FORM 20-F
Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
     

FORM 20-F

     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
     
    Or
     
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2003
     
    Or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 1-15182

DR. REDDY’S LABORATORIES LIMITED
(Exact name of Registrant as specified in its charter)

     
Not Applicable
(Translation of Registrant’s name into English)
  ANDHRA PRADESH, INDIA
(Jurisdiction of incorporation or organization)

7-1-27, Ameerpet
Hyderabad, Andhra Pradesh 500 016, India
+91-40-23731946


(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

     
Title of Each Class   Name of Each Exchange on which Registered

 
American depositary shares, each representing one equity share   New York Stock Exchange
     
Equity Shares*   New York Stock Exchange


*Not for trading, but only in connection with the registration of American depositary shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered pursuant to Section 12(g) of the Act: None


Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None


Indicate the number of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

76,515,948 Equity Shares

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

             
Yes   x   No   o

Indicate by check mark which financial statement item the registrant has elected to follow.
             
Item 17   o   Item 18   x



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Table of Contents

Currency of Presentation and Certain Defined Terms

     In this annual report on Form 20-F, references to “$” or “U.S.$” or “dollars” or “U.S. dollars” are to the legal currency of the United States and references to “Rs.” or “rupees” or “Indian rupees” are to the legal currency of India. Our financial statements are presented in Indian rupees and translated into U.S. dollars and are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”). References to “Indian GAAP” are to Indian Generally Accepted Accounting Principles. References to a particular “fiscal” year are to our fiscal year ended March 31 of such year. References to our “ADSs” are to our American Depositary Shares.

     References to “U.S.” or “United States” are to the United States of America, its territories and its possessions. References to “India” are to the Republic of India. All references to “we,” us,” “our,” “DRL,” “Dr. Reddy’s” or the “Company” shall mean Dr. Reddy’s Laboratories Limited. “Dr. Reddy’s” is a registered trademark of Dr. Reddy’s Laboratories Limited in India. Other trademarks or trade names used in this annual report on Form 20-F are trademarks registered in the name of Dr. Reddy’s Laboratories Limited or are pending before the respective trademark registries.

     Except as otherwise stated in this report, all translations from Indian rupees to U.S. dollars are based on the noon buying rate in the City of New York on March 31, 2003, for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York, which was Rs.47.53 per $1.00. No representation is made that the Indian rupee amounts have been, could have been or could be converted into U.S. dollars at such a rate or any other rate.

     Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

Forward-looking and Cautionary Statement

     IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED “RISK FACTORS” AND “OPERATING AND FINANCIAL REVIEW AND PROSPECTS” AND ELSEWHERE IN THIS REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT’S ANALYSIS ONLY AS OF THE DATE HEREOF. IN ADDITION, READERS SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND IN OUR PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME.

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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND LISTING
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
SIGNATURES
INDEPENDENT AUDITORS’ REPORT
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MEMORANDUM AND ARTICLES OF ASSOCIATION
CERTIFICATE OF INCORPORATION
AMENDED CERTIFICATE OF INCORPORATION
LIST OF SUBSIDIARIES OF THE REGISTRANT
SECTION 302 CERTIFICATION
SECTION 302 CERTIFICATION
SECTION 906 CERTIFICATION


Table of Contents

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

3.A.      Selected financial data - summary of selected consolidated financial data

     The selected consolidated financial data should be read in conjunction with the consolidated financial statements, the related notes and operating and financial review and prospects, which are included elsewhere in this annual report. The selected consolidated statements of income data for the five years ended March 31, 2003 and selected consolidated balance sheet data as of March 31, 1999, 2000, 2001, 2002 and 2003 have been derived from our audited consolidated financial statements and related notes, which have been prepared and presented in accordance with U.S. GAAP.

                                                       
          Fiscal Year Ended March 31,
         
          1999   2000   2001   2002   2003   2003
         
 
 
 
 
 
          (Rs. in millions, U.S.$ in thousands, except share data)
Income Statement Data:
                                               
Product sales
  Rs. 6,503.9     Rs. 7,886.9     Rs. 10,974.8     Rs. 16,408.8     Rs. 18,069.8     U.S.$ 380,177  
License fees
    100.0       89.3             124.8              
Services
                      89.1              
           
     
     
     
     
     
 
Total revenues
    6,603.9       7,976.2       10,974.8       16,622.7       18,069.8       380,177  
Cost of revenues
    4,259.7       4,751.6       5,735.8       6,869.0       7,838.9       164,926  
           
     
     
     
     
     
 
Gross profit
    2,344.2       3,224.6       5,239.0       9,753.7       10,230.9       215,251  
Operating Expenses:
                                               
 
Selling, general and administrative expenses
    1,451.8       1,708.2       2,818.9       3,667.6       5,020.3       105,624  
 
Research and development expenses
    264.3       351.3       508.8       741.6       1,374.9       28,927  
 
Amortization expenses
    219.1       304.9       482.3       487.7       419.4       8,825  
 
Foreign exchange (gain)/loss
    299.6       (2.0 )     (62.1 )     (208.9 )     70.1       1,475  
           
     
     
     
     
     
 
Total operating expenses
    2,234.8       2,362.4       3,747.9       4,688.0       6,884.7       144,851  
Operating income
    109.4       862.1       1,491.0       5,065.7       3,346.2       70,400  
Equity in loss of affiliates
    (3.5 )     (19.8 )     (31.5 )     (130.5 )     (92.1 )     (1,938 )
Other (expense) / income, net
    (185.4 )     (301.7 )     (387.0 )     154.4       683.1       14,372  
           
     
     
     
     
     
 
Income before income taxes and minority interest
    (79.5 )     540.7       1,072.5       5,089.7       3,937.2       82,835  
           
     
     
     
     
     
 
Income taxes
    (122.7 )     (256.8 )     (321.4 )     (153.8 )     (398.1 )     (8,375 )
Minority interest
    24.2       (1.0 )     (9.2 )     (14.8 )     (6.7 )     (142 )
Net income/(loss)
  Rs. (178.0 )   Rs. 282.9     Rs. 741.9     Rs. 4,921.0     Rs. 3,532.4     U.S.$ 74,318  
           
     
     
     
     
     
 
Earnings per equity share:
                                               
   
Basic
  Rs. (2.82 )   Rs. 4.48     Rs. 11.74     Rs. 64.73     Rs. 46.16     U.S.$ 0.97  
   
Diluted
  Rs. (2.82 )   Rs. 4.48     Rs. 11.74     Rs. 64.62     Rs. 46.16     U.S.$ 0.97  
Weighted average number of equity shares used in computing earnings per equity share:*
                                               
   
Basic
    63,177,560       63,177,560       63,177,560       76,027,565       76,515,948       76,515,948  
   
Diluted
      63,177,560       63,177,560       63,177,560       76,149,568       76,516,731       76,516,731  
Dividend declared per share
  Rs. 1.59     Rs. 1.94     Rs. 1.94     Rs. 7.50     Rs. 5.00     U.S.$ 0.11  


*   Each ADR represents one equity share. Historical figures have been adjusted to reflect the two for one stock split effected in October 2001.

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    Fiscal Year Ended March 31,
   
    1999   2000   2001   2002   2003   2003
   
 
 
 
 
 
    (Rs. in millions, U.S.$ in thousands, except share data)
Other Data:
                                               
Net cash provided by / (used in):
                                               
Operating activities
  Rs. (120.8 )   Rs. 632.6     Rs. 617.1     Rs. 4,652.8     Rs. 4,366.7     U.S.$ 91,873  
Investing activities
    (974.0 )     (1,378.9 )     (689.4 )     (1,532.9 )     (1,954.7 )     (41,126 )
Financing activities
    521.1       793.7       (87.7 )     1,421.8       (153 )     (3,219 )
Effect of exchange rate changes on cash
    654.2       90.9       81.5       88.8       (95 )     (1,999 )
Expenditures on property, plant and equipment
    (555.8 )     (299.4 )     (489.0 )     (1,090.3 )     (1515.7 )     (31,890 )
Balance Sheet Data:
                                               
Cash and cash equivalents
  Rs. 419.3     Rs. 557.5     Rs. 478.9     Rs. 5,109.4     Rs. 7,273.4     U.S.$ 153,028  
Working capital
    442.4       100.3       795.4       9,518.6       12,023.5       252,966  
Total assets
    9,468.2       11,164.7       11,882.9       18,967.0       23,091.7       485,834  
Total long-term debt, excluding current portion
    815.8       1,157.3       1,003.4       47.0       40.91       861  
Total stockholders’ equity
    4,479.9       4,627.2       5,240.5       15,457.4       18,831.8     U.S.$ 396,210  

Exchange Rates

     The following table sets forth, for the fiscal years indicated, information concerning the number of Indian rupees for which one U.S. dollar could be exchanged based on the average of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York. The column titled “Average” in the table below is the average of the daily noon buying rate on the last business day of each month during the year.

                                 
Fiscal Year Ended                                
March 31   Period End   Average   High   Low

 
 
 
 
1999
    42.50       42.27       42.83       39.74  
2000
    43.65       43.46       43.75       42.84  
2001
    46.85       45.88       46.90       43.70  
2002
    48.83       47.80       48.83       46.88  
2003
    47.53       48.43       49.07       47.53  

     The following table sets forth the high and low exchange rates for the previous six months and are based on the average of the noon buying rate in the City of New York on the last business day of each month during the period for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank of New York:

                 
Month   High   Low

 
 
March 2003
    47.85       47.53  
April 2003
    47.46       47.34  
May 2003
    47.35       46.85  
June 2003
    47.15       46.40  
July 2003
    46.49       46.06  
August 2003
    46.18       45.85  

On September 29, 2003, the noon buying rate in the city of New York was Rs.45.85.

3.B.     Capitalization and indebtedness

     Not applicable.

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3.C.     Reasons for the offer and use of proceeds

     Not applicable.

3.D.     Risk factors

     You should carefully consider all of the information set forth in this Form 20-F and the following risk factors that we face and that are faced by our industry. The risks below are not the only ones we face. Additional risks not currently known to us or that we presently deem immaterial may also affect our business operations. Our business, financial condition or results of operations could be materially or adversely affected by any of these risks. This Form 20-F also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere. See “Forward-Looking Statements.”

RISKS RELATING TO OUR BUSINESS

If we cannot respond adequately to the increased competition we expect to face in the future, we will lose market share and our profits will go down.

     Our products face intense competition from products developed, or under development, by other companies in India and abroad, including major pharmaceutical and chemical companies, specialized contract research organizations, research and development firms, universities and other research institutions. Many of our competitors have greater financial resources and marketing capabilities than we do. Some of our competitors, especially multinational pharmaceutical companies, have greater experience than we do in clinical testing and human clinical trials of pharmaceutical products and in obtaining regulatory approvals. Our competitors may succeed in developing technologies and products that are more effective, more popular or cheaper than any we may develop or license. These developments could render our technologies and products obsolete or uncompetitive, which would harm our business and financial results.

     We believe some of our competitors have broader product ranges, stronger sales forces and better segment positioning than us, which enables them to compete effectively.

If we cannot maintain our position in the Indian pharmaceutical industry in the future, we may not be able to attract co-development, outsourcing or licensing partners and may lose market share.

     In order to attract multinational corporations into co-development and licensing arrangements, it is necessary for us to maintain the position of a leading pharmaceutical company in India. Multinational corporations have been increasing their outsourcing of both active pharmaceutical ingredients and generic formulations to highly regarded companies that can produce high quality products at low cost that conform to standards set in developed markets. If we cannot maintain our current position in the market, we may not be able to attract outsourcing or licensing partners and may lose market share.

If our research and development efforts do not succeed, this may restrict our introduction of new products, which is critical to our business.

     In order to remain competitive, we must successfully commercialize additional generic and/or innovative branded pharmaceutical products. To accomplish this, we commit substantial efforts, funds and other resources to research and development, both through our own dedicated resources and our various collaborations with third parties. Our ongoing investments in new product launches and research and development for future products could result in higher costs without a proportionate increase in revenues.

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     In the pharmaceutical business, the research and development process can take up to 12 years, or even longer, from discovery to commercial product launch. This process is conducted in various stages. During each stage, there is a substantial risk that we will not achieve our goals and accordingly, we may abandon a product in which we have invested substantial amounts. Our overall profitability depends on our ability to continue developing commercially successful products.

     Our dependence on research and development makes it highly important that we recruit and retain high quality researchers and development specialists. We commit substantial efforts and funds to this effort. Should we fail in our efforts, this could adversely effect our ability to continue developing commercially successful products and, thus, our overall profitability.

If we fail to comply fully with government regulations applicable to our research and development activities or regarding the manufacture of our products, it may delay or prevent us from developing or manufacturing our products.

     Our research and development activities are heavily regulated. If we fail to comply fully with applicable regulations, then there could be a delay in the submission or approval of potential new products for marketing approval. In addition, the submission of an application to a regulatory authority does not guarantee that a license to market the product will be granted. Each authority may impose its own requirements and/or delay or refuse to grant approval, even when a product has already been approved in another country. In our principal markets, the approval process for a new product is complex, lengthy and expensive. The time taken to obtain approval varies by country but generally takes from six months to several years from the date of application. This registration process increases the cost to us of developing new products and increases the risk that we will not succeed in selling them successfully.

     Also, governmental authorities, including the U.S. Food and Drug Administration (“U.S. FDA”), heavily regulate the manufacture of our products. If we or our third party suppliers fail to comply fully with such regulations, then there could be a government-enforced shutdown of production facilities, which in turn could lead to product shortages. A failure to comply fully with such regulations could also lead to a delay in the approval of new products.

If there is a change in government regulations regarding the amount of revenue that we may be able to derive from a particular product, our revenues may decrease.

     Governments throughout the world also heavily regulate the marketing of our products. Most countries also place restrictions on the manner and scope of permissible marketing to physicians and to other health care professionals. The effect of such regulations may be to limit the amount of revenue that we may be able to derive from a particular product. In addition, if we fail to comply fully with such regulations, then civil or criminal actions could be brought against us. In addition to normal price competition in the marketplace, the prices of our pharmaceutical products are restricted by price controls imposed by governments and health care providers in several countries. Price controls operate differently in different countries and can cause wide variations in prices between markets. Currency fluctuations can aggravate these differences. The existence of price controls can limit the revenues we earn from our products.

If a regulatory agency amends or withdraws existing approvals to market our products, this may cause our revenues to decline.

     Regulatory agencies may at any time reassess the safety and efficacy of our products based on new scientific knowledge or other factors. Such reassessments could result in the amendment or withdrawal of existing approvals to market our products, which in turn could result in a loss of revenue, and could serve as an inducement to bring lawsuits against us.

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If we are sued by consumers for defects in our products, it could harm our reputation and thus our profits.

     Our business inherently exposes us to potential liability. From time to time, the pharmaceutical industry has experienced difficulty in obtaining desired amounts of product liability insurance coverage. We export products to the United States, a market noted for its litigious nature and high awards of damages. Although we have obtained product liability coverage with respect to products that we manufacture, if any product liability claim not covered by insurance or exceeding the policy limits were sustained against us, it could harm our business and financial condition. This risk is likely to increase as we develop our own new-patented products in addition to making generic versions of drugs that have been in the market for some time.

If we are unable to patent new products and protect our proprietary information, or if we infringe on the patents of others, our business may be harmed.

     While our business has traditionally focused on non-patented products, patents are likely to become more significant to us in the future. Our success will depend, in part, on our ability in the future to obtain patents, protect trade secrets and other proprietary information and operate without infringing on the proprietary rights of others. Our competitors may have filed patent applications, or hold issued patents, relating to products or processes that compete with those we are developing, or their patents may impair our ability to do business in a particular geographic area.

     Historically, in addition to patents, we have relied on trade secrets, know-how and other proprietary information as well as requiring our employees, vendors and suppliers to sign confidentiality agreements. However, these confidentiality agreements may be breached, and we may not have adequate remedies for any breach. Third parties may otherwise gain access to our proprietary information or may independently develop substantially equivalent proprietary information.

