shares are listed on the Stock Exchange at Luxembourg. The annual listing fees for the year 2013-2014 has been paid to these Exchanges. DISCLOSURE OF PARTICULARS As required by the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, the relevant information and data is given at Annexure 'C'. FIXED DEPOSITS The Company has not invited / received any fixed deposits during the period. DIRECTORS' RESPONSIBILITY STATEMENT In terms of provisions of Section 217 (2AA) of the Companies Act, 1956, ("Act"), your Directors confirm that: (i) In the preparation of the annual accounts, the applicable accounting standards have been followed, alongwith proper explanation relating to material departures, wherever applicable. (ii) The Directors have 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 the Company, as at the end of the accounting year and of the loss of the Company for the period. (iii) The Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities. (iv) The Directors have prepared the annual accounts on a going concern basis. DIRECTORS As per provisions of the Companies Act, 2013, Mr. Akihiro Watanabe, Dr. Anthony H. Wild, Mr. Percy K. Shroff and Mr. Rajesh V. Shah, Independent Directors, are proposed to be reappointed at the ensuing AGM for a term of five years. Mr. Takashi Shoda, Non-Executive-Non-Independent Director, retires by rotation at the ensuing AGM and being eligible offers himself for re-appointment. CORPORATE GOVERNANCE Report on Corporate Governance alongwith the Certificate of the Auditors, M/s. B S R & Co. LLP, confirming compliance of conditions of Corporate Governance as stipulated under Clause 49 of the Listing Agreement with the Stock Exchanges forms part of the Annual Report. COST AUDIT M/s. R. J. Goel & Co., Cost Accountants, were appointed as the Cost Auditor of the Company and their Audit report on the Cost Accounts of the Company for the 15 months period ended March 31, 2014, will be submitted to the Central Government in due course. In terms of the Companies (Cost Accounting Records and Compliance) Rules, 2011, Cost Audit Report for the year ended December 31, 2012 was filed on June 8, 2013, well before the last date of filing being June 30, 2013. AUDITORS M/s. B S R & Co. LLP, Chartered Accountants, retire as Auditors of the Company at the conclusion of ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept the office of the Auditors, if reappointed. AUDITORS' REPORT With regard to the comments contained in the Auditors' Report, explanations are given below :- (i) The accumulated losses of the Company at the end of the current period are more than fifty percent of its net worth (Computed without adjusting accumulated losses) and the Company incurred cash losses in the current period (Clause x of the Annexure to the Auditors' Report) The accumulated losses are primarily due to provision created (net of reversal) for settlement with the Department of Justice (DOJ) of the United States of America for resolution of civil and criminal allegations by the DOJ (refer to note 8 of the financial statements) in earlier years. The Company has incurred cash losses during the current period primarily due to US FDA related remediation costs and certain exceptional items including loss on foreign exchange option derivatives and inventory provision/ write off and other costs at Toansa and Mohali plants. (ii) Short Term funds used for long term purposes (Clause xvii of the Annexure to the Auditors' Report) The Company had created a provision for settlement (net of reversal during the current period) with the DOJ during the year ended December 31, 2011, which is currently reflected as payable of Rs.29,238.60 million to a subsidiary (refer to note 8 of the financial statements). This has resulted in long-term funds being lower by Rs.35,175.73 million compared to long-term assets as at 31 March 2014. Accordingly, short term funds of Rs.35,175.73 million have been used for long-term purposes. The Company expects to overcome the situation in the near future. (iii) Procedures of physical verification of inventories and maintaining proper records of inventories and fraud reported on the Company (clause (ii)(b), (c) and clause (xxi) of the Annexure to the Auditors' Report) During the current period, the Company has written-down carrying amount of inventory by Rs.424 million, consequent to the findings of an exercise carried out by the management in response to certain internal information received by it. The findings primarily concluded intentional incorrect inventory management of certain intermediate products by certain manufacturing unit level staff resulting in yield mismanagement and consequent incorrect higher quantity of inventories. Appropriate actions have been taken by the Company including strengthening of internal controls. (iv) Slight delay in deposit of statutory dues (clause ix(a) of the Annexure to the Auditors' Report). In few cases, there was slight delay in depositing small amounts of statutory dues. Requisite corrective actions have been taken. STATEMENT OF EMPLOYEES Statement of particulars of employees as required under Section 217(2A) of the Companies Act, 1956 ("Act") and Rules framed thereunder forms part of the Annual Report. However, in terms of the provisions of Section 219(1)(b) (iv) of the Act, this Report and Accounts are being sent to all the shareholders excluding the Statement of particulars of employees under Section 217(2A) of the Act. Any shareholder interested in obtaining a copy of the statement may write to the Company Secretary at the Corporate Office of the Company. ACKNOWLEDGEMENTS The Directors hereby wish to place on record their appreciation of the significant contribution made by each and every employee of the Company. The Directors also thank all other stakeholders for their support and encouragement. Your Directors look forward to your continued support in the years to come. On behalf of the Board of Directors Dr. Tsutomu Une Chairman Gurgaon May 9, 2014 |