Section B: • Provisions made pursuant to consent decree filed by FDA, USA prohibiting the company from manufacturing and distributing from one facility in to the US market and consequent comments in Audit Report (including CARO)
• Change in accounting policy for ESOPs pursuant to opinion of EAC of ICAI
• Write-down of inventory due to intentional incorrect inventory management systems followed
Ranbaxy Laboratories Limited: (15 months ended 31-03-2014)
From Significant Accounting Policies
Employee stock option based compensation
The Company follows SEBI guidelines for accounting of employee stock options. The cost is calculated based on the intrinsic value method, i.e., the excess of market price of underlying equity shares, as of the date of the grant of options over the exercise price of such options, is regarded as employee compensation and in respect of the number of options that are expected to ultimately vest, such cost is recognised on a straight line basis over the period over which the employees would become unconditionally entitled to apply for the shares. The cost recognised at any date at least equals the intrinsic value of the vested portion of the option at that date. Adjustment, if any, for difference in the initial estimate for number of options that are expected to ultimately vest and related actual experience is recognised in the Statement of Profit and Loss of that period. In respect of vested options that expire unexercised, the cost is reversed in the Statement of Profit and Loss of that period.
During the current period, the Company has changed its policy with respect to treatment of shares issued to Ranbaxy ESOP trust (‘ESOP trust’). As per a recent opinion of the Expert Advisory Committee (‘EAC’) of The Institute of Chartered Accountants of India, as on the reporting date, the shares issued to an ESOP trust but yet to be allotted to employees be shown as a deduction from the Share Capital with a corresponding adjustment to the loan receivable from ESOP Trust. Accordingly, the Company has shown shares held by the ESOP Trust on the reporting date as a deduction from the share capital.
Compilers’ Note: The EAC opinion referred above is reproduced in March 2014 issue of ‘Chartered Accountant’ of ICAI.
From Notes to Accounts
41 b) (i) The US FDA conducted an inspection at the Company’s manufacturing facility located in Toansa in January 2014. Consequent to the findings of the inspection, on 23rd January, 2014, the US FDA invoked the Consent Decree prohibiting the Company from manufacturing and distributing APIs from its Toansa manufacturing facility and finished drug products containing APIs, manufactured at this facility, into the US regulated market. The Company has since progressed in investigating the findings of the US FDA (as contained in Form 483) and has submitted its response to the US FDA.
(ii) Subsequent to the imposition of the Consent Decree at the Toansa manufacturing facility as mentioned above, regulators in some jurisdictions including those of European Union (‘EU’) countries have sought clarifications/took actions in respect of shipments from Toansa manufacturing facility. The Company is in dialogue with these regulatory agencies and is addressing their concerns. The Company expects to resume API bulk shipments to the EU countries from Toansa manufacturing facility upon receipt of clearances from relevant regulatory authorities.
(iii) The Department of Justice of the USA (‘US DOJ’), United States Attorney’s Office for the District of New Jersey has issued an administrative subpoena, dated 13th March, 2014, to the Company seeking information primarily related to the Company’s API Toansa manufacturing facility in India for which a Form 483 was issued by US FDA in January, 2014 (as explained in (i) above). The Company is fully cooperating with this information request and is in dialogue with the US DOJ for submission of the requisite information.
(iv) During the quarter ended 31st March, 2014, the Company has temporarily put on hold its operations from the API manufacturing facilities at Toansa to examine the manufacturing and quality processes and controls, voluntarily as a precautionary measure. The same is expected to be resumed shortly.
(v) The management is taking all necessary steps to resolve the above matters to the satisfaction of the concerned authorities. However, considering the above matters relating to the Toansa manufacturing facility, provisions (primarily relating to inventories, trade commitments, sales return etc.), amounting to Rs. 2,862.78 have been recognised in these financial statements. In calculating these provisions, the management has used the best information and estimates, presently available. Since the matter involves significant judgement and in view of the inherent uncertainty of the present situation, the actual amounts may differ eventually.
41(c) During the quarter ended 31st March, 2014, the Company has temporarily put on hold its operations from API manufacturing facility at Dewas to examine the manufacturing and quality processes and controls, consequent to receipt of certain internal information. Consequent to the findings of the above exercise, the carrying amount of inventory has been written down by Rs. 424. The attribution of this amount to any particular period/ year is not possible. The Company expects to resume the operations shortly.
From Auditors’ Report
Emphasis of Matter
Without qualifying our opinion, we draw attention to note 41 b) of the financial statements which explains in detail the prohibition imposed by the Food and Drug Administration of the United States of America on the Toansa manufacturing unit of the Company, and the communications received from/ actions taken by other regulators including the Department of Justice of the United States of America and regulators in European Union countries. Consequently, the Company has made provisions, to the extent of Rs. 2,862.78 million, on the basis of best information and estimates presently available with the Company. The basis and assumptions used by the management in calculating these provisions involve significant judgment and estimates (including those relating to inventories, sales return, trade commitments, realisability of tax assets, etc.). There are inherent uncertainties regarding the future actions of the regulators, the impact of which is not ascertainable at this stage and therefore, the actual amounts may eventually differ.
FROM CARO Report
Clause 10
The accumulated losses of the Company at the end of the current period are not less than 50% of its net worth (without adjusting accumulated losses). As explained to us, these 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 the earlier years. The Company has incurred cash losses in the current period, though it had not incurred cash losses in the immediately preceding financial year.
Clause 17
According to the information and explanations given to us and on an overall examination of the Balance Sheet of the Company as at 31st March, 2014, we are of the opinion that short term funds of Rs. 35,175.73 million have been used for long-term purposes primarily on account of accumulated losses including those related to settlement with the 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).
Clause 21
As explained in note 41 c) of the financial statements; 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. Being a pharmaceutical quality related technical matter, we have relied on the management’s assessment of the said adjustment. as informed to us, appropriate actions have been taken by the Company including strengthening of internal controls. subject to these comments, according to the information and explanations given to us, no fraud on or by the Company has been noticed or reported during the course of our audit.
From Directors’ 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 50% 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 31st December, 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 31st 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.
