DIRECTORS' REPORT Your Directors have pleasure in presenting the Thirty Second Annual Report of your Company along with the audited statement of accounts for the year ended March 31, 2016. Business Review The last financial year saw your Company take further steps towards achieving its vision of being the Leading Non-Competing API partner to the Pharmaceutical Industry in India and abroad. We have seen that as our relationships with key partners mature, Neuland is putting its best foot forward to reap the benefits. During the last year, your Company has seen key players come forward to seek a more strategic relationship with Neuland. Your Company is also seeing the initial effects of the improvements made in terms of product mix changes, cost optimisation and process improvements, that are expected to have a positive impact on the profit margins, efficiencies and overall profitability. Your Company has continued its track record with leading Regulatory Authorities, successfully clearing an Audit by the USFDA during the year under review. Based on the track-record, and the steps being taken to ensure compliance on various fronts, we are confident that the management is leading your Company in the right direction which will see all the stakeholders gaining both in the short and the long term. Dividend The Board of Directors has recommended a final dividend of Rs. 2/-per equity share (20% dividend) to the members for their approval. The dividend, if approved, will be paid to members within the period stipulated by the Companies Act, 2013. The outflow on account of dividend (inclusive of tax on distributed profits) will be Rs. 213.84 lacs. Share Capital The equity shares of your Company continue to be listed and traded on the BSE Limited and National Stock Exchange of India Limited. The paid up equity share capital as on March 31, 2016 was Rs. 895.39 lacs. Your Company has not issued or allotted any shares or granted stock options or sweat equity during the year under review. Outlook While the Pharmaceutical Industry continues to be a highly competitive space especially in India, your Company has made significant strides in carving a niche for itself as a pure-play API player. This clear strategy has enabled the Company to leverage its portfolio with customers, and the changes made over the past few years will lead to tangible results. Your Company is well positioned to grow both the generic API business and the Custom Manufacturing Solutions business. This is clear from the change in the business mix over the last year and the prospects based on the projects on which the Company is working. Your Company is well-equipped to take advantage of the opportunity which presents itself before the Company. Consolidated Financial Statements The Consolidated Financial Statements of the Company prepared in accordance with relevant Accounting Standards (AS) issued by the Institute of Chartered Accountants of India, and approved by the Board of Directors of the Company, form part of this Annual Report. Annual accounts of the subsidiary companies are kept for inspection by any member at the Registered Office of the Company as well as at the Registered Office of the respective subsidiary companies. Any member interested in a copy of the accounts of the subsidiaries may write to the Company Secretary at the Registered Office of the Company. A report on the performance and financial position of the subsidiaries, set out in the prescribed form AOC-1 in terms of proviso to sub section (3) of Section 129 of the Companies Act, 2013, is provided as Annexure A to the consolidated financial statement and hence not repeated here. Subsidiaries & Joint Venture Your Company has two subsidiaries, Neuland Laboratories K.K., Japan and Neuland Laboratories Inc. USA, working on market development. There are no associate companies within the meaning of Section 2(6) of the Companies Act, 2013 ("Act"). Further there has been no material change in the nature of business of the subsidiaries. Your Company's joint venture, Cato Research Neuland India Private Limited, did not have any operations in the past couple of years. It was decided to dissolve the joint venture, as it was not able to generate any business due to significant challenges in the clinical trials environment in India, and necessary steps have been taken in respect of the same. Holding Company Your Company is a Subsidiary Company of Neuland Health Sciences Private Limited as per Section 2(87) of the Companies Act, 2013. Documents uploaded on the Website The following documents are available on the website of the Company (www.neulandlabs.com ) in compliance with Companies Act, 2013: • Unpaid dividend details as per Section 124(2) • Corporate Social Responsibility Policy as per Section 135(4)(a) • Financial Statements of the Company and Consolidated Financial Statements along with relevant documents as per third proviso to section 136(1) • Separate audited accounts in respect of subsidiaries as per fourth proviso to section 136(1) • Details of vigil mechanism for directors and employees to report genuine concerns as per proviso to section 177(10) • Policy on Material Subsidiaries • The terms and conditions of appointment of independent directors as per Schedule VI to the Act. Research & Development The Research and Development (R&D) team of your Company continues its ventures to ensure that identified products are scaled up at the appropriate time such that there is a steady stream of new products. During the year under review, six of the existing products were taken up for process improvement involving cycle time reduction, recovery and reuse of solvents, adoption of green chemistry, yield improvement and backward integration of key starting materials. The increase in the Custom Manufacturing Solutions (CMS) business coupled with customer satisfaction is due in large measure to your team showing utmost importance to the customer needs without compromising on the quality and timelines. There is a great emphasis on QBD (Quality by Design) for robust processes. The team has been working on acquiring new capabilities, prominent among them being enzymatic research. It has initiated work on the same while forging strong collaborative links which could play a key role in the future. Environment, Health & Safety Your Company is committed to excellence in environment, health and safety (EHS) and believes it is an important pillar for good corporate governance. Environmental protection, prevention of occupational illness and prevention of work injuries are corporate responsibilities. As a responsible corporate citizen, your Company continuously strives to serve the society through responsibly managing EHS related expectations of internal and external customers. To achieve this, we ensure that all our activities, products and services are carried out considering appropriate EHS related concerns and addressing the same. In this financial year no reportable accident/incident happened in your Company. Your Company recognizes EHS stewardship as an integral part of everything it does to run its business and continually evaluates EHS related aspects and risks as part of the organizational decision-making process. All employees of your Company are enjoined to take personal responsibility for meeting the requirement of the EHS management systems and required competencies are developed and performances are monitored. EHS policy acts as a guiding principle for identifying, analyzing and mitigating any environmental impacts and/or safety and health risks arising from our activities, products and services. While developing processes at R&D, the Company adopts 'Green Chemistry'. Through this method, input materials like various chemicals, solvents, water, energy and process conditions are selected aiming at minimization of potential environmental aspects and safety and health hazards. Once processes are developed, process improvement initiatives are taken up continuously to optimize consumption of raw materials, solvents, water and energy in manufacturing processes to make them sustainable. On the Occupational Health front, your Company has a full-fledged occupational health center with a physician(s), support staff and required infrastructure. Hazard & Operability (HazOp) and Hazard Identification & Risk Assessment (HIRA) studies are carried out for processes and activities to minimize health and safety risks from such processes and activities. Your Company has implemented co-processing of certain hazardous wastes as fuel substitutes in authorized cement plants in their kilns to support energy resource conservation and reduce greenhouse gas emissions. This beneficial use of hazardous wastes is helping the environment in by conserving precious energy resources and reducing greenhouse gas emissions. Regular pollution monitoring is carried out to ensure compliance with permitted norms. Your Company continually invests in pollution control and safety related infrastructures depending on need and invested Rs. 654.70 lacs equal to 1.28 % of revenue in the financial year 2016. Your Company has spent Rs. 961.11 lacs equal to 1.87 % of revenue in the financial year 2016 towards operation and maintenance of these infrastructures. Information Management Systems Your Company's information technology platform is a key component in offering customers transparency, accountability and reliability while executing their orders. The system design and architecture is kept updated to track the progress in execution of their orders. In view of 'mobile handset' increasingly becoming standard device of computing, Mobile Device Management (MDM) & Mobile Application Management (MAM) solutions have been implemented using Enterprise Mobility Suite (EMS) in a secure and manageable environment along with Microsoft Office 365 and Azure cloud services. Most of the current manual business processes have been automated to bring transparency, which helps to improve productivity. A new employee portal has been planned to be launched shortly which will cater to various Employee Self Service (ESS) related activities from anywhere and any device. Key business functions like Plant Maintenance (PM), Production Planning (PP) are in the process of being automated using SAP ERP. To secure end points (PC, laptop, mobile etc.) and information flow over e-mail & web, various measures including Data Leak Prevention (DLP), Rights Management Systems (RMS), Mobile Device Management (MDM) and Media Encryption are in the process of being implemented to protect