     There has been substantial patent related litigation in the pharmaceutical industry concerning the manufacture, use and sale of various products. In the normal course of business, we are sometimes subject to lawsuits and the ultimate outcome of litigation could adversely affect our results of operations, financial condition and cash flow. Regardless of regulatory approval, should anyone commence a lawsuit against us with respect to any alleged patent infringement by us, whether because of the filing of an application for governmental approval, such as a new drug application, or otherwise, the expense of any such litigation and the resulting disruption to our business, whether or not we are successful, could harm our business. The uncertainties inherent in patent litigation make it difficult for us to predict the outcome of any such litigation.

If we are unable to defend ourselves in patent challenges, we could be subject to injunctions preventing us from selling our products, resulting in a decrease in revenues, or we could be subject to substantial liabilities that would lower our profits.

     We take all reasonable steps to ensure that our products, including the products manufactured and sold by our generics business unit, do not infringe valid third-party intellectual property rights. Nevertheless, originating companies commonly assert patent and other intellectual property rights in order to delay or prevent generic competition. As a result, we can become involved in extensive litigation regarding our generic products. If we are unsuccessful in defending ourselves against these suits, we could be subject to injunctions preventing us from selling our generic products, resulting in a decrease in revenues, or to damages, which may be substantial. Either event could adversely effect our consolidated financial position, results of operations or liquidity.

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If we elect to sell a generic product prior to the completion of all appellate level patent litigation, we could be subject to liabilities for damages if a lower court judgment upon which we are relying is reversed.

     At times we seek approval to market generic products before the expiration of patents for those products, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our products. As a result, we often face significant patent litigation. Depending upon a complex analysis of a variety of legal and commercial factors, if we win a lower court decision in such patent litigation, we may, in certain circumstances, elect to market a generic product even though an appeal of the lower court decision is pending. Should we elect to proceed in this manner, we could face substantial patent liability damages were a higher court to overturn the trial court’s decision.

If we do not maintain and increase our arrangements for overseas distribution of our products, our revenues and net income could decrease.

     We market our products in over 70 countries. Our products are marketed in these countries through our subsidiaries as well as joint ventures. Because we do not have the resources to market and distribute our products ourselves in all our export markets, we also market and distribute our products through third parties by way of marketing and agency arrangements. These arrangements may be terminated by either party providing the other with notice of termination or when the contract regarding the arrangement expires. We may not be able to successfully negotiate these third party arrangements or find suitable joint venture partners in the future. Any of these arrangements may not be available on commercially reasonable terms. Additionally, our marketing partners may make important marketing and other commercialization decisions with respect to products we develop without our input. As a result, many of the variables that may affect our revenues and net income are not exclusively within our control when we enter into arrangements like these.

If we fail to comply with environmental laws and regulations or face environmental litigation, our costs may increase or our revenues may decrease.

     We may incur substantial costs to comply with requirements of environmental laws and regulations. In addition, we may discover currently unknown environmental problems or conditions. We are subject to significant national and state environmental laws and regulations, which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in or result from our operations. Environmental laws and regulations in India are not as extensive as they are in other countries, such as the United States. They have, however, been increasing in stringency and it is possible that they will become significantly more stringent in the future. If any of our plants or the operations of such plants are shut down, we will continue to incur costs in complying with regulations, appealing any decision to close our facilities, maintaining production at our existing facilities and continuing to pay labor and other costs which continue even if the facility is closed. As a result, our overall operating expenses will increase and our profits will decrease.

If the world economy is affected due to terrorism or wars, it may adversely affect our business and results of operations.

     Several areas of the world have experienced terrorist acts and retaliatory operations recently. If the overall economy of the world is affected by such acts, our business and results of operations may be damaged as a consequence.

If we have difficulty in integrating companies that we merge with or acquire, our business may be harmed.

     Acquisitions may involve a number of risks, including diversion of management’s attention, failure to retain key acquired personnel and clients, unanticipated events or circumstances, legal liabilities

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and amortization of acquired intangible assets, some or all of which could harm our results of operations and financial condition. Our inability to successfully integrate companies that we have acquired or merged with, or companies that we acquire or merge with in the future, could harm our business.

     We may acquire or make strategic investments in complementary businesses or products, or enter into strategic partnerships or alliances with third parties in order to enhance our business. It is possible that we may not identify suitable acquisition, strategic investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on terms commercially acceptable to us or at all. The inability to identify suitable acquisition targets or investments or the inability to complete such transactions may affect our competitiveness and our growth prospects.

Our principal shareholders control us and, if they take actions that are not in your best interests, it may harm the value of your investment in our ADSs.

     Certain of our directors, together with members of their immediate families, in the aggregate, beneficially own approximately 26.02% of our issued shares. As a result, these people, acting together, are likely to have the ability to exercise significant control over most matters requiring approval by our shareholders, including the election and removal of directors and significant corporate transactions. This control by these directors and their family members could delay, defer or prevent a change in control of us, impede a merger, consolidation, takeover or other business combination involving us, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us even if that was in our best interest.

If we improperly handle any of the dangerous materials used in our business and accidents result, we could face significant liabilities that would lower our profits.

     We handle dangerous materials including explosive, toxic and combustible materials like sodium azide, acrolein and acetyl chloride. If improperly handled or subjected to the wrong conditions, these materials could hurt our employees and other persons, cause damage to our properties and harm the environment. This, in turn, could subject us to significant litigation, which could lower our profits in the event we were found liable.

If we experience labor union problems, our production capacity and overall profitability could be adversely affected.

     Approximately 12.4% of our employees belong to a number of different labor unions. We have in the past experienced strikes at facilities by some of our employees. Future strikes may cause a reduction in the productivity of the affected facilities.

If there is delay and/or failure in supplies of materials, services and finished goods from third parties, it may adversely affect our business and results of operations.

     In some of our key business operations, such as the manufacture, formulation and packaging of products, we rely on third parties for the timely supply of specified raw materials, equipment, contract manufacturing, formulation or packaging services and maintenance services. Although we actively manage these third party relationships to ensure continuity of supplies on time and to our required specifications, some events beyond our control could result in the complete or partial failure of supplies or in supplies not being delivered on time. Any such failure could adversely effect our business and results of operations.

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If we do not effectively manage our operations in our foreign subsidiaries and review equity investees, these operations may incur losses or otherwise adversely affect our business and results of operations.

     Currently, we operate our business through subsidiaries and equity investees in other countries. Because of our limited experience in operating subsidiaries and reviewing equity investees outside of India, we are subject to additional risks related to our international expansion strategy, including risks related to complying with a wide variety of national and local laws, restrictions on the import and export of certain intermediates, drugs, technologies and multiple and possibly overlapping tax structures. In addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with international operations generally. We may also face difficulties integrating new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. If we do not effectively manage our operations in these subsidiaries and review equity investees effectively we may lose money in these countries and it may adversely affect our business and results of operations.

Fluctuations in exchange rates may adversely affect our business and results of operations.

     Our principal subsidiaries are located in the United States, United Kingdom and Russia and each has significant local operations. A significant portion of our revenues are in other currencies, especially the U.S. dollar and pound sterling, while a significant portion of our costs are in Indian rupees. As a result, if the relative value of the Indian rupee to these other currencies declines, our revenues will decrease.

If there is a change in tax regulations, it may increase our tax liabilities and thus adversely affect our financial results.

     Currently, we enjoy various tax benefits and exemptions under Indian tax laws. Any changes in these laws, or their application in matters such as tax exemption on export income and transfer pricing, may increase our tax liabilities and thus adversely affect our financial results.

If there is a change in accounting standards, it may affect our reported results of operations.

     New or revised accounting standards and rules promulgated from time to time by United States or Indian accounting standard boards may significantly affect our reported results of operations. As an example, we currently use the intrinsic value based method to account for our employee stock based compensation plans. Any changes requiring that we record compensation expense in our consolidated statements of income for employee stock options using the fair value method could have a significant negative effect on our reported results of operations.

If we were to experience a supply interruption, we might be unable to meet the active pharmaceutical ingredients needs of our generics and formulations segments, and our needs might conflict with those of our active pharmaceutical ingredients customers.

     Many of the active pharmaceutical ingredients and formulations that we manufacture, distribute and sell are dependent on highly specialized raw materials. We can provide no assurances that supply sources will not be interrupted from time to time. In the event that we experience a shortage in our supply of raw materials, we might be unable to fulfill all of the active pharmaceutical ingredients needs of our generics and formulations segments, which could result in a loss of production capacity for these segments. In addition, this could result in a conflict between the active pharmaceutical ingredients needs of our generics and formulations segments and the needs of customers of our active pharmaceutical ingredients segment, some of whom are also our competitors in the formulations segment. In either case,

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we could potentially lose business from adversely affected customers and we could be subjected to lawsuits.

RISKS RELATING TO INVESTMENTS IN INDIAN COMPANIES

A slowdown in economic growth in India may adversely affect our business and results of operations.

     Our performance and the quality and growth of our business are necessarily dependent on the health of the overall Indian economy. The Indian economy has grown significantly over the past few years. According to data for 2001-02 released by India’s Central Statistical Organisation (“CSO”) on January 31, 2003, Gross Domestic Product at factor cost (i.e., gross payments to factors of production such as labor, land and capital) at constant 1993-94 prices grew at 5.6% in 2001-02. Any future slowdown in the Indian economy could harm us, our customers and other contractual counterparties.

     The Indian economy is in a state of transition. The share of the services sector of the economy is rising while that of the industrial, manufacturing and agricultural sector is declining. It is difficult to gauge the impact of these fundamental economic changes on our business.

A significant change in the Indian government or in its economic liberalization and deregulation policies may adversely affect the Indian economy, the health of which our business depends upon.

     We are an Indian company and a substantial part of our operations are conducted, and most of our assets are located, in India. The Indian government has traditionally exercised and continues to exercise a dominant influence over many aspects of the economy. Its economic policies have had and could continue to have a significant effect on private-sector entities, including us, and on market conditions and prices of Indian securities, including our shares and our ADSs. Although the current government has continued India’s current economic liberalization and deregulation policies, we cannot assure you that they will continue to do so in the future. A significant change in these policies could harm business and economic conditions in India in general as well as our business, our future financial performance and the price of our shares and our ADSs.

If communal disturbances or riots erupt in India, or if regional hostilities increase, this would adversely affect the Indian economy, the health of which our business depends upon.

     India has experienced communal disturbances, terrorist attacks and riots during recent years. If such disturbances continue or are exacerbated, our operational, sales and marketing activities may be adversely affected, resulting in a decline in revenue. Sales in India contributed approximately 35.9% of our total sales for fiscal 2003.

     Also, India has from time to time experienced hostilities with neighboring countries. The hostilities have continued sporadically. The hostilities between India and Pakistan are particularly threatening because both India and Pakistan are nuclear powers. Hostilities and tensions may occur in the future and on a wider scale. These hostilities and tensions could lead to political or economic instability in India and harm our business, our future financial performance and the price of our shares and our ADSs.

If inflation continues to rise in India, we may not be able to increase the prices of our products in order to pass the costs along to our customers and our profits may decline.

     For the quarter ended June 30, 2003, the inflation rate based on the wholesale price index was above 5.0%, an increase over the rate of inflation in previous quarters, and it may continue to increase. We may not be able to pass these costs on to our customers by increasing the price we charge for our products. If this occurs, our profits may decline.

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If environmental conditions in India including drought, floods and earthquakes, affect our main facilities, our revenues could decline.

     Our main facilities are located in the Hyderabad area. This region has experienced earthquakes, floods and droughts in the past and has experienced droughts in recent years. In the event of a drought so serious that the drinking water in the region is limited, the government would cut the supply of water to all industries including our facilities and this would adversely affect our production capabilities, reduce the volume of products we can manufacture and reduce our revenues. Even if we take precautions to provide back-up support in the event that a natural disaster occurs in parts of India affecting our main facilities, environmental conditions may affect our facilities, harming production and ultimately our business.

Wage pressures in India may prevent us from sustaining our competitive advantage and may reduce our profit margins.

     Wage costs in India have historically been significantly lower than wage costs in developed countries and have been one of our competitive strengths. However, wage increases in India may prevent us from sustaining this competitive advantage and may negatively affect our profit margins. Compensation increases may adversely affect our business and results of operations.

Because specific government approval is required to sell shares withdrawn from the depositary facility, your ability to make those sales may be delayed.

     Investors seeking to sell in India any shares withdrawn upon surrender of an ADS will require Reserve Bank of India approval for each transaction unless the sale of those shares is made on a stock exchange or in connection with an offer made under the regulations regarding takeovers. Further, because currency exchange controls exist in India, the Reserve Bank of India will approve the foreign currency equivalent of the price at which your equity shares are transferred based on a specified formula, and a higher price per share may not be permitted. Additionally, except in limited circumstances, if you seek to convert the rupee proceeds from your sale of equity shares in India into foreign currency and then repatriate that foreign currency from India, you will have to obtain an additional Reserve Bank of India approval for each transaction. If approvals are required, we cannot guarantee that such approvals will be obtained in a timely manner or at all. Because of possible delays in obtaining requisite approvals, you may be prevented from realizing gains during periods of price increases or limiting losses during periods of price declines.

There are limits and conditions to the deposit of shares into the ADS facility.

     Indian legal restrictions may limit the supply of ADSs. The only way to add to the supply of ADSs will be through a primary issuance because the depositary will not be permitted to accept deposits of outstanding shares and issue ADSs representing those shares. However, an investor in ADSs who surrenders an ADS and withdraws shares will be permitted to redeposit those shares in the depositary facility in exchange for ADSs. In addition, an investor who has purchased shares in the Indian market will be able to deposit them in the ADS program, but only in a number that does not exceed the number of underlying shares that have been withdrawn from and not re-deposited into the depositary facility. Moreover, there are restrictions on foreign institutional ownership of shares as opposed to ADSs.

There may be less company information available in Indian securities markets than securities markets in developed countries.

     There is a difference between the level of regulation and monitoring of the Indian securities markets over the activities of investors, brokers and other participants as compared to the level of regulation and monitoring of markets in the United States and other developed economies. The Securities and Exchange Board of India is responsible for improving disclosure and other regulatory standards for

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the Indian securities markets. The Securities and Exchange Board of India has issued regulations and guidelines on disclosure requirements, insider trading and other matters. There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in developed countries, which could affect the market for our equity shares.

Indian stock exchange closures, broker defaults, settlement delays and strikes by brokerage firm employees could affect the market price and liquidity of our equity shares.

     The Indian securities markets are smaller than the securities markets in the United States and Europe and have experienced volatility from time to time. The regulation and monitoring of the Indian securities market and the activities of investors, brokers and other participants differ, in some cases significantly, from those in the United States and some European countries. Indian stock exchanges have experienced problems, including temporary exchanges closures, broker defaults, settlement delays and strikes by brokerage firm employees, which, if those or similar problems were to continue or recur, could affect the market price and liquidity of the securities of Indian companies, including the shares, in both domestic and international markets.

If financial instability occurs in other countries, particularly emerging market countries in Asia, our business could be disrupted and the price of our shares and our ADSs could decrease.

     The Indian markets and the Indian economy are influenced by economic and market conditions in other countries, particularly emerging market countries and other developing countries. Although economic conditions are different in each country, investors’ reactions to developments in one country can have adverse effects on the securities of companies in other countries, including India. A loss of investor confidence in the financial systems of other emerging markets may cause increased volatility in Indian financial markets and, indirectly, in the Indian economy in general. Any worldwide financial instability could also have a negative impact on the Indian economy. Financial disruptions may occur again and could harm our business, our future financial performance and the price of our shares and our ADSs.

Our equity shares and our ADSs may be subject to market price volatility, and the market price of our ADSs may decline disproportionately in response to adverse developments that are unrelated to our operating performance.

     Market prices for the securities of pharmaceutical companies, including our own, have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as the following can have an adverse effect on the market price of our ADSs and equity shares:

    fluctuations in our operating results,
 
    the aftermath of our public announcements,
 
    concern as to safety of drugs,
 
    general market conditions,
 
    our dependence on drug research and development to drive future operating results, and
 
    the inclusion of our shares in the Stock Exchange, Mumbai and National Stock Exchange indices.

