Dr Reddys Laboratories Ltd Directors Report.

Dear Member,

Your directors are pleased to present the 36th annual report for the year ended 31 March 2020.

FINANCIAL HIGHLIGHTS

Table 1 gives the consolidated and standalone financial highlights of the company based on Indian Accounting Standards (Ind AS) for FY2020 (i.e. from 1 April 2019 to 31 March 2020) compared to the previous financial year.

COMPANY AFFAIRS*

The companys consolidated total income for the year was Rs.181.38 billion, which was up by 15% over the previous year. In US$ terms, this amounted to US$ 2.41 billion. Profit before taxes (PBT) was Rs.18.86 billion, representing a decline of 19% over the previous year. In US$ terms, this translated to US$ 250 million.

The companys standalone total income for the year was Rs.125.94 billion, which was up by 16% over the previous year. In US$, this amounted to US$ 1.67 billion. PBT was Rs.27.76 billion, which was up by 63% over the previous year. In US$ terms, this translated to US$ 368 million.

Revenues from Global Generics were up by 12% and stood at Rs.138.1 billion. There was growth across North America Generics, Emerging Markets and India, with a strong growth in Europe.

Revenues from North America stood at Rs.64.7 billion, registering a year-on-year growth of 8%. This was largely on account of revenue contribution from new products launched, increase in volumes for some of our base products, and favourable foreign exchange movement, partly offset by high price erosions in some of our products.

During the year, the company filed eight abbreviated new drug applications (ANDAs) in the USA. As of 31 March 2020, there were 99 generic filings awaiting approval with the US Food and Drug Administration (USFDA), comprising 97 ANDAs and two NDAs filed under Section 505(b)(2). Of the 97 ANDAs, 54 are Para IV applications, and we believe 30 of these have ‘First to File status.

Revenues from Emerging Markets were Rs.32.8 billion, registering a year-on-year growth of 14%. Revenues from India stood at Rs.28.9 billion, registering a year-on-year growth of 11%. Revenues from Europe were Rs.11.7 billion, registering a year-on-year growth of 49%.

Revenues from PSAI stood at Rs.25.7 billion, registering a year-on-year growth of 7%. During the year, the company filed 10 drug master files (DMFs) in the US.

SCHEME OF AMALGAMATION

During the year, the board of directors approved the scheme of amalgamation of Dr. Reddys Holdings Limited with the company ("the scheme") subject to the receipt of necessary approvals from statutory authorities, members, creditors and Honble National Company Law Tribunal (NCLT), Hyderabad. The company has received no-observation letters on 11 October 2019, from the BSE Limited and National Stock Exchange of India Limited on the basis of no comments received from Securities and Exchange Board of India (SEBI). The members and unsecured creditors of the company at the Honble NCLT convened meetings held on 2 January 2020, approved the said scheme with requisite majority. The petition for approval of the said scheme has been filed with the Honble NCLT, Hyderabad Bench on 9 January 2020. The final hearing on the petition is pending.

DIVIDEND

Your directors are pleased to recommend a dividend of Rs.25 (500%) for FY2020, on every equity share of Rs.5/-. The recommended dividend is in line with the dividend distribution policy of the company. The dividend, if approved at the 36th annual general meeting (AGM), will be paid to those members whose names appear on the register of members of the company as of end of the day on 14 July 2020.

TABLE 1 FINANCIAL HIGHLIGHTS (Rs. MILLION)

CONSOLIDATED

STANDALONE

FY2020 FY2019 FY2020 FY2019
Total income 181,376 157,857 125,936 108,639
Profit before depreciation, amortization, impairment and tax 46,694 34,384 35,650 24,813
Depreciation and amortization 11,631 11,348 7,892 7,806
Impairment of non-current assets 16,767 116 - -
Profit before tax and before share of equity accounted investees 18,296 22,920 27,758 17,007
Share of profit of equity accounted investees, net of tax 561 438 - -
Profit before tax 18,857 23,358 27,758 17,007
Tax expense (1,403) 3,858 (1,619) 4,234
Net profit for the year 20,260 19,500 29,377 12,773
Opening balance of retained earnings 112,000 96,247 99,511 90,740
Net profit for the year 20,260 19,500 29,377 12,773
Other comprehensive income/(loss) 5 255 5 -
Dividend paid during the year (3,314) (3,320) (3,314) (3,320)
Tax on dividend paid (602) (682) (600) (682)
Transfer to general reserve - - - -
Closing balance of retained earnings 128,349 112,000 124,979 99,511

The conversion rate is considered as US$ 1 = 7539

Note: FY2020 represents fiscal year 2019-20, from 1 April 2019 to 31 March 2020, and analogously for FY2019 and other such labelled years.