IPR, Customer Data and Confidentiality. All the employees are aware and have been sensitized that all assets of your Company generate confidential information and therefore information security is viewed with great importance. Your Company appreciates the importance of intellectual property rights and has put in place procedures to protect strictly intellectual properties. This includes comprehensive user awareness training for Information Security Management System (ISMS) adoption and its adherence followed by internal ISMS audit of all functions. Your Company successfully completed ISO 27001:2013 second surveillance audit of Information Security Management System. Corporate Governance Report, Management Discussion & Analysis and Other Information Required under the Companies Act, 2013 and Listing Agreement As per SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015, Corporate Governance Report with Certificate from a Practicing Company Secretary thereon and Management Discussion and Analysis report are attached and form part of this report. Directors and Key Managerial Personnel Dr.Nirmala Murthy was appointed as an Independent Non-Executive Director of the Company with effect from May 8, 2015 at the previous Annual General Meeting, for a period of five consecutive years for a term up to May 7, 2020. In accordance with the provisions of Section 152 of the Companies Act, 2013, Mr.D.Saharsh Rao shall retire by rotation and being eligible offers himself for re-appointment. Details of the proposal for re-appointment of Mr.D.Saharsh Rao are mentioned in the Explanatory Statement under Section 102 of the Companies Act, 2013 of the Notice of the 32nd Annual General Meeting. The profile of the Directors for re-appointment is included in the Report on Corporate Governance annexed. Your Board recommends the above re-appointment of Director in the best interest of the Company. Dr.D.R.Rao, Chairman & Managing Director, Mr.D.Sucheth Rao, Vice Chairman & CEO, Mr.D.Saharsh Rao, Joint Managing Director, Mr.Anil Kumar, Chief Financial Officer, Ms.Sarada Bhamidipati, Company Secretary & Compliance Officer are Key Managerial Personnel of the Company. Independent Directors' Declaration All the Independent Directors have given declarations that they meet the criteria of independence as laid down under Section 149(6) of the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure requirements) Regulations, 2015. Listing at Stock Exchanges The equity shares of your Company continue to be listed and traded on the BSE Limited and National Stock Exchange of India Limited. The Annual Listing fee for the year 2016-17 has been paid to both the stock exchanges. Directors' Responsibility Statement Pursuant to Section 134(3)(c) of the Companies Act, 2013, your Directors confirm that to the best of their knowledge and belief and according to the information and explanation obtained by them: a) 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 explanation relating to material departures, if any; b) such accounting policies as mentioned in the Notes to the Financial Statements have been selected and applied consistently and judgement and estimates have been made that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at March 31, 2016 and of the profit of the Company for the year ended on that date; c) 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; d) the annual financial statements have been prepared on a going concern basis; e) proper internal financial controls were in place and that the financial controls were adequate and were operating effectively; and f) systems to ensure compliance with the provisions of all applicable laws were in place and were adequate and operating effectively. Board Meetings During the year under review, four Board Meetings and four Audit Committee Meetings were convened and held, the details of which are given in the Corporate Governance Report, which forms part of this report. The intervening gap between the Meetings was within the period prescribed under the Companies Act, 2013. Board Evaluation Pursuant to the provisions of the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure requirements) Regulations, 2015, the Board has carried out an evaluation of the directors as well as the evaluation of the Board and its Committees. The process was carried out by circulating questionnaires on the Board and Committees functioning on certain parameters. The performance evaluation of the independent directors was carried out by the entire Board, except the director being evaluated. The performance evaluation of the non-Independent Directors including Executive Directors was carried out by the Independent Directors. Independent Directors' Meeting A separate meeting of the independent directors was convened, which reviewed the performance of the Board, the non-independent directors and the Chairman. Audit Committee The composition of the Audit Committee and its terms of reference are included in the Report on Corporate Governance annexed. Nomination and Remuneration Committee The details of the Nomination and Remuneration Committee are set out in the Report of Corporate Governance, forming part of this report. Your Company has a Nomination and Remuneration Policy as required under section 178 of the