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If you are not able to exercise preemptive rights available to other shareholders, your investment in our securities may be diluted.

     A company incorporated in India must offer its holders of shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any shares, unless these rights have been waived by at least 75.0% of the company’s shareholders present and voting at a shareholders’ general meeting. U.S. investors in our ADSs may be unable to exercise preemptive rights for the shares underlying our ADSs unless a registration statement under the Securities Act of 1933 is effective with respect to the rights or an exemption from the registration requirements of the Securities Act of 1933 is available. Our decision to file a registration statement will depend on the costs and potential liabilities associated with a registration statement as well as the perceived benefits of enabling U.S. investors in our ADSs to exercise their preemptive rights and any other factors we consider appropriate at the time. We might choose not to file a registration statement under these circumstances. If we issue any of these securities in the future, those securities may be issued to the depositary, which may sell them in the securities markets in India for the benefit of the investors in our ADSs. We cannot assure you as to the value, if any, the depositary would receive upon the sale of these securities. To the extent that you are unable to exercise preemptive rights, your proportional interests in us would be reduced.

ITEM 4. INFORMATION ON THE COMPANY

4.A.     History and development of the company

     Dr. Reddy’s Laboratories Limited was incorporated in India under the Indian Companies Act, 1956, by its promoter, Dr. K. Anji Reddy as a Private Limited Company on February 24, 1984. We were converted to a Public Limited Company in November 1985 and listed on the Indian Stock Exchanges in August 1986 and on the New York Stock Exchange on April 11, 2001. We are registered with the Registrar of Companies, Andhra Pradesh, Hyderabad, India as Company No. 01-4507. Our registered office is located at 7-1-27, Ameerpet, Hyderabad – 500 016 and the telephone number of our registered office is +91-040-23731946. The name and address of our registered agent in the United States is Dr. Reddy’s Laboratories, Inc., One Park Way, Upper Saddle River, New Jersey 07458, Attn: General Counsel.

     We first began our operations in 1984 as an Indian manufacturer of active pharmaceutical ingredients. In the years that followed, we began to export our active pharmaceutical ingredients to other countries and made strategic acquisitions that enabled us to expand our export business. Today, our active pharmaceutical ingredients are exported to over 70 countries worldwide.

     We began our formulations operations in 1987, and gradually grew our formulations segment by introducing a large number of new products, acquiring and building new brands and creating a wide marketing network. We began to export formulations in 1992, mainly to Russia and other countries of the former Soviet Union. We currently market our formulations in over 38 countries and coordinate our export activities through subsidiaries and joint ventures worldwide.

     In 1992, we started our own drug development operations through Dr. Reddy’s Research Foundation (“DRF”), an independent non-profit organization. As of April 1, 2002, the discovery operations of DRF were merged into us and now form part of our drug discovery segment.

     Between November 1999 and January 2000, we acquired a 87.1% equity stake in American Remedies Limited (“American Remedies”), a publicly traded Indian pharmaceutical company primarily engaged in domestic manufacturing and marketing of formulations and active pharmaceutical ingredients for allopathic and natural products. The cash consideration paid was Rs.896.9 million (U.S.$19.5 million). On October 26, 2001, we acquired the balance of the shares we did not yet own (12.9% interest)

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through a merger and exchange of shares. Consequently, American Remedies has ceased to exist as a separate legal entity.

     In February 2001, we completed our merger with Cheminor Drugs Limited (“Cheminor”), a publicly traded Indian pharmaceutical company engaged in the manufacture of active pharmaceutical ingredients, intermediates and generic formulations. Prior to the merger, we owned 8.7% of the equity of Cheminor, which we acquired between 1996 and 1997. Upon consummation of the merger, approximately 5.1 million equity shares of the Company were issued to the Cheminor shareholders. The operations of Cheminor have been merged with the Company and Cheminor has ceased to exist as a distinct legal entity.

     Our generics segment started operations in the second half of fiscal 2001, with its primary focus on the regulated markets of the United States and Europe. This segment accounted for 23.7% of our revenues in fiscal 2003. We market products in the United States through our United States subsidiary and through marketing alliances. As of March 31, 2003, we had 11 Abbreviated New Drug Applications (“ANDAs”) approved by the U.S. FDA and 23 ANDAs were pending approval.

     On April 11, 2002, we completed the acquisition of BMS Laboratories Limited, a U.K.-based generics company (now Dr. Reddy’s Laboratories (EU) Ltd.) for a consideration of 9.16 million pounds sterling, thus obtaining ownership of BMS Laboratories Limited and its subsidiary, Meridian Healthcare (UK) Limited (now Dr. Reddy’s Laboratories (UK) Ltd.). The consideration was paid 6.23 million pounds sterling in cash, 0.11 million pounds sterling in direct acquisition costs and 2.82 million pounds sterling in promissory notes payable over a period of 4-1/2 years, which includes contingent consideration of 1.00 million pounds sterling. The acquired companies now operate as our wholly-owned subsidiaries. This was our first overseas acquisition and gave us entry into the U.K. generics market.

     During fiscal 2003, we initiated the building of a United States-based specialty product business. We are currently in the process of establishing the management infrastructure and distribution relationships necessary to support this business. In December 2001, we filed our first New Drug Application (“NDA”) for amlodipine maleate under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act. In October 2002, the U.S. FDA determined our NDA as “Approvable”. In March 2003, we filed our second NDA with the U.S. FDA.

     As on March 31, 2003, the capital work-in-progress amounted to Rs.637.9 million, financed entirely through internal accruals.

4.B.     Business overview

     We are an emerging global pharmaceutical company with proven research capabilities. We are vertically integrated with a presence across the pharmaceutical value chain. We produce active pharmaceutical ingredients, finished dosage forms and biotechnology products and market them globally, with a focus on India, United States, Europe and Russia. We conduct research in the areas of cancer, diabetes, cardiovascular, inflammation and bacterial infection.

     Our revenues for fiscal 2003 were Rs.18,069.8 million (U.S.$380.2 million). We derived 35.9% of these revenues from sales in India, 32.4% from North America (United States and Canada), 11.7% from Russia and other countries of the former Soviet Union, 7.8% from Europe and 12.2% from other countries. Our net income during the same period was Rs.3,532.4 million (U.S.$74.3 million).

OUR STRATEGY

     Today, we are a diversified, emerging generics company. Over the next few years, our intent is to become an integrated, global, mid-sized pharmaceutical company. We intend to transform ourselves into

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a global, discovery-led pharmaceutical company able to achieve long-term sustainable growth and increased shareholder value.

     We are leveraging the scale and the strengths that we have built in our core businesses of active pharmaceutical ingredients and intermediates, formulations and generics to provide a platform for our continued growth. Over the next 5-7 years, we will focus on driving growth in these businesses to strengthen our cash flows to support our discovery-led ambition and build a sustainable United States specialty product business. Our specialty product business will initially be focused on the development and marketing of specialty products. Each of these businesses, and the management and sales and marketing infrastructure that we create to operate these businesses, will serve to support our future discovery-based operations.

OUR PRINCIPAL AREAS OF OPERATION

     The following table shows our revenues and percentage of total revenues of formulations, active pharmaceutical ingredients and intermediates, generics, diagnostics, critical care and biotechnology and drug discovery for the last three years:

                                                           
      Fiscal Year Ended March 31,
     
Segment   2001   2002   2003
   
 
 
      (Rs. in millions, U.S.$ in thousands)
Formulations
  Rs. 5,365.0       48.9 %   Rs. 6,035.2       36.3 %     6,860.4       38.0 %   U.S.$ 144,337.6  
Active pharmaceutical ingredients and intermediates
    4,977.4       45.4       5,237.2       31.6       6,340.7       35.1       133,404.6  
Generics
    229.6       2.1       4,526.8       27.2       4,284.2       23.7       90,136.6  
Diagnostics, critical care and biotechnology
    342.2       3.1       429.1       2.6       428.2       2.4       9,008.6  
Drug discovery
                124.8       0.8                    
Other
    60.6       0.5       269.6       1.5       156.3       0.8       3,289.6  
 
   
     
     
     
     
     
     
 
 
Total revenues
  Rs. 10,974.8       100.0 %   Rs. 16,622.7       100.0 %   Rs. 18,069.8       100.0 %   U.S.$ 380,177  
 
   
     
     
     
     
     
     
 

Formulations Segment

     Formulations, also referred to as branded finished dosages, are finished pharmaceutical products ready for consumption by the patient. Branded means we package the formulations for sale under our brand name. We sell branded formulations in India and other emerging markets. Branded formulations accounted for 38.0% of our revenues in fiscal 2003.

     We export our branded formulations to over 38 countries worldwide. Our major markets in this segment are India, Russia and other countries of the former Soviet Union, Latin America and China. We have also expanded into developing markets, including Myanmar, Sri Lanka, Vietnam, Kenya, Trinidad and Malaysia. We have progressively increased the number of countries in which we market our formulations by registering our products in various markets around the world. During fiscal 2003, we filed 285 product dossiers in various countries around the world. The total number of product registrations we held at the end of fiscal 2003 was approximately 850. The new markets we entered during fiscal 2003 were Guyana and St. Lucia.

     The following table sets forth our fiscal 2001, 2002 and 2003 formulations revenues by geographic area:

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      Fiscal Year Ended March 31,
     
      2001   2002   2003
     
 
 
Country   Revenues   % Total   Revenues   % Total   Revenues   % Total

 
 
 
 
 
 
      (in millions)   (in millions)   (in millions)
India
  Rs. 3,708.9       69.1 %   Rs. 3,993.1       66.2 %   Rs. 4,303.3     U.S.$ 90.5       62.7 %
Russia
    992.8       18.5       1,312.3       21.7       1661.9       35.0       24.2  
Brazil
    79.2       1.5       45.0       0.7       5.9       0.1       0.1  
Venezuela
    61.7       1.2       79.2       1.3       63.0       1.3       0.9  
Vietnam
    56.0       1.0       67.0       1.1       62.4       1.3       0.9  
Sri Lanka
    37.9       0.7       28.4       0.5       50.1       1.1       0.7  
Myanmar
    51.5       1.0       22.8       0.4       45.6       1.0       0.7  
Trinidad
    11.9       0.2       15.5       0.3       29.0       0.6       0.4  
Others
    365.1       6.8       471.9       7.8       639.2       13.4       9.4  
 
   
     
     
     
     
     
     
 
 
Total
  Rs. 5,365.0       100.0 %   Rs. 6,035.2       100.0 %     6,860.4     U.S.$ 144.3       100.0 %
 
   
     
     
     
     
     
     
 

     Emerging markets

     India. Our revenues from sales of formulations in India were 62.7% of our total formulations sales in fiscal 2003. In India, our formulations business focuses mainly on the therapeutic categories of gastro-intestinal, anti-infectives, pain management, cardiovascular, anti-diabetes, women’s health care and dental care. As of March 31, 2003, we had a total of 123 brands. Of these, our key brands — Nise, Omez, Ciprolet, Stamlo, Enam, Reclide, Antoxid, Stamlo Beta and Clamp — together contributed to 49.1% of our formulations revenues in India in fiscal 2003. Our sales of formulations in India grew 16.3% in fiscal 2003 as against the industry average of 5.6% according to Operations Research Group, a market research firm, in its March Moving Annual Total report for the 12 month period ending March 2003. According to Operations Research Group, as at March 2003, we had 17 brands that were ranked either first or second in terms of sales in India in their respective product categories. According to the Center for Marketing and Advertising Research Consultancy (“CMARC”), which measures doctor prescriptions, we were the fifth most prescribed company in India (this report covers the period from November 2002 to February 2003).

     During fiscal 2003, we were the first company in the country to launch an injectable form of omeprazole, Omez Injection. We also launched Broncho Vaxom, a novel concept in the management of recurrent respiratory tract infections. Broncho Vaxom, marketed under a license from OM Pharma, a Switzerland-based pharmaceutical company, is a preparation that is taken orally and contains microorganisms modified to stimulate the body’s immune response.

     The Indian central government has established the National Pharmaceutical Pricing Authority (“NPPA”) to control pharmaceutical prices. To implement and enforce the provisions of the Drugs Prices Control Order, on August 14, 2003, NPPA advised all manufacturers to comply with notified prices with respect to certain bulk drugs (also known as active pharmaceutical ingredients) and formulations categorized as “scheduled” under the notification. At present, approximately 74 drugs and their formulations are categorized as scheduled. Our main products under price control are: ciprofloxacin, norfloxacin, doxycyclene, salbutamol, theophylline, cloxacillin, ciprofloxacin, norfloxacin, doxycycline, ranitidine, cloxacillin, ibuprofen, griseofulvin, vitamin A, vitamin B1, vitamin B2, vitamin C and vitamin E. The following table provides a summary of our sales in our main therapeutic categories for the last 3 fiscal years:

                                                   
      Year ended March 31,
     
      2001   2002
     
 
      Number of                   Number                
Therapeutic   Our           %   of Our           %
Category (1)   Products   Revenues   Total (2)   Products   Revenues   Total (2)

 
 
 
 
 
 
              (in millions)                   (in millions)        
Gastro-intestinal
    17     Rs. 676.9       18.3 %     30     Rs. 694.3       17.4 %
Pain management
    17       626.5       16.9       29       776.5       19.4  
Cardiovascular
    13       711.9       19.2       48       675.9       16.9  
Anti-infectives
    22       566.2       15.3       59       480.0       12.0  
Nutrients and natural
    7       327.8       8.8       6       473.0       11.8  

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                   
      Year ended March 31,
     
      2003
     
      Number of                        
Therapeutic   Our                   %
Category (1)   Products   Revenues   Total (2)

 
 
 
              (in millions)        
Gastro-intestinal
    35     Rs. 778.3       U.S.$16.4       18.1 %
Pain management
    29       817.6       17.2       19.0  
Cardiovascular
    28       705.5       14.8       16.4  
Anti-infectives
    37       491.5       10.3       11.4  
Nutrients and natural
    22       527.2       11.1       12.3  

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      Year ended March 31,
     
      2001   2002
     
 
      Number of                   Number                
Therapeutic   Our           %   of Our           %
Category (1)   Products   Revenues   Total (2)   Products   Revenues   Total (2)

 
 
 
 
 
 
              (in millions)                   (in millions)        
Gynecology
    12       218.5       5.9       25       28.2       0.7  
Urology
    1       50.7       1.4       4       60.1       1.5  
Diabetes
    4       176.9       4.8       5       187.8       4.7  
Dermatology
    9       91.9       2.5       20       105.1       2.6  
Respiratory
    4       44.8       1.2       10       9.2       0.2  
Dental
                      19       23.3       0.6  
Others
    20       216.7       5.8       30       479.7       12.2  
 
   
     
     
     
     
     
 
 
Total
    126     Rs. 3708.9       100.0 %     285     Rs. 3,993.1       100.0 %

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                   
      Year ended March 31,
     
      2003
     
      Number of                        
Therapeutic   Our                   %
Category (1)   Products   Revenues   Total (2)

 
 
 
              (in millions)        
Gynecology
    16       207.6       4.4       4.8  
Urology
    7       81.4       1.7       1.9  
Diabetes
    13       161.7       3.4       3.8  
Dermatology
    17       157.5       3.3       3.6  
Respiratory
    19       198.3       4.2       4.6  
Dental
    19       130.5       2.7       3.0  
Others
    35       46.2       1.0       1.1  
 
   
     
     
     
 
 
Total
    277     Rs. 4303.3     U.S.$ 90.5       100 %


(1)     The categorization into therapeutic segments is based on marketing practice and focuses on therapies.

(2)     Refers to the therapeutic category’s revenues from sales in India expressed as a percentage of our total revenues from sales in all of our therapeutic categories in India.