In terms of Regulation 43A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations), the companys dividend distribution policy is attached as Annexure I to the boards report.

TRANSFER TO RESERVES

The company has not proposed to transfer any amount to the general reserve.

SHARE CAPITAL

The paid-up share capital of your company increased by Rs.0.53 million to Rs.830.86 million in FY2020 due to allotment of 106,134 equity shares, on exercise of stock options by eligible employees through the ‘Dr. Reddys Employees Stock Option Scheme, 2002 and ‘Dr. Reddys Employees ADR Stock Option Scheme, 2007.

FIXED DEPOSITS

The company has not accepted any deposits covered under Chapter V of the Companies Act, 2013. Accordingly, there is no disclosure or reporting required in respect of details relating to deposits.

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.

MATERIAL CHANGES AND COMMITMENTS AFFECTING THE FINANCIAL POSITION OF THE COMPANY

There have been no such changes.

SUBSIDIARIES AND ASSOCIATES

The company had 50 subsidiaries and two joint venture companies as on 31 March 2020. During FY2020, Aurigene Pharmaceutical Services Limited was incorporated as a step-down subsidiary company. Dr. Reddys Singapore Pte. Limited and Reddy Antilles N.V. were closed and ceased to be wholly-owned subsidiaries. Dr. Reddys Laboratories International SA ceased to be a step-down subsidiary of the company consequent to its merger with Dr. Reddys Laboratories SA.

Section 129(3) of the Companies Act, 2013 states that where the company has one or more subsidiaries or associate companies, it shall, in addition to its financial statements, prepare a consolidated financial statement of the company and of all 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 statements of its subsidiaries and associates.

Hence, the consolidated financial statements of the company and all its subsidiaries and joint ventures, prepared in accordance with Ind AS 110 and 111 as specified in the Companies (Indian Accounting Standards) Rules, 2015, form part of the annual report. Moreover, a statement containing the salient features of the financial statements of the companys subsidiaries and joint ventures in the prescribed Form AOC-1, is attached as Annexure II to the boards report.

This statement also provides details of the performance and financial position of each subsidiary and joint venture.

In accordance with Section 136 of the Companies Act, 2013, the audited financial statements and related information of the company and its subsidiaries, wherever applicable, are available on the companys website: www.drreddys.com.

These are also available for inspection during regular business hours at our registered office in Hyderabad, India.

PARTICULARS OF LOANS, GUARANTEES OR INVESTMENTS

The company makes investments or extends loans/guarantees to its wholly-owned subsidiaries for their business purposes. 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 was 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 information for shareholders is provided in the chapter on Additional Shareholders Information. A certificate from the statutory auditors of the company confirming compliance with the conditions of corporate governance is attached to the chapter on Corporate Governance.

MANAGEMENT DISCUSSION AND ANALYSIS

A detailed report on the Management Discussion and Analysis in terms of Regulation 34 of SEBIs Listing Regulations is provided as a separate chapter in the annual report.

BOARD OF DIRECTORS AND KEY MANAGERIAL PERSONNEL

During FY2020, the members of the company approved reappointment of Mr. Sridar Iyengar (DIN: 00278512) and Ms. Kalpana Morparia (DIN: 00046081), independent directors, effective 31 July 2019 for a second term of four and five years respectively, under Section 149 of the Companies Act, 2013. Mr. Anupam Puri and Dr. Omkar Goswami ceased to be independent directors of the company with effect from 26 July 2019 and 30 July 2019 respectively on completion of their terms.

Mr. Prasad R Menon, independent director aged 74 years, was appointed as a non-executive independent director for a term of five years with effect from 30 October 2017. As per Regulation 17(1A) of the Listing Regulations, effective 1 April 2019, the company shall appoint a person or continue the directorship of any person as a non-executive director who has attained seventy five years of age only on approval of its members by way of a special resolution. Mr. Menon will be attaining the age of seventy five years during his present term of five years ending on 29 October 2022. The board recommends continuation of directorship of Mr. Menon as an independent director pursuant to Regulation 17(1A) of the Listing Regulations.