Companies Act, 2013, for selection and appointment of Directors, Key Managerial Personnel, Senior Management and their remuneration. Policy of Directors' Appointment and Remuneration Your Company's Policy on Directors' appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under section 178(3) of the Act are covered in the Corporate Governance Report which forms part of this report. Further, information about elements of remuneration package of individual directors is provided in the extract of Annual Return as provided under Section 92(3) of the Act, is enclosed at Annexure-3 in the prescribed form MGT-9 and forms part of this Report. Code of Conduct for Directors and Senior Management The Directors and members of Senior Management have affirmed compliance with the Code of Conduct for Directors and Senior Management of the Company. A declaration to this effect has been signed by the Chairman & Managing Director and forms part of the Annual Report. Internal Financial Controls The Company has in place adequate internal financial controls with reference to financial statements. During the year under review such controls were tested and no reportable material weakness in the design or operation were observed. Vigil Mechanism Your Company has a vigil mechanism to deal with instances of fraud and mismanagement, if any. The Whistle Blower Policy enables reporting of unethical behaviour, actual or suspected fraud or violation of the Company's code of conduct or ethics policy, to the management. The vigil mechanism also ensures that strict confidentiality is maintained and provides adequate safeguards against victimization of employees who avail of the mechanism and also provides for direct access to the Chairman of the Audit committee in exceptional cases. Prevention of Insider Trading The Company has adopted (i) Code of Internal Procedures and Conduct for Regulating, Monitoring and Reporting of Trading by Insiders and (ii) Code of Fair Disclosures with a view to serve as a guiding charter for all concerned persons associated with the functioning of the Company pursuant to the SEBI (Prohibition of Insider Trading) Regulations, 2015. The Company Secretary & Compliance Officer is responsible for implementation of the Code. Disclosure as per Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 Your Company is committed to ensure that there is no scope for sexual harassment at workplace and has adopted a policy on prevention, prohibition and redressal of sexual harassment at workplace in line with the provisions of Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 and the rules framed thereunder The Company has not received any complaints on sexual harassment during the year under review. Employee Stock Option Scheme During the year under review, your Company has not granted any stock options and none of the eligible employees have exercised options, under the Company's Employee Stock Option Scheme, 2008 ("ESOS 2008"). Disclosures with respect to Stock Options, as required under Regulation 14 of the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 ('the Regulations1), are given in Annexure-2 to this report. Statutory Auditors The financial statements have been audited by Walker Chandiok & Co LLP (ICAI Firm's Registration No. 001076N/N500013), Chartered Accountants, Statutory Auditors of the Company. Pursuant to the provisions of Section 139 of the Act and the rules framed thereunder, Walker Chandiok & Co LLP, Chartered Accountants, were appointed as Statutory Auditors of the Company from the conclusion of the 30th Annual General Meeting (AGM) of the Company for a period of five years, i.e., till the conclusion of the 35th AGM to be held in the year 2019, subject to ratification of their appointment by the members at every AGM. Cost Auditors Pursuant to Section 148 of the Companies Act, 2013 read with the Companies (Cost Records and Audit) Amendment Rules, 2014, subject to the approval of the Central Government, if any required, the Audit Committee has recommended and the Board of Directors had appointed M/s. Nageswara Rao & Co. (Registration No. 000332), Cost Accountants, Hyderabad, being eligible and having sought re-appointment, as Cost Auditors of the Company, to carry out the cost audit of the products manufactured by the Company during the financial year 2016-17. Secretarial Audit Report Your Company has obtained Secretarial Audit Report for the financial year 2015-16 from the Company Secretary in practice for compliance with Section 204(1) of the Companies Act, 2013, Listing Agreement, SEBI Regulations on Takeover, Insider Trading and Depositories & Participants. A text of the Annual Secretarial Audit Report is annexed to the Corporate Governance Report and forms part of this report. Insurance Your Company has taken necessary steps to mitigate risks and obtained appropriate insurances and the Board is kept appraised of the risk assessment and minimization procedures. The assets of the Company have been adequately covered under insurance. The policy values have been determined taking into consideration the value of the assets of the Company. Material Changes There have been no material changes and commitments affecting the financial position of the Company since the close of financial year i.e. since March 