     The following tables summarizes the position of our main formulations brands in the Indian market for each of the last 3 years:

                                           
      Therapeutic   Therapeutic Sub-                   %
Brand   Category   category   Revenues in Fiscal 2003   Total(3)

 
 
 
 
                      (in millions)        
Nise
  Pain management   Non-steroidal   Rs. 654.5     U.S.$ 13.8       15.2 %
 
          anti-inflammatory                        
Omez
  Gastro-intestinal   Anti-ulcerant     467.4       9.8       10.9  
Ciprolet
  Anti-infectives   Anti-infectives     169.2       3.6       3.9  
Stamlo
  Cardiovascular   Calcium channel                        
 
      blocker     253.8       5.3       5.9  
Enam
  Cardiovascular   Anti-hypertensive     144.5       3.0       3.4  
Reclide
  Anti-diabetic   Oral anti-diabetic     84.7       1.8       2.0  
Antoxid
  Nutraceuticals   Antioxidant     100.0       2.1       2.3  
Stamlo Beta
  Cardiovascular   Anti-hypertensive     154.2       3.2       3.6  
Clamp
  Anti-infectives   Anti-infectives     83.5       1.8       1.9  
 
                   
     
     
 
 
Total
                    2,111.8     U.S.$ 44.4       49.1 %

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                           
              Market                        
      Rank of   Share of                        
      Our Brand   our Brand                        
      Within   Within                   Revenues
      Product   Product   Brand   Revenues in   in fiscal
Brand   Category(1)   Category(1)   Growth %(2)   fiscal 2002   2001

 
 
 
 
 
                              (in millions)
Nise
    1       31.5 %     10.2 %   Rs. 587.9     Rs. 445.4  
Omez
    1       35.4       2.7       463.3       439.5  
Ciprolet
    5       5.5       -4.6       219.2       275.1  
Stamlo
    1       25.0       6.8       373.3       342.6  
Enam
    2       23.0       -0.7       142.6       145.7  
Reclide
    3       17.9       -5.3       87.0       90.4  
Antoxid
    1       6.5       0.3       109.9       97.1  
Stamlo Beta
    2       16.5       15.5       129.0       109.9  
Clamp
    3       10.3       121.7       52.9       55.2  
 
   
     
     
     
     
 
 
Total
                          Rs. 2,165.1     Rs. 2,000.9  

(1)     Therapeutic sub-categories are the specific groups within each therapeutic category and product categories are the compound groups within each therapeutic sub-category. Source: Operations Research Group March 2003.

(2)     Revenue growth determined based on retail sales. Revenue growth over the corresponding 12-month period for the previous year. Source: Operations Research Group March 2003.

(3)     Refers to the brand’s revenues from sales in India expressed as a percentage of our total revenues from sales in all of our therapeutic categories in India.

     Russia. Total pharmaceutical sales in the Russian market were Rs.1,661.9 million (U.S.$35 million) in fiscal 2003. Russia is our largest export market in this segment and our sales of formulations in this market accounted for 21.7% and 24.2% of our revenues in the formulations segment in fiscal 2002 and 2003, respectively. Pharmexpert, a market research firm, ranked us number 16 in sales in Russia in fiscal 2003.

     The following table provides a summary of our revenues in Russia by therapeutic category for each of the last 3 years:

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      Fiscal Year Ended March 31,
     
      2001   2002
     
 
Therapeutic   Number of                   Number of           %
Category   Products   Revenues   % Total(1)   Products   Revenues   Total(1)

 
 
 
 
 
 
              (in millions)                   (in millions)        
Gastro-intestinals
    4     Rs. 250.8       25.3 %     5     Rs. 343.1       26.1 %
Anti-infectives
    7       277.5       27.9       7       318.2       24.2  
Cardiovascular
    2       304.1       30.6       6       378.3       28.8  
Pain management
    5       116.1       11.7       9       184.0       14.0  
Respiratory
    1       4.5       0.5       1       12.4       0.9  
Others
    6       39.8       4.0       15       76.3       6.0  
 
   
     
     
     
     
     
 
 
Total
    25     Rs. 992.8       100.0 %     43     Rs. 1,312.3       100.0 %

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                   
      Fiscal Year Ended March 31,
     
      2003
     
Therapeutic   Number of                   %
Category   Products   Revenues   Total(1)

 
 
 
              (in millions)        
Gastro-intestinals
    2     Rs. 355.0     U.S.$ 7.5       21.3 %
Anti-infectives
    7       398.6       8.4       24.0  
Cardiovascular
    4       331.7       7.0       20.0  
Pain management
    9       268.9       5.7       16.2  
Respiratory
    1       16.0       0.3       0.9  
Others
    11       291.7       6.1       17.6  
 
   
     
     
     
 
 
Total
    34     Rs. 1,661.9     U.S.$ 35.0       100.0 %

(1)     Refers to the therapeutic category’s revenues from sales in Russia expressed as a percentage of our total revenues from sales in all of our therapeutic categories in Russia.

     The following table provides a summary of our principal products in the Russian market for each of the last 3 years:

                                           
      Fiscal Year Ended March 31
     
              2001   2002
             
 
Brand   Therapeutic Category   Revenues   % Total(1)   Revenues   % Total(1)

 
 
 
 
 
              (in millions)           (in millions)        
Enam
  Cardiovascular   Rs. 281.8       28.4 %   Rs. 368.3       28.1 %
Omez
  Gastro-intestinals     244.2       24.6       336.1       25.6  
Ciprolet
  Anti-infectives     271.6       27.4       300.3       22.9  
Ketorol
  Pain management     92.8       9.3       127.7       9.7  
 
           
     
     
     
 
 
Total
          Rs. 890.4       89.7 %   Rs. 1,132.4       86.3 %

[Additional columns below]

[Continued from above table, first column(s) repeated]

                           
      Fiscal Year Ended March 31
     
      2003
     
Brand   Revenues           % Total(1)

 
 
 
      (in millions)                
Enam
  Rs. 354.2     U.S.$ 7.4       21.3 %
Omez
    352.2       7.4       21.2  
Ciprolet
    336.4       7.1       20.2  
Ketorol
    166.4       3.5       10.0  
 
   
     
     
 
 
Total
  Rs. 1209.2     U.S.$ 25.4       72.7 %

(1)   Refers to the brand’s revenues from sales in Russia expressed as a percentage of our total revenues from all formulation sales in Russia.

     Our top four brands, Omez, Ciprolet, Enam and Ketorol, contributed nearly 73% of our formulation revenues in Russia in fiscal 2003. Omez, our anti-ulcerant product and Ciprolet, our product in the anti-infective segment, are ranked as the 21st and 22nd best selling formulation brands, respectively, in the Russian market as per the Pharmexpert March 2003 report. In fiscal 2003, we launched a number of new products, including Exifine, Sparflo, Nise and Mitotax.

     Our strategy in Russia is to focus on the therapeutic areas of gastro-intestinal, pain management, anti-infectives, cardiovascular, anti-allergic and over-the-counter segments. Our focus is to build brand leaders in the above therapeutic segments. Omez, Ciprolet and Nise have already become brand leaders in their respective categories, as reported by the Pharmexpert March 2003 report.

     Other Emerging Markets. We have operations in former Soviet Union countries other than Russia, specifically Ukraine, Kazakhstan and Belarus. Our export of formulations to these countries accounted for 6.3% of revenues in our formulations segment in fiscal 2003. We also have operations in other emerging markets, such as Venezuela, Trinidad, Vietnam, Brazil, Sri Lanka and Myanmar. Our export of formulations to these countries accounted for 3.6% of revenues in our formulations segment in fiscal 2003.

     We are also focusing on expanding our presence in China. In China, we market through our equity investee, Kunshan Rotam Reddy Pharmaceuticals Co. Ltd. (“KRRP”). As of March 31, 2003, we hold a 51% equity interest in KRRP. We currently market five products and have 15 products pending registration. We have 75 marketing representatives in China covering hospitals.

     As reported by Boston Consulting Group in their July 2002 report titled “Opportunities for Action in Health Care”:

    China’s pharmaceutical market size was approximately U.S.$15.74 billion in 2002, registering a growth of 10.24%.

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    By 2010, China is expected to emerge as the fifth largest pharmaceutical market in the world, with revenue of over U.S.$24 billion.
 
    Driving this growth is China’s rapid economic development and its recent accession into the World Trade Organization.

     Sales, marketing and distribution network

     India. We generate demand for our products by promoting them to doctors who prescribe them, and meeting with pharmacists to see that the pharmacists stock our brands. Our focus on brand building is, therefore, primarily driven through efforts to build relationships with the medical community. While we do not sell directly to doctors or pharmacists, our 1,300 field personnel frequently visit doctors and pharmacists throughout the country to promote our products. In addition, we sponsor medical conferences in different parts of the country and conduct seminars for doctors.

     We sell our formulations primarily through clearing and forwarding agents to over 2,000 stockists who decide which brands to buy based on demand. The stockists pay for our products pursuant to an agreed credit period and in turn sell these products to retailers. Our clearing and forwarding agents are responsible for transporting our products to the stockists and ensuring that the stockists maintain adequate supplies of our products. We pay our clearing and forwarding agents on a commission basis. We have insurance policies that cover our products during shipment and storage at clearing and forwarding locations.

     Russia. In Russia, we sell directly to some of the principal national distributors, including Protek, Zao Sia International, Shreya, Rossib, Avesta and Asburo. We also distribute our products through our wholly owned subsidiary located in Russia, OOO JV Reddy Biomed Ltd. Russia. Our sales and marketing efforts are driven through a team of 90 marketing representatives, 10 regional managers and 3 zonal managers to promote our products through doctors across 45 cities in Russia.

     In this market, credit is generally extended only to customers after they have established a satisfactory history of payment with us. The credit ratings of these customers are based on turnover, payment track record and the number of the customers’ branches or pharmacies and are reviewed on a quarterly basis.

     Other Emerging Markets. In other emerging markets, our key focus markets are China, Brazil and other countries of the former Soviet Union, including Kazakhstan, Uzbekistan, Ukraine and Belarus, where we have our own sales personnel to promote our products. In several of these emerging markets, we market and distribute through local agents. We also have representative offices in several of these countries.

     In China, where we market through KRRP, we have 75 marketing representatives covering hospitals. In Brazil, we have established a wholly-owned subsidiary, Dr. Reddy’s Farmaceutica do Brasil Ltda., to market our branded products.

Active Pharmaceutical Ingredients and Intermediates Segment

     Active pharmaceutical ingredients are the principal ingredients for formulations/generics and are also known as bulk actives or bulk drugs. Active pharmaceutical ingredients become formulations when the dosage is prepared for human consumption in the form of a tablet, capsule or liquid using additional inactive ingredients. Intermediates are the compounds from which active pharmaceutical ingredients are made. Our active pharmaceutical ingredients business contributed 35.1% of our total revenues for fiscal 2003. We produce more than 100 different active pharmaceutical ingredients and intermediates for use in pharmaceuticals. We export active pharmaceutical ingredients to emerging as well as developed markets covering over 70 countries. In addition, we also supply active pharmaceutical ingredients and

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intermediates to our formulations and generics segments. The research and development group within the active pharmaceutical ingredients and intermediates division contributes to our business by creating intellectual property (principally with respect to manufacturing processes and intermediates), providing research intended to reduce the cost of production of our products and developing approximately 10-15 new products every year. Our principal markets in this business segment include North America (the United States and Canada) and Europe, which together contributed 45.1% of the segment’s revenues.

     The following table sets forth revenues of active pharmaceutical ingredients and intermediates by geographic area for each of the last 3 fiscal years:

                                                             
        Year ended March 31,
       
        2001   2002   2003
       
 
 
        Revenues   % Total(1)   Revenues   % Total(1)   Revenues         % Total(1)
       
 
 
 
 
 
 
        (in millions)           (in millions)           (in millions)        
Emerging markets
                                                       
India
  Rs. 1,551.8       31.2 %   Rs. 1,648.4       31.5 %   Rs. 1,749.1     U.S.$ 36.8       27.6 %
Bangladesh
    134.2       2.7       85.5       1.6       88.6       1.9       1.4  
Other countries
    1,177.4       23.7       1,477.7       28.2       1,582.6       33.3       24.9  
 
   
     
     
     
     
     
     
 
 
Total emerging markets
    2,863.4       57.5       3,211.6       61.3       3,420.3       72.0       53.9  
Developed markets
                                                       
United States
    1,560.6       31.4       1,559.8       29.8       2,397.7       50.4       37.8  
Europe
    501.9       10.1       404.5       7.7       465.9       9.8       7.3  
Japan
    51.5       1.0       61.3       1.2       56.8       1.2       0.9  
 
   
     
     
     
     
     
     
 
 
Total developed markets
    2,114.0       42.5       2,025.6       38.7       2,920.4       61.4       46.1  
 
   
     
     
     
     
     
     
 
   
Total
  Rs. 4,977.4       100.0 %   Rs. 5,237.2       100.0 %   Rs. 6,340.7     U.S.$ 133.4       100.0 %

(1)    Refers to our revenues from API sales in the applicable country expressed as a percentage of our total revenues from API sales throughout the world.

     The following table set forth the sales of our key pharmaceutical ingredients for each of the last 2 fiscal years:

                                                     
            Year ended March 31,
           
            2002   2003    
           
 
  For Use in
    Therapeutic   Therapeutic                                           Our Branded
Product   Category   Sub-category   Revenues   %Total   Revenues   %Total   Formulations

 
 
 
 
 
 
 
            (in millions)           (in millions)            
Ciprofloxacin   Anti-infective   Anti-bacterial   Rs. 725.8       13.9 %   Rs. 773.2     U.S.$ 16.3       12.2 %   Ciprolet
Ranitidine   Gastro-intestinal   Anti-ulcerant     522.3       10.0       697.3       14.7       11.0     Zoran
Norfloxacin   Anti-infective   Anti-bacterial     73.6       1.4       28.1       0.6       0.4     Norilet
Enrofloxacin   Anti-infective   Anti-bacterial     175.7       3.4       139.8       2.9       2.2      
Omeprazole   Gastro-intestinal   Anti-ulcerant     110.9       2.1       80.0       1.7       1.3     Omez
Nizatidine   Gastro-intestinal   Anti-ulcerant     304.0       5.8       658.7       13.9       10.4      
Ibuprofen   Pain management   Analgesic     383.9       7.3       456.0       9.6       7.2     Ibuclin
Naproxen Sodium   Pain management   Anti-inflammatory     285.2       5.4       400.8       8.4       6.3      
Dextromethorphan   Respiratory   Anti-allergic     238.2       4.5       190.4       4.0       3.0      
Doxazosin Mesylate   Cardiovascular   Anti-hypertensive     116.6       2.2       181.4       3.8       2.9      
Sparfloxacin   Anti-infective   Anti-bacterial     358.6       6.8       175.8       3.7       2.8     Sparflo
Tizanidine   Gastro-intestinal   Anti-ulcerant     8.9       0.2       166.8       3.5       2.6      
Q-Acid   Gastro-intestinal   Anti-ulcerant     145.3       2.8                        
Sertraline HCl   Cardiovascular   Anti-hypertensive     124.4       2.4       143.1       3.0       2.3      
Naproxen   Pain management   Anti-inflammatory     107.0       2.0       160.1       3.4       2.5      

     We believe that, as a result of changes in our reporting structure upon consummation of our merger with Cheminor, it is not practicable to present an analysis of revenues by key products for the year ended March 31, 2001.Emerging Markets. India is the single largest market in this region, contributing 27.6% to the segment’s revenues in fiscal 2003. In India, we market our active pharmaceutical

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ingredients to Indian and multinational companies who are also our competitors in the formulations segment.

     In India, our top six products are ciprofloxacin, sparfloxacin, ranitidine, gatifloxacin, clopidogrel and losarton potassium. The market in India is highly competitive with severe pricing pressure and competition from cheaper Chinese imports.

     The NPPA has fixed the ceiling prices of some of our active pharmaceutical ingredients. We are currently selling all of those products at a price lower than the price set by the NPPA.

     Our sales to other emerging markets were at Rs.1,563.2 million and Rs.1,671.2 million for the fiscal years 2002 and 2003, respectively. Our key focus markets include Korea, Argentina, Brazil, Indonesia, Colombia, Mexico, Egypt, Iran, Saudi Arabia, Syria, Turkey and South Africa. Our strategy is to build relationships with the top customers in each of these markets and partner with them in their product launches by providing timely regulatory and analytical support.