The board of directors appointed Mr. Erez Israeli as chief executive officer of the company and accordingly re-designated Mr. G V Prasad, as co-chairman and managing director of the company with effect from 1 August 2019.

Further, the term of appointment of Mr. G V Prasad ends on 29 January 2021. The board of directors at its meeting held on 20 May 2020, have reappointed Mr. G V Prasad as whole-time director designated as co-chairman and managing director of the company (or such other designation as the board may deem fit), for a further period of five years with effect from 30 January 2021 (including terms and conditions of the appointment), subject to approval of the members at the forthcoming 36th AGM scheduled on 30 July 2020.

Mr. K Satish Reddy, retires by rotation at the forthcoming 36th AGM and being eligible, seeks reappointment.

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 laid down in Section 149(6) of the Companies Act, 2013, is in compliance with Rule 6(3) of the Companies (Appointment and Qualifications of Directors) Rules, 2014 and Regulation 16(1)(b) of the Listing Regulations.

Further, they have affirmed compliance to the code of conduct for independent directors as prescribed in Schedule IV of the Companies Act, 2013.

Brief profiles of Mr. Prasad R Menon,

Mr. G V Prasad and Mr. K Satish Reddy, are given in the chapter on Corporate Governance and the Notice convening the 36th AGM for reference of the members.

There has been no other change in any other key managerial personnel during the year under review.

BOARD EVALUATION

As per provisions of the Companies Act, 2013 and Regulation 17(10) of the Listing Regulations, an evaluation of the performance of the board, its committees and members was undertaken. For details, please see the chapter on Corporate Governance in this annual report.

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.

A potential board member is also assessed on the basis of independence criteria 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 19(4) of the Listing Regulations and on recommendation of the companys nomination, governance and compensation committee, the board adopted a remuneration policy for directors, KMP, senior management and other employees. The policy is attached in the Chapter on Corporate Governance.

NUMBER OF BOARD MEETINGS

The board of directors met five times during the year. In addition, an annual board retreat was held to discuss strategic matters. Details of board meetings and the board retreat are given in the chapter on Corporate Governance.

AUDIT COMMITTEE

The audit committee of the board of directors consists entirely of independent directors. Presently, the committee comprises Mr. Sridar Iyengar (chairman),

Mr. Leo Puri, Mr. Bharat N Doshi and Ms. Shikha Sharma. Further details can be seen in the chapter on Corporate Governance. 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, and chaired by Ms. Shikha Sharma. Details of the committee and its terms of reference are set out in the chapter on Corporate Governance.

The audit and risk management committees review key risk elements of the companys business, finance, operations and compliance, and respective mitigation strategies. The risk management committee reviews key strategic, business, compliance and operational risks, while issues around ethics and fraud, internal control over financial reporting (ICOFR), as well as process risks and their mitigation are reviewed by the audit committee.

The companys finance, investment and risk management council (FIRM council) and Compliance Council are management level committees which operate under a charter and focus on risks associated with the companys business and compliance. The FIRM council and the Compliance council periodically review matters pertaining to risk management, compliance and ethics respectively. Additionally, the enterprise wide risk management (ERM) function helps management and the board to periodically prioritize, review and measure business risks against a pre-determined risk appetite, and their suitable response, depending on whether such risks are internal, strategic or external.

During FY2020, focus areas of risk management committee included review and benchmarking of the ERM framework, progress on cyber security, data privacy, quality and regulatory, compliance, climate change risks and other operating risk exposures.

ADEQUACY OF INTERNAL FINANCIAL CONTROL SYSTEMS

The company has in place adequate internal financial controls with reference to its financial statements. These controls ensure the accuracy and completeness of the accounting records and the preparation of reliable financial statements.

DIRECTORS RESPONSIBILITY STATEMENT

In terms of Section 134(5) of the Companies Act, 2013, 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 FY2020 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 the 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 the contracts or arrangements entered into by the company with related parties referred to in Section 188(1) of the Companies Act, 2013 in Form AOC-2 is attached as Annexure III to the boards report. All contracts and arrangements

with related parties were in the interest of the company. Details of related party disclosures form part of the notes to the financial statements provided in the annual report.