31, 2016. Further, it is hereby confirmed that there has been no change in the nature of business of the Company. Extract of Annual Return The extract of Annual Return required under Section 134(3)(a) of the Companies Act, 2013 read with Rule 12(1) of the Companies (Management and Administration) Rules, 2014, is enclosed as Annexure-3 in Form No.MGT-9 and forms part of this report. Transactions with Related Parties All related party transactions which were entered into during the year under review were on arm's length basis and in the ordinary course of business. There were no materially significant related party transactions made by the Company with its Promoters, Directors, Key Managerial Personnel or other designated persons which may have a potential conflict with the interest of the Company at large. Prior omnibus approval of the Audit Committee is obtained for the transactions which are of a repetitive nature and a statement giving details of all related party transactions is placed before the Audit Committee and the Board of Directors for their approval on a quarterly basis, and deviations, if any, were ratified. The Company has Related Party Transaction Policy for purpose of identification and monitoring of such transactions. The Policy on materiality of related party transactions and dealing with related party transactions as approved by the Board may be accessed on the Company's website, www.neulandlabs.com Your Directors draw attention of the members to Note 29 to the financial statement which sets out related party disclosures. Further, the prescribed details of related party transactions of the Company in Form No. AOC-2, in terms of Section 134 of the Act read with Rule 8 of the Companies (Accounts) Rules, 2014 is given in the Annexure-6 to this report. Internal Control The information about internal controls is set out in the Management Discussion & Analysis report which is attached and forms part of this report. Particulars of Loans, Guarantees and Investments Your Company has not given any loans and guarantees or made any investments under Section 186 of the Act during the year under review. Deposits from Public Your Company has not accepted any deposits from the public and as such no amount of principal or interest on deposits from the public was outstanding as on the date of the Balance Sheet. Significant and Material Orders passed by the Regulators or Courts There are no significant material orders passed by the Regulators / Courts which would impact the going concern status of the Company and its future operations. Risk Management The Board oversees Company's processes for determining risk tolerance and review management's action and comparison of overall risk tolerance to established levels. Major risks identified by the businesses and functions are systematically addressed through appropriate actions on a continuous basis. For details, please refer to the Management Discussion and Analysis report which forms part of the Board Report. Corporate Social Responsibility The Corporate Social Responsibility Committee (CSR Committee) has formulated and recommended to the Board, a Corporate Social Responsibility Policy (CSR Policy) indicating the activities to be undertaken by the Company, which has been approved by the Board. The CSR Policy is available on your Company's website www. neulandlabs.com. Your Company has initiated CSR activities as per the CSR Policy and in compliance with Schedule VII to the Companies Act, 2013. The details of the CSR initiatives and activities and the amounts spent during the financial year 2015-16 are given in the Annual Report of CSR activities in Annexure 5 to this Report. Energy Conservation, Technology Absorption and Foreign Exchange Earnings and Outgo The information on conservation of energy, technology absorption and foreign exchange earnings and outgo stipulated under Section 134(3)(m) of the Companies Act, 2013 read with Rule, 8 of The Companies (Accounts) Rules, 2014, is annexed herewith as Annexure-1. Industrial Relations Your Company's relations with its employees continue to be cordial. Dedicated work by the workmen, supervisors and executives of your Company made it possible to achieve success under trying and difficult circumstances. Particulars of Employees Disclosures pertaining to remuneration and other details as required under Section 197(12) of the Act read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are provided in the Annexure-4 of this report. In terms of the provisions of Section 197(12) of the Act read with Rules 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 the limits set out in the said rules is annexed herewith as Annexure-4. Acknowledgement Your Board is appreciative of the passion, dedication and commitment demonstrated on the job by all the employees. The trust reposed in your Company by its esteemed customers helped stabilize growth during the year under review. Your Directors wish to place on record their gratitude to the Customers, Vendors, Government, Financial Institutions, Banks and Shareholders for their continuing support, guidance and assistance over the years. For and on behalf of the Board Sd/- Dr. Davuluri Rama Mohan Rao Chairman & Managing Director (DIN: 00107737) Place : Hyderabad, DATE : May 20, 2016 |