     Developed Markets. Our principal markets are North America, Europe and Japan. In the United States, over the next five years, a large number of products are expected to come off patent, providing significant opportunity for our active pharmaceutical ingredients business. We have been actively involved in the marketing of active pharmaceutical ingredients and intermediates in the United States for over a decade. We can sell our active pharmaceutical ingredients in the United States only after submission of a drug master file (“DMF”). Any drug for which an ANDA is being filed must have a drug master file in place with respect to a particular supplier supplying the underlying active pharmaceutical ingredient. For European markets, we obtain a European DMF and, where applicable, a certificate of suitability or certificate of European Pharmacopoeia.

     We currently have over 40 DMFs on file in the United States. For each of these, we are either already supplying the product or are waiting to supply the product when it comes off patent.

     Sales, Marketing and Distribution Network

     Emerging Markets. In India, we have a sales team of 10 people to market our products. We also have several indenting agents who focus on regional sales and marketing. The sales are made directly from the factory as well as through clearing and forwarding agents. Distribution through clearing and forwarding agents is done to give better service to the customer. We currently have five clearing and forwarding agents. The sales through these agents in India accounted for approximately 27% of the total sales in India in the active pharmaceutical ingredients segment in fiscal 2003.

     With respect to other emerging markets, we have a sales team of 7 individuals and also have indenting agents to market our products.

     Developed Markets. We market through our subsidiaries in the United States and Europe. These subsidiaries are engaged in all aspects of marketing activity and support our customers’ pursuit of regulatory approval for their products.

Generics Segment

     Our generics operations started in the second half of fiscal 2001. Our generic products are marketed principally in North America (United States and Canada) and the United Kingdom. Growth in the generic pharmaceutical industry has been driven by the increased market acceptance of generic drugs, as well as the number of brand drugs for which patent terms and/or other market exclusivities have expired or been determined to be invalid.

     This segment accounted for 23.7% of our total revenues for fiscal 2003, contributing Rs.4,284.2 million. Revenues from sales of fluoxetine 40 mg capsules accounted for 41.8% of our total revenues in

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this segment in fiscal 2003. Significant product launches in fiscal 2003 included tizanidine in the United States and omeprazole in the United Kingdom.

     In fiscal 2003, revenues in this segment were Rs.754.21 million from our subsidiaries in the United Kingdom, Rs.3,276.6 million from sales in the United States, Rs.168.3 million from sales in Canada and Rs.85.1 million from sales in all other countries.

     The following table sets forth the sales of our principal generics finished dosages for each of the last 3 fiscal years:

                                                 
    Therapeutic   Therapeutic   Fiscal 2001           Fiscal 2002        
Product   Category   Sub-Category   Revenues   % Total   Revenues   % Total

 
 
 
 
 
 
                    (in millions)           (in millions)        
Fluoxetine capsules
  Central Nervous System   Anti-psychotic               Rs. 3,687.8       81.5 %
Ranitidine tablets
  Gastro-intestinal   Anti-ulcerant   Rs. 161.2       70.2 %     322.5       7.1  
Oxaprozin tablets
  Pain management   Anti-inflammatory     26.9       11.7       201.6       4.5  
Famotidine tablets
  Gastro-intestinal   Anti-ulcerant                 128.4       2.8  
Ranitidine capsules
  Gastro-intestinal   Anti-ulcerant     32.1       14.0       108.6       2.4  
Omeprazole Capsules
  Gastro-intestinal   Anti-ulcerant                        
Tizanidine tablets
  Spasticity   Muscle Relaxant                        

[Additional columns below]

[Continued from above table, first column(s) repeated]

                         
Product   Fiscal 2003 Revenues   % Total

 
 
    (in millions)        
Fluoxetine capsules
  Rs. 1,789.3     U.S.$ 37.6       41.8 %
Ranitidine tablets
    225.1       4.7       5.3  
Oxaprozin tablets
    10.3       0.2       0.2  
Famotidine tablets
    170.4       3.6       3.9  
Ranitidine capsules
    196.5       4.1       4.6  
Omeprazole Capsules
    283.0       6.0       6.6  
Tizanidine tablets
    777.8       16.4       18.2  

     Generic drugs are the chemical and therapeutic equivalents of reference brand drugs, typically sold under their generic chemical names at prices below those of their brand drug equivalents. These drugs are required to meet similar governmental standards as their brand-name equivalents and must receive regulatory approval prior to their sale in any given country. In the United States, generic drugs may enter the market after the approval of an ANDA and the expiration, invalidation or non-infringement of any patents on the corresponding brand drug, or the end of any other market exclusivity periods related to the brand drug.

     Growth in the global generic formulations market is fueled by a large number of patented drugs coming off patent in the next five years, and the increasing pressure on governments of developed countries to reduce health care expenditures. We intend to take advantage of our cost competitiveness and the manufacturing facilities that we have, which have been inspected by the United Kingdom, United States and South African regulatory authorities.

     In the United States, a generic pharmaceutical company must file an ANDA pursuant to Section 505(j) of the Federal Food, Drug and Cosmetic Act. The ANDA process is used to apply for approval to market a generic version of a patented drug. An ANDA applicant in the United States is required to review the patents of the innovator listed in the Orange Book and make an appropriate certification. There are several different types of certifications that can be made. A Paragraph IV filing is made when the ANDA applicant believes its product or the use of its product does not infringe on the innovator’s patents listed in the Orange Book or where the applicant believes that such patents are not valid or enforceable. The first generic company to file a Paragraph IV filing may be eligible to receive a six-month marketing exclusivity period from the date a court rules the patent is invalid or not infringed. A Paragraph III filing is made when the ANDA applicant does not intend to market its generic product until the patent expiration. A Paragraph II filing is made where the patent has already expired. A Paragraph I filing is made when the innovator has not submitted the required patent information for listing in the Orange Book. Another type of certification is made where a patent claims a method of use, and the ANDA applicant’s proposed label does not claim that method of use. When an innovator has listed more than one patent in the Orange Book, the ANDA applicant must file separate certifications as to each patent. Generally, Paragraph IV and Paragraph III filings are made before the product goes off patent, and Paragraph II and Paragraph I filings are made after the patent has expired.

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     In June 2003, the U.S. FDA announced reforms in its generic drug review program with the goal of providing patients with greater and more predictable access to effective, low cost generic alternatives to brand name drugs.

     In July 2003, the U.S. FDA issued a guidance intended to provide information on how the U.S. FDA intends to determine eligibility for 180-day generic drug exclusivity when, on the same day, more than one applicant submits an ANDA for the same drug under section 505(j) of the Federal Food, Drug, and Cosmetic Act containing a paragraph IV certification to a listed patent, and no paragraph IV certification to the patent was submitted on any previous day. To date, the U.S. FDA’s exclusivity decisions have involved applications or amendments submitted on different days. This guidance explains why and how the U.S. FDA intends to apply a multiple first applicant approach.

     In Canada, the European Union (including the United Kingdom) and South Africa, we have to file product dossiers with the particular country’s regulatory authority for permission to market the generic formulation. The regulatory authorities may inspect our manufacturing facility before approval of the dossier.

     Once approval is obtained in one European Union country, approvals can be obtained in other European Union countries subject to expiration of the patent in that country.

     As of June 30, 2003, we had filed 35 ANDAs with the U.S. FDA, of which 11 have been approved and two have been tentatively approved. In Europe, we have filed eight product dossiers with the Medical Control Agency, or MCA, of which four have been approved. In South Africa, we have filed five product dossiers with the Medicine Control Council, or MCC, of which four have been approved and one is under review. In Canada, we have filed three product dossiers with the Therapeutic Product Programme, or TPP, of which one has been approved and the rest are still under review.

     The following is a table containing applications filed and approved by the appropriate regulatory authorities as of September 31, 2003:

             
        Therapeutic Sub-   Patent
Product(1)   Therapeutic Category   Category   Expiry

 
 
 
United States            
Ranitidine (75 mg t,150/300 mg c)   Gastro-intestinal   Anti-ulcerant   Expired
Famotidine (10 mg t, 20/40 mg t)   Gastro-intestinal   Anti-ulcerant   Expired
Fluoxetine (10 mg t, 10/20/40 mg c)   Central nervous system   Anti-psychotic   Expired
Oxaprozin (600 mg t)   Pain management   Anti-inflammatory   Expired
Enalapril maleate & Hydrochlortiazide (5-12.5 mg /10-25 mg t)   Cardiovascular   Anti-hypertensive   Expired
Ibuprofen (200/400/600/800 mg t)   Pain management   Analgesic   Expired
Tizanidine (2 & 4 mg t)   Spasticity   Muscle relaxant   Expired
Nefazodone (50/100/150/200/250 mg t)   Central nervous system   Anti-psychotic   Expired
 
Europe(2)            
Ranitidine (150/300 mg t)   Gastro-intestinal   Anti-ulcerant   Expired
Ciprofloxacin (100/250/500/750 mg t)   Anti-infective   Anti-bacterial   Expired
Omeprazole (10, 20 & 40 mg)   Duodenal, Gastric   Anti-ulcerant   Expired
Nizatidine (150 / 300 mg)   Actuve Duodenal   Anti-ulcerant   Expired
 
South Africa            
Omeprazole (10/20/40 mg c)   Gastro-intestinal   Anti-ulcerant   Expired
Ranitidine HCL (75 mg t)   Gastro-intestinal   Anti-ulcerant   Expired
Enalapril maleate (2.5/5/10/20 mg t)   Cardiovascular   Anti-hypertensive   Expired
Ciprofloxacin (100/250/500/750 mg t)   Anti-infective   Anti-bacterial   Expired

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        Therapeutic Sub-   Patent
Product(1)   Therapeutic Category   Category   Expiry

 
 
 
Canada            
Flouxetine (10/20, 40 mg c)   Central nervous system   Anti-psychotic   Expired
 
Australia            
Norfloxacin (400mg t)   Anti-infective   Anti-bacterial   Expired
 
New Zealand            
Norfloxacin (400mg t)   Anti-infective   Anti-bacterial   Expired

(1)   c = capsule, t = tablet
 
(2)   Applications were filed in one or more of the United Kingdom, Germany or France. Once approval is obtained in one of these countries, approvals can be obtained in other European Union countries subject to expiration of the patent in that country.

     Sales, Marketing and Distribution Network

     In North America, we market our generic products directly under our own label as well as the labels of our marketing partners. In early 2003, we launched ibuprofen tablets and oxaprozin Hcl tablets under our own label. We have a profit sharing arrangement with Par Pharmaceuticals, Inc. to market certain other prescription generic formulations, none of which are over-the-counter products. We have also entered into a 15-year exclusive agreement with Leiner Health Products, Inc. to market over-the-counter products in the United States. In Canada, we have entered into a profit sharing arrangement with Cobalt Pharmaceuticals Inc. to market our generic products. In South Africa, Triomed (Proprietary) Limited, our marketing partner, was recently acquired by Aspen Pharmaceuticals. However, our relationship continues with Aspen, except with respect to our omeprazole product. In the United Kingdom, we market our generic products through our United Kingdom subsidiaries that we acquired during fiscal 2003. We intend to expand our operations in the United Kingdom and other European markets through these subsidiaries.

Diagnostics, Critical Care and Biotechnology Segment

     This division was created in 1998 to focus on and create a strong technology base in the areas of critical care and biotechnology. While this area of our business generates low sales volume, it is a high value segment. Our diagnostic products are generally kits that test for different diseases or conditions. Our critical care products are formulations used in hospitals to treat specific disease conditions. Our biotechnology products cover therapeutics and vaccines development.

     The following table provides a breakdown of sales figures for each of the last 3 years for the areas of diagnostics, critical care and biotechnology:

                                                         
    Year ended March 31,
   
    2001   2002   2003
   
 
 
Division   Revenues   % Total   Revenues   % Total   Revenues   % Total

 
 
 
 
 
 
    (in millions)           (in millions)           (in millions)        
Critical Care
  Rs. 194.1       56.7 %   Rs. 230.2       53.7 %   Rs. 235.5     U.S.$ 4.9       55.0 %
Diagnostics
    148.1       43.3       161.4       37.6       136.8       2.9       31.9  
Biotechnology
                37.5       8.7       55.9       1.2       13.1  
 
   
     
     
     
     
     
     
 
Total
  Rs. 342.2       100.0 %   Rs. 429.1       100.0 %     428.2     U.S.$ 9       100.0 %

     The following table sets forth revenues of diagnostics, critical care and biotechnology by geographic area for each of the last 3 fiscal years:

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    Year ended March 31,
   
    2001   2002   2003
   
 
 
Division   Revenues   % Total   Revenues   % Total   Revenues   % Total

 
 
 
 
 
 
    (in millions)           (in millions)           (in millions)        
India
  Rs. 331.0       96.7 %   Rs. 409.4       95.4 %   Rs. 378.0     U.S.$ 8.0       88.3 %
Russia
                  7.8       1.8       14.4       0.3       3.4  
Other CIS
                                1.2             0.2  
Other
    11.2       3.3       11.8       2.8       34.6       0.7       8.1  
 
   
     
     
     
     
             
 
Total
  Rs. 342.2       100.0 %   Rs. 429.1       100.0 %   Rs. 428.2     U.S.$ 9.0       100.0 %

     Diagnostics. Consistent with our strategy to focus our resources on core areas of operations, the board of directors decided to transfer the manufacturing of our key diagnostic product, namely Fast Forward HcG Velocit, a pregnancy detection kit, to our formulations division. The diagnostics division’s trading operations were discontinued effective as of April 1, 2003. We believe that the termination of our trading operations in this division will not materially impact our financial results, as revenues from trading operations accounted for less than 1% of our revenues in fiscal year 2003.

     In October 2000, we formed Pathnet India Pvt. Ltd. with Gribbles Pathology of Australia to establish a network of pathology laboratories and specimen collection centers throughout India. We are an equity investee in Pathnet India Pvt. Ltd.

     Critical care. This business accounted for 55% of the segment’s revenues in fiscal 2003, contributing Rs.235.5 million. Since its inception in fiscal 1999, this business has grown at a compound annual growth rate of 78%. We focus on high margin, low volume products for niche markets in India in the area of critical care, with emphasis on oncology. Our main products are Dacotin (oxaliplatin), Mitotax (paclitaxel), Cytogem (gemcitabine) and Docetere (docetaxel). We manufacture all products ourselves except for Dacotin, which is licensed and imported from Debiopharm S.A. of Switzerland.

     In fiscal 2003, we launched Oreta, our brand of leterozole. In fiscal 2002, we launched Lomtin, our brand of lomustine, and Tabi, our brand of bicalutamide.

     The following table sets forth the sales of our key products for each of the last 3 years:

                                                                   
      Therapeutic   Fiscal 2001           Fiscal 2002                                
Product   Category   Revenues   % Total   Revenues   % Total   Fiscal 2003 Revenues   % Total

 
 
 
 
 
 
 
              (in millions)           (in millions)           (in millions)        
Mitotax
  Ovarian/breast/lung cancer   Rs. 83.3       42.9 %   Rs. 80.3       37.3 %   Rs. 83.0     U.S.$ 1.7       35.3 %
Docetere
  Breast/lung cancer     31.8       16.4       37.1       17.2       37.6       0.8       15.9  
Cytogem
  Lung/pancreatic cancer     5.7       2.9       33.2       15.4       38.2       0.8       16.2  
Dacotin
  Colorectal cancer     36.4       18.8       31.1       14.4       27.3       0.6       11.6  
 
           
     
     
     
     
     
     
 
 
Total
          Rs. 157.2       81.0 %   Rs. 181.7       84.3 %   Rs. 186.1     U.S.$ 3.9       79.0 %

     Biotechnology. We believe we are one of the first pharmaceutical companies in India to venture into biotechnology. Our aim in this area is to provide innovative and value-added therapeutic products and diagnostic proteins using recombinant DNA. We are also in the process of developing our capabilities in molecular biology, cell culture, fermentation, downstream processing and hybridoma technology.