VIGIL MECHANISM/WHISTLE- BLOWER/OMBUDSPERSON POLICY

The company has an ombudsperson policy (whistle-blower/vigil mechanism) to report concerns. The vigil mechanism consists of a hotline comprising, a dedicated e-mail ID and a phone number. The ombudsperson policy also safeguards against retaliation of those who use this mechanism.

The audit committee chairperson is the chief ombudsperson. The policy also provides for raising concerns directly to the chief ombudsperson. Details of the policy are available on the companys website: www.drreddys.com/investors/ governance/ombudsperson-policy

STATUTORY AUDITORS

M/s. S.R. Batliboi & Associates LLP, chartered accountants (firm registration no. 101049W/E300004) were appointed as statutory auditors of the company at the 32nd AGM held on 27 July 2016, for a period of five years commencing from the conclusion of 32nd AGM till the conclusion of the 37th AGM, subject to ratification by members every year, as may be applicable. However, the Ministry of Corporate Affairs (MCA) vide its notification dated 7 May 2018 has omitted the requirement under the first proviso to Section 139 of the Companies Act, 2013 and Rule 3(7) of the Companies (Audit and Auditors) Rules, 2014, regarding ratification of appointment of statutory auditors by members at every subsequent AGM.

Consequently, M/s. S.R. Batliboi &

Associates LLP, chartered accountants, continue to be the statutory auditors of the company till the conclusion of 37th AGM, as approved by members at 32nd AGM held on 27 July 2016.

SECRETARIAL AUDITOR

Pursuant to Section 204 of the Companies Act, 2013 and the Companies (Appointment and 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 FY2020. The secretarial audit report for FY2020 is attached as Annexure IV to the boards reports.

Based on the consent received from Mr. Makarand Joshi, partner of M/s Makarand M Joshi & Co (MMJC), practising company secretaries, Mumbai, India (membership no. FCS 5533 and certificate of practice no. 3662) and on the recommendation of the audit committee, the board has approved appointment of Mr. Makarand Joshi as the secretarial auditor of the company for FY2021.

COST AUDITORS

Pursuant to Section 148(1) of the Companies Act, 2013 read with the relevant Rules made thereunder, the company maintains the cost records in respect of its pharmaceuticals business.

On the recommendation of the audit committee, the board has appointed M/s. Sagar & Associates, cost accountants (firm registration no. 000118) as cost auditors of the company for the FY2021 at a remuneration of Rs.7 lakh 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 members.

As a matter of record, relevant cost audit reports for FY2019 were filed with the Central Government on 26 August 2019, within the stipulated timeline. The cost audit report for FY2020 will also be filed within the timeline.

SECRETARIAL STANDARDS

In terms of Section 118(10) of the Companies Act, 2013, the company complies with Secretarial Standards-1 and 2, relating to the ‘Meetings of the Board of Directors and ‘General Meetings respectively as specified by the Institute of Company Secretaries of India and approved by the Central Government. The company has also voluntarily adopted the recommendatory Secretarial Standard-3 on ‘Dividend and Secretarial Standard-4 on ‘Report of the Board of Directors issued by the Institute of Company Secretaries of India.

BOARDS RESPONSE ON AUDITORS QUALIFICATIONS, RESERVATIONS OR ADVERSE REMARKS OR DISCLAIMERS 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/TRIBUNALS

On August 25, 2017, a securities class action lawsuit was filed against the company, its then chief executive officer (CEO) and its chief financial officer (CFO) in the United States District Court for the District of New Jersey. The companys co-chairman, its chief operating officer (COO) of that time (since retired), and Dr. Reddys Laboratories, Inc., were subsequently named as defendants in the case. The operative complaint alleges that the company made false or misleading statements or omissions in its public filings, in violation of the US federal securities laws; that the companys share price dropped and its investors were affected.

On March 21, 2019, the District Court issued its decision (dated March 20, 2019) granting in part and denying in part the motion to dismiss. Pursuant to that decision, the Court dismissed the plaintiffs claims on 17 out of the 22 alleged misstatements/omissions.