     We are one of the few Indian companies that have capabilities in the manufacture of biotechnological products. Our activities in this field range from DNA cloning and bacterial and yeast fermentation to protein isolation and purification. We have been successful in developing protein therapeutics from molecular cloning and fermentation through process development and production. We believe that the research-intensive nature of these products will make it difficult for our competitors to replicate our efforts.

     We are in the process of developing several recombinant molecules for therapeutic and diagnostic segments. We also plan to manufacture therapeutic proteins for use as vaccines, anti-virals and growth

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factors. These products have a broad range of uses including use in the prevention and treatment of hepatitis B and C, in alleviating anemic and neutropenic conditions during chemotherapy and in the treatment of some forms of cancer.

     In July 2001, we launched our first biotechnology product, Grastim, a human granulocyte colony-stimulating factor. Sales of Grastim for fiscal 2003 were Rs.55.86 million.

     Sales, Marketing and Distribution Network. We sell our products through clearing and forwarding agents in India. We also have a marketing team to promote the products to medical specialists and to focus on sales to hospitals, government agencies, non-government institutional organizations and pathology laboratories. For the export markets, we use the marketing and distribution network of our formulations division.

Drug Discovery Segment

     Drug discovery is a key segment of our business. While we continue to seek licensing and development arrangements with third parties to develop our discoveries, we also conduct clinical testing of some drugs ourselves where it is economically and technically feasible. Our long-term strategy for drug discovery is to increasingly undertake clinical testing ourselves, as we believe that this will enable us to derive higher value for our compounds.

     In 1992, we started our own drug discovery operations through Dr. Reddy’s Research Foundation (which we sometimes refer to as “DRF”), an independent non-profit organization whose financial statements are consolidated with ours. Pursuant to an agreement on February 27, 1997 with DRF, we appoint DRF’s trustees and have some control over its operations.

     During fiscal 2003, the discovery operations at DRF were transferred to us and now form part of our drug discovery segment. DRF no longer conducts research activities but continues to sponsor drug discovery seminars and individuals seeking visas to study in the United States.

     In fiscal 2001, 2002 and 2003, we spent Rs.255.9 million, Rs.394.8 million and Rs.449.3 million, respectively, towards drug discovery activities. In fiscal 2001, 2002 and 2003, we received Rs.Nil, Rs.124.8 million and Rs.Nil, respectively, in revenues from drug discovery activities.

     As part of our research and development strategy, we established Reddy U.S. Therapeutics, Inc. in Atlanta, Georgia, U.S.A. By setting up a research facility in the United States, we have better access to research scientists in the United States, enhancing our screening abilities for new molecular targets and mechanisms and access to high technology platforms. This subsidiary explores for new molecular targets and designs screening mechanisms for promising drugs, as well as follows up on leads developed by us in India.

     Stages of Testing. The stages of testing required before a pharmaceutical product can be marketed in the United States are generally as follows:

     
Phase of Development   Description

 
Preclinical   Animal studies and laboratory tests to evaluate safety and efficacy, demonstrate activity of a product candidate and identify its chemical and physical properties.
Phase I   Clinical studies to test safety profile of drug in humans.
Phase II   Clinical studies conducted with groups of patients to determine preliminary efficacy, dosage and expanded evidence of safety.
Phase III   Larger scale clinical studies conducted in patients to provide sufficient data for statistical proof of efficacy and safety.

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     For ethical, scientific and legal reasons, animal studies are required in the discovery and safety evaluation of new medicines. Preclinical tests assess the potential safety and efficacy of a product candidate in animal models. The results of these studies must be submitted to the FDA as part of a NDA before human testing may proceed.

     U.S. law further requires that studies conducted to support approval for product marketing be “adequate and well controlled.” In general, this means that either a placebo or a product already approved for the treatment of the disease or condition under study must be used as a reference control. Studies must also be conducted in compliance with good clinical practice (“GCP”) requirements, and adverse event and other reporting requirements must be followed.

     The clinical trial process can take three to ten years or more to complete, and there can be no assurance that the data collected will be in compliance with GCP regulations, will demonstrate that the product is safe or effective, or, in the case of a biologic product, pure and potent, or will provide sufficient data to support U.S. FDA approval of the product. The U.S. FDA may place clinical trials on hold at any point in this process if, among other reasons, it concludes that clinical subjects are being exposed to an unacceptable health risk. Trials may also be terminated by institutional review boards, who must review and approve all research involving human subjects. Side effects or adverse events that are reported during clinical trials can delay, impede, or prevent marketing authorization.

     Therapeutic Focus. We focus on new drug discovery and development in the areas of diabetes, cancer, bacterial infections, cardiovascular and metabolic disorders. The compounds currently under development by us include:

         
Compound   Therapeutic Area   Development Status
DRF 2593   Diabetes   Phase II completed
DRF 4158   Metabolic disorders   Preclinical completed
DRF 4832   Metabolic disorders   Late preclinical
DRF 1042   Cancer   Phase I completed
DRF 1644   Cancer   Preclinical completed
DRF 11057   Bacterial infections   Preclinical
DRF 10945   Metabolic disorders/Dyslipidemia   Preclinical
RUS 3108   Cardiovascular   Preclinical

     Patents. The status of patents filed and issued as of March 31, 2003 are summarized below:

                                                         
    Metabolic           Bacterial                                
    Disorders   Cancer   infections   Inflammation   Ulcer   Miscellaneous   Total
U.S. filed
    53       12       5       1       1       0       72  
U.S. issued
    29       6       0       0       1       0       36  
PCT filed(1)
    54       10       4       2       1       1       72  
PCT issued(1)
    49       9       3       2       1       1       65  
India filed
    95       40       17       10       2       18       182  
India issued
    16       10       0       0       0       8       34  

(1) “PCT” means the Patent Cooperation Treaty, an international treaty that facilitates foreign patent filings for residents of member countries when obtaining patents in other member countries.

     Research Advisory Committee. The Research Advisory Committee is composed of twelve leading professionals in the field of healthcare and chemical engineering. Of these, three are employed by our group companies, while the rest are independent. These professionals contribute to the strategic definition and implementation of pre-clinical development plans for our products. Members of the advisory committee meet individually and as a group with the management on an annual basis. As a result of the transfer of the research operations at DRF to the company, the advisory committee now advises the company rather than DRF.

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Member   Profile
Dr. K. Anji Reddy   Chairman, Dr. Reddy’s Laboratories Limited
Dr. R. Rajagopalan   President, Discovery Research, Dr. Reddy’s Laboratories Limited
Dr. A. Venkateswarlu   Director, Dr. Reddy’s Laboratories Limited
Dr. Goverdhan Mehta   Director, Indian Institute of Science, Bangalore
Dr. G. S. R. Subba Rao   Professor of Organic Chemistry, Indian Institute of Science, Bangalore
Dr. P. Balram   Professor, Molecular Biophysics Unit, Indian Institute of Science, Bangalore
Dr. D. Balasubramaniam   Director-Research, L.V. Prasad Eye Institute, Hyderabad
Dr. V. Mohan   Managing Director, M.V. Diabetes Specialties Center (P) Ltd., Madras
Dr. H. B. Chandelia   Hon. Physician, Endocrine and Metabolic Diseases, Jaslok Hospital and Research Center, Hon. Professor of Medicine and Diabetes, Grant Medical College and JJ Hospital Bombay
Dr. A. K. Ganguly   Consultant to Schering-Plough Research Institute, New Jersey, U.S.A.
Dr. K. Janardhan Reddy   Professor and Chairman, Department of Pathology, Northwestern University Medical School, Chicago, Illinois, U.S.A.
Dr. Sampath Parthasarthy   Director, Division of Research, Emory University School of Medicine, Atlanta, Georgia, U.S.A.

     Collaborations. As part of our research program, we pursue collaborations with leading institutions and laboratories all over the world. We enter into these collaborations to utilize the expertise and facilities these institutions provide. We have collaborated with the National Cancer Institute in Maryland, which is a part of the United States National Institutes of Health. We have entered into collaboration agreements with the National Cancer Institute for the screening of anti-cancer compounds.

MANUFACTURING

     We are a vertically integrated pharmaceutical company with capabilities to manufacture active pharmaceutical ingredients as well as finished dosages. In fiscal 2003, our active pharmaceutical ingredients business supplied 19.1% and 30.7% of the raw materials consumed in manufacturing our branded formulations and our generic formulations, respectively.

     The regulatory requirements in the international markets demand current Good Manufacturing Practices, or cGMP, from early stages of technology development. Currently, all our facilities are cGMP compliant and have been inspected by several regulatory authorities across the globe. We are also committed to maintaining high standards in the areas of health, safety and the environment. We believe that all our manufacturing facilities comply with the standards fixed by the regulatory authorities.

Active Pharmaceutical Ingredients and Intermediates

     The active pharmaceutical ingredients and intermediates business involves long lead times in ordering and procuring raw materials and a long credit period on sale of the final product. We therefore maintain high levels of stock to compensate for the long order replenishment cycle. The manufacturing process consumes a wide variety of raw materials that we obtain from sources that comply with the requirements of regulatory authorities in the markets to which we supply our products. Our suppliers are broad based so there is no risk arising from dependence on a single supplier. Where possible, we have also entered into annual quantity and price contracts to reduce possible risks and minimize costs.

     We procure raw materials on the basis of our requirement planning cycles. On average, we store the raw materials for no longer than six months before using them in the manufacturing process. The stages in manufacturing our products involve our workers combining raw materials through one or more chemical reactions, mixing the combinations in reactors for a set period of time under specified process conditions and then storing the products in drums. Active pharmaceutical ingredients are generally stored in controlled storage facilities before being dispatched. They generally are packaged for dispatch in sealed drums.

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Formulations

     The main difference between active pharmaceutical ingredients, formulations and generics is the form in which they are produced and the way they are packaged. While active pharmaceutical ingredients are distributed in bulk, formulations and generics are packaged in individual doses for consumption by the patient. In fiscal 2003, our active pharmaceutical ingredients operations provided 19.1% of the raw materials for our branded formulations business, with the balance being outsourced from various other suppliers. We have alternate suppliers for all our raw materials in the event we require an urgent supply or are unsatisfied with the raw materials supplied by our current supplier.

     Our manufacture of branded formulations is subject to strict quality and contamination controls throughout. Each production line consists of a series of rooms through which the product passes at different stages of its development and manufactures only one product at a specific dosage at any one time. When the ingredients have been combined, the dosages are measured and produced as pellets, capsules, coated or uncoated tablets and liquids and then packaged and quarantined to be tested for quality and contamination. The Ministries of Health of Iran, Brazil, Latvia, Romania and Ghana have successfully inspected some of our manufacturing plants. In April 2003, we commenced setting up a 900 million units formulations facility in Goa, India to meet anticipated export requirements, with an estimated outlay of Rs.315 million. The project will be financed through internal cash flows and we expect it to be completed in fiscal 2004.

Generics

     As with formulations, generics are packaged in individual doses for consumption by the patient. In fiscal 2003, our active pharmaceutical ingredients and intermediates segment provided 30.7% of raw materials for our generics business.

     Our manufacture of generics is subject to strict quality and anti-contamination controls throughout. Tablets and capsules are manufactured in dedicated modules and only one product manufactured in a module at a time. Each module has several rooms where various stages of manufacturing occur and all these rooms are served by several air-handling units, aimed at containing contamination by way of graded pressure differentials between the rooms. The equipment used is fully automatic and programmable, and is used only after it is calibrated and validated. Facilities are available for the manufacture of tablets, hard gelatin capsules and soft gelatin capsules. We manufacture generic formulations products to order. We added large batch size tableting and pellets facilities during fiscal 2003.

Diagnostics, Critical Care and Biotechnology

     For our critical care products, we manufacture most of the active pharmaceutical ingredients. The manufacturing of the formulation is undertaken at our formulations facility.

     We have a facility at Bachupalli, Andhra Pradesh, India that manufactures our biotechnology products. The manufacture of our biotechnology products involves cloning human proteins in bacteria and then extracting the proteins from the bacteria by fermentation. The facility is equipped with a cell culture laboratory for evaluation of products as well as a facility for studies of compounds and provision for the safe disposal of wastes and effluents.

COMPETITION

Active Pharmaceutical Ingredients and Intermediates (“API”)

     The global API market can broadly be divided into regulated and less regulated markets. The less regulated markets offer large opportunities with minimal entry barriers in terms of regulatory

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requirements with respect to the qualification process and intellectual property rights. The regulated markets like the United States, Europe and Japan, on the other hand, have high regulatory entry barriers in terms of cGMP and approved facilities. As a result, there is a premium for quality and regulatory compliance along with greater stability for both volumes and prices.

     The API business in India is a mature business and hence intensely competitive. The business is highly fragmented with numerous small players, as there are cheaply available technologies and low investment requirements. We compete with a number of manufacturers globally, which vary in size. Our main competitors in India are Aurobindo Pharma Limited, Ranbaxy Laboratories Limited, Sun Pharmaceuticals Limited, Zydus Cadila Limited, Hetero Drugs Limited, Divi’s Laboratories, Matrix Laboratories and Biocon India Limited.

     Our main competitors in the export market are Teva Pharmaceutical Industries Limited, Ranbaxy Laboratories Limited, Shasun Chemicals Limited and Cipla Limited.

Formulations

     We compete with different companies in different countries, depending upon therapeutic and product categories, and within each category upon dosage strengths and drug delivery. According to Operations Research Group, we are the sixth largest formulation manufacturer in India, with a market share of 2.8% for fiscal 2003. Of the top ten participants in the Indian formulations market, three are multinational corporations and the rest are Indian corporations. We believe that more multinationals are likely to enter the market once product patent protection is assured.

     Our top five competitors in the Indian market are Glaxo SmithKline Pharmaceuticals Limited, Cipla Limited, Ranbaxy Laboratories Limited, Nicholas Piramal India Limited and Sun Pharmaceuticals Industries Limited.

     In our export markets, we compete with local companies, multinational corporations and players from other emerging markets. In Russia and in most of our export markets, we believe our products occupy a niche between the less expensive local products and the more expensive products of the multinational corporations.

Generics

     Revenues and gross profit derived from the sales of generic pharmaceutical products tend to follow a pattern based on certain regulatory and competitive factors. As patents and regulatory exclusivity for brand name products expire, the first off-patent manufacturer to receive regulatory approval for generic equivalents of such products is generally able to achieve significant market penetration. As competing off-patent manufacturers receive regulatory approvals on similar products, market share, revenues and gross profit typically decline, in some cases dramatically. Accordingly, the level of market share, revenues and gross profit attributable to a particular generic product is normally related to the number of competitors in that product’s market and the timing of that product’s regulatory approval and launch, in relation to competing approvals and launches. Consequently, we must continue to develop and introduce new products in a timely and cost-effective manner to maintain our revenues and gross margins. In addition, the other competitive factors critical to the business include price, product quality, prompt delivery, customer service and reputation. Many of our competitors seek to participate in sales of generic products by, among other things, collaborating with other generic pharmaceutical companies or by marketing their own generic equivalent to their branded products. Our major competitors in generic products include Ranbaxy Limited, Teva Pharmaceutical Industries Ltd., Barr Laboratories Inc., Mylan Laboratories Inc., Andrx Corporation, IVAX Corporation and Geneva Pharmaceuticals, a division of Novartis A. G.

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Diagnostics, Critical Care and Biotechnology

     Our main competitors in the area of critical care are Dabur India Limited, Cipla Limited, Eli Lily & Co. and Aventis India Limited.

LEGAL PROCEEDINGS

Patent Challenges

     At times, following our determination that an innovator’s patent is invalid or not infringed by our products, we seek to develop generic products for sale prior to patent expiration in various countries. In the United States, to obtain generic approval for a product prior to the expiration of the innovator’s patent, we challenge the innovator’s patent. As a result of invoking such patent challenge procedures, in the ordinary course of business we often become a party to, and expect to continue to be involved in, patent litigation regarding the validity or infringement of innovator patents. In addition, in the ordinary course of business we are, and expect to continue to be, a party to patent litigation involving the extent to which manufacturing process techniques may infringe on innovator or third party process patents.