On May 15, 2020,

Dr. Reddys Laboratories Limited,

Dr. Reddys Laboratories, Inc., and certain of the companys current or former directors and officers (collectively, the "Defendants"), have entered into a Stipulation and Agreement of Settlement (the "Stipulation") with Lead Plaintiff i.e. the Public Employees Retirement System of Mississippi in the putative securities class action filed against the Defendants in the United States District Court for the District of New Jersey. As consideration for the settlement of the class action, the company has agreed to pay US$

9 million. The settlement is subject to the approval of the court and may be terminated prior to courts approval pursuant to the grounds for termination set forth in the Stipulation. Subject to the terms of the Stipulation, in exchange for the settlement consideration, Lead Plaintiff and members of the settlement class who do not opt-out of this settlement would release, among other things, the claims that were asserted, or that they could have asserted, in this class action. In entering into the settlement, the Defendants do not

admit, and explicitly deny, any liability or wrongdoing of any kind. Subject to the terms of the Stipulation, the settlement resolves the remainder of the litigation.

As the company is adequately insured with respect to the aforesaid liability, the settlement did not have any impact on the companys consolidated income statement for the year ended March 31,2020.

INFORMATION REQUIRED UNDER SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTION, PROHIBITION AND REDRESSAL) ACT, 2013

The company has an apex complaints committee and an internal complaints committee which operate under a defined redressal system for complaints pertaining to sexual harassment of women at the workplace. Details are available in the principle 3 of the Business Responsibility Report forming a part of this annual report.

CORPORATE SOCIAL RESPONSIBILITY (CSR) INITIATIVES

As per Section 135 of the Companies Act, 2013, the company has a board-level CSR committee consisting of Mr. Bharat N Doshi (chairman), Mr. G V Prasad and Mr. K Satish Reddy. The companys CSR policy provides a constructive framework to review and organize our social outreach programs in health, livelihood and education.

During the year, the committee monitored implementation and adherence to the CSR policy. Details of the CSR policy and initiatives taken by the company during the year are available on the companys website: www.drreddys.com. The report on CSR activities is attached as Annexure V to the boards report.

BUSINESS RESPONSIBILITY REPORT

A detailed Business Responsibility Report as required under Regulation 34 of the Listing Regulations, is given 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 the Companies Act, 2013, read with IEPF Authority (Accounting, Audit, Transfer and Refund) Rules, 2016, as amended, declared dividends and interest on debentures which remained unpaid or unclaimed for a period of seven years have been transferred by the company to the IEPF, which has been established by the Central Government.

The above-referred rules also mandate transfer of shares on which dividend are lying unpaid and unclaimed for a period of seven consecutive years to IEPF.

The company has issued individual notices to the members whose equity shares are liable to be transferred to IEPF, advising them to claim their dividend on or before 18 August 2020. Details of transfer of unpaid and unclaimed amounts to IEPF are given in the chapter on Additional Shareholders Information.

EMPLOYEES STOCK OPTION SCHEMES

During the year, there has been no material change in the ‘Dr. Reddys Employees Stock Option Scheme, 2002, the ‘Dr. Reddys Employees ADR Stock Option Scheme, 2007and Dr. Reddys Employees Stock Option Scheme, 2018 (collectively referred as ‘the schemes).

The schemes are in compliance with the SEBI (Share Based Employee Benefits) Regulations, 2014.

Details are available on the companys website: https://www.drreddys.com/ media/879298/esop-stock-incentive-note. pdf. The details also form part of note 2.24 of the notes to accounts of 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 VI to the boards report

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 members 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 up to the date of the forthcoming 36th AGM by members through electronic mode. Any members interested in obtaining a copy thereof may write to the company secretary in this regard.

CONSERVATION OF ENERGY, 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 VII to the boards report.

ANNUAL RETURN

Details forming part of the extract of the annual return in form MGT-9 are attached as Annexure VIII to the boards report.

ACKNOWLEDGMENT

Your directors place on record their sincere appreciation for the significant contribution made by its employees through their dedication, hard work and commitment, as also for the trust reposed in the company by the medical fraternity and patients. The board of directors also acknowledge the support extended by the analysts, bankers, government agencies, media, customers, suppliers, members and investors at large.

It looks forward to your continued support in the companys endeavour to accelerate access to innovative and affordable medicines because Good Health Cant Wait.

For and on behalf of the board of directors

K Satish Reddy

Chairman

Place : Hyderabad

Date : 20 May 2020.