Environmental Litigation

     The Indian Council for Environmental Legal Action (the “Council”) filed a writ in 1989 under Article 32 of the Constitution of India against the Union of India and others in the Supreme Court of India for the safety of people living in the Patancheru and Bollarum areas of the Medak district of Andhra Pradesh. The Council seeks to provide clean drinking water to people living in these areas whose water supplies are affected by chemical industrial pollution. The Council is asking for relief in the nature of an order directing the Union and the State Government to avert pollution and compensate those affected by it.

     We believe it will be some time from now before there is a resolution of this environmental litigation because there are 62 industries operating in Bollarum, 32 of which discharge industrial effluent into the Nakka River. We believe that we have maintained our effluent treatment plants and treated the effluents well within the limits prescribed by the environmental authorities and have also made payment towards the compensation to be paid to farmers in this region. However, if companies that are subject to this litigation are found not to be compliant, then all companies affected by the litigation may be required to cease operations. This may affect our operations until judicial relief from a higher court is obtained from such an order. We will continue to upgrade our effluent treatment plants in accordance with the directives issued by the Pollution Control Board and comply with the directions given by the Andhra Pradesh High Court (the “High Court”) in this regard.

     The total compensation we have paid to date at the direction of the High Court is Rs.1.9 million. Such payments were made during fiscal years 1993, 1994, 1996, 1997 and 2001 and have been charged to the income statement in the year of payment. Such payments were made in full to the extent demanded from us by the High Court. Although the matter is still pending before the courts, we consider the possibility of additional liability to be remote. We cannot estimate the cost to us in the event that we are unsuccessful in this case. Even if we are discharged from this litigation, the amount already paid to the High Court will not be returned to us.

Norfloxacin Price Control Order

     We manufacture and distribute norfloxacin, a formulations product. Under the Drugs Prices Control Order (“DPCO”), the Government of India has the authority to designate a pharmaceutical product as a “specified product” and fix the maximum selling price for such product. In 1995, the government designated norfloxacin as a “specified product” and fixed the maximum selling price. We have filed a legal suit against the notification on the grounds that the government failed to comply with

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the rules of the DPCO. The matter is currently under litigation in the High Court. The High Court has granted an interim order in our favor. Accordingly, we continue to sell norfloxacin at prices in excess of the maximum selling price fixed by the government. In the event that we are unsuccessful in the litigation, we will be required to refund the sale proceeds in excess of the maximum selling price to the government. As of March 31, 2002 and 2003 this excess is estimated at Rs.148.5 million and Rs.162.4 million, respectively.

DR. REDDY’S WEBSITE

     Our Annual Report on Form 20-F and Quarterly Reports on Form 6-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website at www.drreddys.com (under the “Investors” section) as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission (the “SEC”).

4.C. Organizational structure

     Dr. Reddy’s Laboratories Limited is the parent company in our group. We have the following subsidiary companies:

                 
            Percentage of
            Direct/Indirect
        Country of   Ownership
Name of Subsidiary   Address   Incorporation   Interest

 
 
 
DRL Investments Limited   7-1-27, Ameerpet, Hyderabad, 500016, India   India     100 %
Compact Electric Limited   7-1-27, Ameerpet, Hyderabad, 500016, India   India     100 %
Zenovus Bio-Tech Private Limited   7-1-27, Ameerpet, Hyderabad, 500016, India   India     100 %(1)
Reddy Pharmaceuticals
Hong Kong Limited
  RPHL 11/F, Tower 2,The Gateway Kowloon Hong Kong   Hong Kong     100 %
OOO JV Reddy Biomed Ltd. Russia   Petrovo Dalnyeye Krasnogroski Area, 143422, Moscow Region   Russia     100 %
Reddy Antilles N.V   Landhuis Joonchi, Kaya Richard J Beaujon z/n, PB No. 837, Curacao, Netherlands Antilles   Netherlands     100 %
Reddy Netherlands B.V   Reddy Netherlands Konningslaan 34, PO Box 74658, 1070 BR, Amsterdam Netherlands   Netherlands     100 %(2)
Reddy Pharmaceuticals Singapore Pte. Ltd.   391A Orchard Road #12-01 Ngee Ann City Tower A Singapore 238873   Singapore     100 %(3)
Reddy US Therapeutics, Inc.   3065, Northwood Circle, Norcross GA 30071   U.S.A.     100 %(4)
Dr. Reddy’s Laboratories, Inc.   One Park Way Upper Saddle River, NJ 07458   U.S.A.     100 %
Dr. Reddy’s Farmaceutica do Brasil Ltda   Rua Caramuru, 417 - 4º andar - Cj. 44 Saúde CEP: 04138-001 São Paulo - SP Brazil   Brazil     100 %
Cheminor Investments
Limited
  7-1-27, Ameerpet, Hyderabad, 500016, India   India     100 %
Aurigene Discovery
Technologies Limited
  10/1, 2nd Floor, 3rd Main, Hanumanth Nagar, Bangalore-560019, India   India     100 %
Aurigene Discovery Technologies, Inc.   50 Blue Ridge Road
North Andover, MA 01845
  U.S.A.     100 %(5)
Kunshan Rotam Reddy Pharmaceutical Co. Limited(6)   Huangpujiangzhonglu Kunshan Economic and Technological Development Zone, Jiangsu province   China     51 %

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            Percentage of
            Direct/Indirect
        Country of   Ownership
Name of Subsidiary   Address   Incorporation   Interest

 
 
 
Dr. Reddy’s Laboratories (EU) Limited(7)   Riverview Road, Beverly, East Yorkshire
HU 17 Old United Kingdom
  United Kingdom     100 %
Dr. Reddy’s Laboratories (UK) Limited(8)   Riverview Road, Beverly, East Yorkshire
HU 17 Old United Kingdom
  United Kingdom     100 %(9)
Dr. Reddy’s Laboratories (Proprietary) Ltd.   PO Box 35465, Menlo Park
0102 South Africa
  South Africa     100 %(10)
Reddy Cheminor S.A.(11)   2, Pole Atlantis, 28000 Chartres, France   France     100 %

Note:

(1)   Our board of directors has recommended the merger of this subsidiary into us, effective as of April 1, 2003.
 
(2)   Indirectly owned through Reddy Netherlands B.V.
 
(3)   Indirectly owned through Reddy Antilles N.V. This subsidiary is in liquidation.
 
(4)   Indirectly owned through Reddy Antilles N.V.
 
(5)   Indirectly owned through Aurigene Discovery Technologies Limited.
 
(6)   Kunshan Rotam Reddy is a legal subsidiary as we hold a 51% stake in it; however, we account for this investment by the equity method and do not consolidate it in our financial statements.
 
(7)   Formerly known as BMS Laboratories Limited.
 
(8)   Formerly known as Meridian Healthcare Limited.
 
(9)   Indirectly owned through Dr. Reddy’s Laboratories (EU) Ltd.
 
(10)   Indirectly owned through Dr. Reddy’s Laboratories, Inc.
 
(11)   This subsidiary is in liquidation.

4.D. Property, plant and equipment

     The following table sets forth current information relating to our principal facilities and proposed facilities:

                         
    Approximate   Built up        
Location   Area   Area   Certification

 
 
 
    (Square feet)   (Square feet)        
Active Pharmaceutical Ingredients and Intermediates
                       
Bollaram, Andhra Pradesh, India
    718,504       309,387     U.S. FDA
Bollaram, Andhra Pradesh, India
    626,987       126,893     U.S. FDA
Bollaram, Andhra Pradesh, India
    252,565       197,562     U.S. FDA
Jeedimetla, Andhra Pradesh, India
    283,047       185,694     U.S. FDA
Miryalguda, Andhra Pradesh, India
    6,098,400       252,060     U.S. FDA
Pydibheemavaram, Andhra Pradesh, India
    6,044,146       190,350     U.S. FDA
Branded Formulations
                       
Bollaram, Andhra Pradesh, India
    217,729       107,600          
Bachupalli, Andhra Pradesh, India
    1,306,372       175,388     Medicine Control Council of South Africa
Pondicherry, India(1)
    86,000       30,250     None
Yanam, Pondicherry, India
    457,000       26,000     None
Diagnostics and Biotechnology
                       
Bachupalli, Andhra Pradesh, India
    174,183       91,460     ISO 9002
Drug Discovery
                       
Miyapur, Andhra Pradesh, India
    653,186       232,715     None
Georgia, United States(2)
    8,123       1,593          
Generics
                       
Bachupalli, Andhra Pradesh, India
    783,823       189,514     U.S. FDA, U.K. Medicine Control Agency and Medicine Control Council of South Africa
208-214, York Road, Battersea, London, Sw11 3sd, United Kingdom(3)
    17,000       10,000     U.K. Medicine Control Agency

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    Approximate   Built up        
Location   Area   Area   Certification

 
 
 
    (Square feet)   (Square feet)        
Riverview Road, Beverley, East Yorkshire, United Kingdom(4)
    64,904       15,179     U.K. Medicine Control Agency

(1)   Approval was obtained at the Annual General Meeting held on August 25, 2003 for the sale of this plant.
 
(2)   Facility owned by Reddy US Therapeutics, Inc.
 
(3)   Facility acquired in connection with the acquisition of Meridian Healthcare Limited on April 11, 2002 and the facility is on lease.
 
(4)   Facility acquired in connection with the acquisition of BMS Laboratories Limited on April 11, 2002.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

5.A. Operating results

Financial Data

     The following table sets forth, for the periods indicated, our consolidated net operating revenues by segment:

                                   
      Year Ended March 31,
     
Segment   2001   2002   2003   2003

 
 
 
 
      (Rs. in millions, U.S.$ in thousands)
Formulations
  Rs. 5,365.0       6,035.2       6,860.4     U.S.$ 144,337.6  
Active pharmaceutical ingredients and intermediates
    4,977.4       5,237.2       6,340.7       133,404.6  
Generics
    229.6       4,526.8       4,284.2       90,136.6  
Diagnostics, critical care and biotechnology
    342.2       429.1       428.2       9,008.6  
Drug discovery
          124.8              
Others
    60.6       269.6       156.3       3,289.6  
 
   
     
     
     
 
 
Total revenues
  Rs. 10,974.8     Rs. 16,622.7     Rs. 18,069.8     U.S.$ 380,177  

     The following table sets forth, for the periods indicated, financial data as percentages of total revenues and the increase (or decrease) by item as a percentage of the amount over the previous year. Cost of revenues and gross profit by segment are shown as a percentage of that segment’s revenues.

                                               
                                  Percentage Increase
                                  (Decrease)
          Percentage of Sales   2001   2002
          Year Ended March 31,   to   to
         
 
 
          2001   2002   2003   2002   2003
         
 
 
 
 
Income Statement Data:
                                       
Revenues by segment:
                                       
   
Formulations
    48.9 %     36.3 %     38.0 %     12.5 %     13.7 %
   
Active pharmaceutical ingredients and intermediates
    45.3       31.5       35.1       5.2       21.1  
   
Generics
    2.1       27.2       23.7       1,871.6       (5.4 )
   
Diagnostics, critical care and biotechnology
    3.1       2.6       2.4       25.4       (0.2 )
   
Drug discovery
          0.8             n.a       (100.0 )
   
Other
    0.6       1.6       0.8       344.2       (42.0 )
 
   
     
     
     
     
 
     
Total revenues
    100.0       100.0       100.0       51.5       8.7  
Cost of revenues by segment:
                                       
   
Formulations
    42.5       35.9       35.8       (4.9 )     13.4  
   
Active pharmaceutical ingredients and intermediates
    62.0       73.8       62.0       25.2       1.7  

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                                  Percentage Increase
                                  (Decrease)
          Percentage of Sales   2001   2002
          Year Ended March 31,   to   to
         
 
 
          2001   2002   2003   2002   2003
         
 
 
 
 
   
Generics
    54.6       10.7       24.7       286.0       119.0  
   
Diagnostics, critical care and biotechnology
    49.9       55.0       54.6       38.2       (1.0 )
   
Drug discovery
                             
   
Other
    121.0       42.6       98.3       56.5       33.9  
 
   
     
     
     
     
 
     
Total cost of revenues
    52.3       41.3       43.4       19.8       14.1  
Gross profit by segment:
                                       
   
Formulations
    57.5       64.1       64.2       25.3       13.8  
   
Active pharmaceutical ingredients and intermediates
    38.0       26.2       38.0       (27.5 )     75.7  
   
Generics
    45.4       89.3       75.3       3,776.5       (20.2 )
   
Diagnostics, critical care and biotechnology
    50.1       45.0       45.4       12.5       0.8  
   
Drug discovery
          100.0             n.a.       (100.0 )
   
Other
    (21.0 )     57.4       1.7       n.a.       (98.3 )
 
   
     
     
     
     
 
     
Total gross profit
    47.7       58.7       56.6       86.2       4.9  
Operating expenses:
                                       
   
Selling, general and administrative expenses
    25.7       22.1       27.8       30.1       36.9  
   
Research and development expenses
    4.6       4.4       7.6       45.8       85.4  
   
Amortization expenses
    4.4       2.9       2.3       1.1       (14.0 )
   
Foreign exchange (gain)/loss
    (0.6 )     (1.3 )     0.4       236.4       n.a.  
 
   
     
     
     
     
 
     
Total operating expenses
    34.1       28.2       38.1       25.1       46.9  
Operating income
    13.6       30.5       18.5       239.8       (33.9 )
Equity in loss of affiliates
    (0.3 )     (0.8 )     (0.5 )     314.3       (29.4 )
Other (expense) / income, net
    (3.5 )     0.9       3.8       n.a.       342.2  
Income before income taxes and minority interest
    9.8       30.6       21.8       374.6       (22.6 )
Income tax benefit / (expenses)
    (2.9 )     (0.9 )     (2.2 )     (52.1 )     158.7  
Minority interest
    (0.1 )     (0.1 )     0.0       61.7       (54.5 )
 
   
     
     
     
     
 
Net income
    6.8       29.6       19.6       563.3       (28.2 )

Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002

     Revenues

     Revenues increased by 8.7% to Rs.18,069.8 million in fiscal 2003 from Rs.16,622.7 million in fiscal 2002, primarily due to an increase in revenues from active pharmaceutical ingredients and formulations. In fiscal 2003, we received 32.4% of our revenues from North America (the United States and Canada), 35.9% from India, 11.7% from Russia and other former Soviet Union countries, 7.8% from Europe and 12.2% from other countries. Sales to North America declined 3.1% to Rs.5,852.6 million in

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fiscal 2003 from Rs.6,037.2 million in fiscal 2002 primarily due to a decline in both volume of sales and prices of fluoxetine 40 mg capsules, which in turn was attributable to increased competition following expiration of our 180-day marketing exclusivity on January 29, 2002. Sales to Russia and other former Soviet Union countries increased by 29.6% to Rs.2,107.9 million in fiscal 2003 from Rs.1,626.8 million in fiscal 2002, primarily due to an increase in both volume and sales price of formulations. Sales to Europe increased by 79.4% to Rs.1,401.0 million in fiscal 2003 from Rs.781.0 million in fiscal 2002 primarily due to our acquisition of Dr. Reddy’s Laboratories (EU) Limited (formerly BMS Laboratories Limited) and Dr. Reddy’s Laboratories (UK) Limited (formerly Meridian Healthcare Limited) (collectively, the “UK Subsidiaries”). Sales in India increased by 7.2% to Rs.6,488.6 million in fiscal 2003 from Rs.6,052.1 million in fiscal 2002, primarily due to an increase in both volume and sales price of formulations and volume of API sales. Sales returns are estimated and provided for in the year of sales. We made allowances for sales returns of Rs.193.2 million and Rs.92.1 million in fiscal 2003 and fiscal 2002, respectively.

     Formulations. In fiscal 2003, 38.0% of our total revenues was derived from the formulations segment, compared to 36.3% in fiscal 2002. Revenues in this segment increased by 13.7% to Rs.6,860.4 million in fiscal 2003 from Rs.6,035.2 million in fiscal 2002.

     Sales in India constituted 62.7% of our total formulations sales in fiscal 2003 and 66.2% in fiscal 2002. Sales of formulations in India increased by 7.8% to Rs.4,303.3 million in fiscal 2003 from Rs.3,993.1 million in fiscal 2002. The overall increase in revenues was primarily the result of increases in both volume of sales and average prices of Nise, our brand of nimesulide, Gaity, our brand of gatifloxacin, Clamp, our brand of amoxycillin and clavulanate potassium, Stamlo Beta, our brand of amlodipine and atenolol, Omez, our brand of omeprazole, and Stamlo, our brand of amlodipine besylate. This was offset by a decrease in sales volume of Ciprolet, our brand of ciprofloxacin, and Antoxid, our brand of anti-oxidants. Revenues from new products introduced in fiscal 2003 amounted to Rs.140.1 million. The major contributors were Elina, our brand of mizolastine, Mintop Forte, our brand of minoxidil, and Dynapres, our brand of tamsulosin.

     Sales outside India increased by 25.2% to Rs.2,557.1 million in fiscal 2003 from Rs.2,042.1 million in fiscal 2002. Sales of formulations to Russia constituted 65.0% of our formulation sales outside India in fiscal 2003 and 64.3% in fiscal 2002. Sales of formulations to Russia increased by 26.6% to Rs.1,661.9 million in fiscal 2003 from Rs.1,312.3 million in fiscal 2002. The increase in sales to Russia was primarily the result of a stable economy, strengthened by investments in our sales and distribution network. The major brands contributing to the increase in our sales in Russia were Ciprolet, Enam, our brand of enalapril maleate, Omez, and Ketorol, our brand of ketorolac. Sales to other CIS countries increased by 40.3% to Rs.430.4 million for fiscal 2003 from Rs.306.7 million for fiscal 2002. Sales to Ukraine, Kazakhstan and Belarus contributed significantly to the increase in sales in this region in fiscal 2003. The products that contributed to the increase in sales in this region, were Enam, our brand of enalapril maleate, Exifine, our brand of terbinafine, Omez, Ketorol and Ciprolet.

     Active Pharmaceutical Ingredients and Intermediates. In fiscal 2003, we derived 35.1% of our total revenues from this segment, compared to 31.5% in fiscal 2002. Revenues in this segment increased by 21.1% to Rs.6,340.7 million in fiscal 2003 from Rs.5,237.2 million in fiscal 2002.

     During fiscal 2003, sales in India constituted 27.6% of our revenues from this segment compared to 31.5% in fiscal 2002. Sales in India increased by 6.1% to Rs.1,749.1 million in fiscal 2003 from Rs.1,648.4 million in fiscal 2002, primarily due to an increase in sales volume of ciprofloxacin, gatifloxacin and ranitidine Hcl. This was partially offset by a decrease in sales volumes and sale prices of sparfloxacin and a decline in prices of omeprazole pellets.

     Sales outside India increased by 27.9% to Rs.4,591.6 million in fiscal 2003 from Rs.3,588.8 million in fiscal 2002. Sales in North America increased by 53.7% to Rs.2,397.7 million in fiscal 2003 from Rs.1,559.8 million in fiscal 2002, primarily due to an increase in sales of nizatidine, ranitidine

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hydrochloride (form #1) and tizanidine hydrochloride. Sales in Europe increased by 15.2% to Rs.465.9 million in fiscal 2003 from Rs.404.5 million in fiscal 2002.

     Generics. In fiscal 2003, we derived 23.7% of our total revenues from this segment, compared to 27.2% in fiscal 2002. Revenues decreased by 5.4% to Rs.4,284.2 in fiscal 2003 from Rs.4,526.8 in fiscal 2002. The decline was primarily the result of a decrease in revenues from fluoxetine 40 mg capsules due to increased competition and reduction of prices following expiry of the 180-day exclusivity for sales in the United States on January 29, 2002. Sales from fluoxetine 40 mg capsules in the United States amounted to Rs.1,789.3 for fiscal 2003 compared to Rs.3,664.5 million for fiscal 2002. This decline was partially offset by revenues from new products like tizanidine (2 mg and 4 mg), which was launched in fiscal 2002 and contributed Rs.777.8 million to our revenues in North America. As a result of our acquisition of the UK Subsidiaries, our revenues in fiscal 2003 from the United Kingdom market amounted to Rs.806.0 million.

     Diagnostics, Critical Care and Biotechnology. In fiscal 2003, we derived 2.4% of our total revenues from this segment, compared to 2.6% in fiscal 2002. Revenues in this segment decreased marginally to Rs.428.2 million in fiscal 2003 from Rs.429.1 million in fiscal 2002

     Revenues in this segment decreased primarily due to a decrease in sales of our diagnostics division by 15.2% to Rs.136.8 million in fiscal 2003 from Rs.161.4 million in fiscal 2002. This was partially offset by an increase in sales of our critical care division by 2.3% to Rs.235.5 million in fiscal 2003 from Rs.230.2 million in fiscal 2002 primarily due to increase in export sales of Mitotax, our brand of paclitaxel. Also, sales of our biotechnology division increased by 49.1% to Rs.55.9 million for fiscal 2003 from Rs.37.5 million for fiscal 2002 due to an increase in sales of Grastim, our brand of filgrastim.

     Drug Discovery. In fiscal 2003 we did not derive any revenues from this segment, compared to fiscal 2002, in which revenues from drug discovery amounted to Rs.124.8 million. This consisted primarily of Rs.107.9 million received as milestone payment from Novo Nordisk as part of our licensing agreement for the molecule DRF 2725 and amortization of upfront license fees of Rs.16.9 million.

     Others. Revenues from our other businesses constituted an insignificant portion of our total revenues for fiscal 2003 and fiscal 2002.

     Cost of Revenues

     Cost of revenues increased by 14.1% to Rs.7,838.9 million for fiscal 2003 from Rs.6,869.0 million for fiscal 2002. Cost of revenues as a percentage of total revenues was 43.4% for fiscal 2003 compared to 41.3% for fiscal 2002.

     Formulations. Cost of revenues in this segment was 35.8% of formulations revenues for fiscal 2003 as compared to 35.9% of formulations revenues for fiscal 2002. Cost of revenues as a percentage of revenues have not materially changed in fiscal 2003 as compared to fiscal 2002.

     Active Pharmaceutical Ingredients and Intermediates. Cost of revenues in this segment decreased to 62.0% of this segment’s revenues in fiscal 2003 compared to 73.8% of this segment’s revenues in fiscal 2002. The decrease in the cost of revenues as a percentage of revenues was primarily due to increased sales volumes of nizatidine, tizanidine and naproxen sodium primarily in North America, which carry higher margins than other products in this segment.

     Generics. Cost of revenues was 24.7% of this segment’s revenues in fiscal 2003 as compared to 10.7% in fiscal 2002. Cost of revenues increased to Rs.1,059.2 million in fiscal 2003 from Rs.483.6 million in fiscal 2002. The increase in cost of revenues as a percentage of sales was primarily as a result of expiry of the 180 day marketing exclusivity of fluoxetine 40mg capsules in January 2002, resulting in a reduction in volumes and average selling price per capsule. In fiscal 2003, revenues in this segment

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decreased by 5.4% while cost of revenues increased by 14%. This disparity was primarily as a result of the high margin of fluoxetine 40mg capsules during the 180 day marketing exclusivity period in fiscal 2002.

     Diagnostics, Critical Care and Biotechnology. Cost of revenues in this segment decreased marginally to 54.6% of this segment’s revenues in fiscal 2003 compared to 55.0% in fiscal 2002. This was primarily due to an increased percentage of exports in total revenues in this segment.

     Gross Profit

     As a result of the trends described above, our gross profit increased by 4.9% to Rs.10,230.9 million in fiscal 2003 from Rs.9,753.7 million in fiscal 2002. Gross margin was 56.6% in fiscal 2003 compared to 58.7% in fiscal 2002.

     Gross margin for the formulations segment increased to 64.2% in fiscal 2003, compared to 64.1% in fiscal 2002. The gross margin for the active pharmaceutical ingredients segment increased to 38.0% in fiscal 2003 from 26.2% in fiscal 2002. The gross margin for the generics segment decreased to 75.3% in fiscal 2003 as compared to 89.3% in fiscal 2002. The gross margin for the diagnostics, critical care and biotechnology segment was 45.4% in fiscal 2003 as compared to 45.0% in fiscal 2002.

     Selling, General and Administrative Expenses

     Selling, general and administrative expenditures as a percentage of total revenues was 27.8% in fiscal 2003, compared to 22.1% in fiscal 2002. Selling, general and administrative expenses increased by 36.9% to Rs.5,020.3 million in fiscal 2003 from Rs.3,667.6 million in fiscal 2002. This increase was largely due to an increase in legal and consultancy fees, software training and development, employee cost, marketing expenses and traveling expenses. Employee costs increased by 37.6% to Rs.1,304.1 million in fiscal 2003 from Rs.947.5 million in fiscal 2002, primarily due to an increased number of employees, including key recruitments at senior levels, and also due to an increase in the payment of performance bonuses. Marketing expenses increased by 12.8% to Rs.1,772.1 million in fiscal 2003 from Rs.1,570.9 million in fiscal 2002. Marketing expenses increased due to an increase in commission on export revenues and increases in bad debt expenses, special campaigns, journal advertisement and business promotion expenses and clearing and forwarding agents servicing expenses. Legal and consultancy expenses increased by Rs.361.0 million due to product patent filings and litigation expenses relating to various patent challenges as well as ANDA related submissions and corporate special projects.

     Research and Development Expenses

     Consistent with our strategy to become a research-driven global pharmaceutical company, research and development costs increased by 85.4% to Rs.1,374.9 million for fiscal 2003 from Rs.741.6 million for fiscal 2002. The increase in costs was primarily due to an expansion of our activities in the generics and API segments and increased research and development projects in the drug discovery segment during fiscal 2003. Research and development costs in our generics and API segment together increased by 163.1% to Rs.724.1 million for fiscal 2003. Research and development costs in our drug discovery segment increased by 13.8% to Rs.449.3 million for fiscal 2003.

     Amortization Expenses

     Amortization expenses decreased by 14.0% to Rs.419.4 million in fiscal 2003 from Rs.487.7 million in fiscal 2002 as a result of adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142. In accordance with this standard, we will not amortize goodwill but will test goodwill for impairment at least annually. The impact of adoption of SFAS No. 142 was partially offset by amortization of dental brands and other intangibles acquired after December 2001. In fiscal 2003, Rs.136.3 million in goodwill was impaired as a result of adoption of SFAS No. 142.

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     Foreign Exchange Gain / Loss

     Foreign exchange loss was Rs.70.1 million in fiscal 2003, compared to a foreign exchange gain of Rs.209.0 million in fiscal 2002. This was primarily due to appreciation of the Indian rupee by 2.5% against the U.S. dollar during fiscal 2003 compared to a 4.8% depreciation during fiscal 2002.

     Operating Income

     As a result of the foregoing, our operating income decreased by 33.9% to Rs.3,346.1 million in fiscal 2003 from Rs.5,065.7 million in fiscal 2002. Operating income as a percentage of total revenues was 18.5% in fiscal 2003 compared to 30.5% in fiscal 2002.

     Other Expenses / Income, Net

     For fiscal 2003 our income from other sources was Rs.683.1 million, compared to Rs.154.4 million for fiscal 2002. This increase was primarily due to an increase of Rs.228.3 million in interest income and an increase of Rs.131.3 million in export benefits resulting from an increase in our levels of exports. The increase in interest income was primarily due to an increase of Rs.1,894.2 million in bank certificates of deposit during fiscal 2003.

     Equity in Loss of Affiliates

     Losses from our equity in our affiliates decreased to a loss of Rs.92.1 million in fiscal 2003 from a loss of Rs.130.5 million in fiscal 2002. This was attributable to a decrease in both the loss and our share of the loss from Pathnet India Private Limited, our equity investee in India, and from Aurantis Farmaceutica Ltda, our equity investee in Brazil. In fiscal 2002, our entire investment in Aurantis Farmaceutica Ltda was reduced to nil due to absorption of our share of losses. The decrease in the loss of our affiliates was offset by an increase in our share of the loss from Kunshan Rotam Reddy Pharmaceutical, our joint venture in China, to Rs.66.2 million for fiscal 2003 from Rs.47.5 million for fiscal 2002.

     Income before Income Taxes and Minority Interest

     As a result of the foregoing, income before income taxes and minority interest decreased by 22.6% to Rs.3,937.2 million in fiscal 2003 from Rs.5,089.7 million in fiscal 2002. As a percentage of revenues, income before income taxes and minority interest was 21.8% of revenues in fiscal 2003 as compared to 30.6% of revenues in fiscal 2002.

     Income Tax Expense

     We recorded an income tax expense of Rs.398.1 million for fiscal 2003 compared to Rs.153.8 million for fiscal 2002. The increase in income tax was primarily due to a reduction in income exempt from tax to Rs.1,054.6 million for fiscal 2003 from Rs.1,582.3 million for fiscal 2002. Income exempt from tax is derived from export earnings exempt for tax purposes and earnings from units set up in backward areas for which we are eligible for tax concessions. In fiscal 2003, export earnings exempt for tax purposes decreased by Rs.629.2 million which was partially offset by an increase in earnings derived from units set up in backward areas by Rs.132.3 million. The increase in the enacted tax rate from 35.7% to 36.75% also contributed to the increase in income tax expense.

     Minority Interest

     Minority interest decreased by 54.7% to Rs.6.7 million for fiscal 2003 from Rs.14.8 million for fiscal 2002. The minority interest for fiscal 2002 was due to our minority interest in the profits of American Remedies. In fiscal 2003, there was no minority interest attributable to American Remedies as

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a result of our acquisition of the entire minority interest in fiscal 2002. In fiscal 2003, the minority interest represented a minority interest in the profits of OOO JV Reddy Biomed Ltd. Russia.

     Net Income

     As a result of the foregoing, our net income decreased by 28.2% to Rs.3,532.4 million in fiscal 2003 from Rs.4,921.0 million in fiscal 2002. Net income as a percentage of total revenues decreased to 19.6% in fiscal 2003 from 29.6% in fiscal 2002.

Fiscal Year Ended March 31, 2002 Compared to Fiscal Year Ended March 31, 2001

     Revenues

     Revenues increased by 51.5% to Rs.16,622.7 million in fiscal 2002 from Rs.10,974.8 million in fiscal 2001 primarily due to an increase in revenues from generic formulations, active pharmaceutical ingredients and branded formulations. In fiscal 2002, we received 36.3% of our revenues from the United States, 36.4% of our revenues from India, 9.8% of our revenues from Russia and other former Soviet Union countries, 4.7% of our revenues from Europe and 12.8% of our revenues from other countries. Sales in the United States grew 238.0% to Rs.6,037.2 million in fiscal 2002 from Rs.1,786.4 million in fiscal 2001, primarily due to revenues from the United States generics market. Sales to Russia and other former Soviet Union countries increased by 31.7% to Rs.1,626.8 million in fiscal 2002 from Rs.1,235.7 million in fiscal 2001. Sales to Europe increased by 54.9% to Rs.781.0 million in fiscal 2002 from Rs.504.3 million in fiscal 2001. Sales in India increased by 8.2% to Rs.6,052.1 million in fiscal 2002 from Rs.5,591.7 million in fiscal 2001.

     We made allowances for sales returns of Rs.72.1 million and Rs.57.3 million in fiscal 2002 and fiscal 2001, respectively. Actual returns during the same periods were Rs.111.7 million and Rs.30.7 million, respectively.

     Formulations. In fiscal 2002, we received 36.3% of our total revenues from the formulations segment, as compared to 48.9% in fiscal 2001. Revenues in this segment increased by 12.5% to Rs.6,035.2 million in fiscal 2002 from Rs.5,365.0 million in fiscal 2001. Gross margin in this segment increased to 64.1% in fiscal 2002 compared to 57.5% in fiscal 2001.

     Revenues in India constituted 66.2% of our total formulations revenue in fiscal 2002 and 69.1% in fiscal 2001. Revenue from the sales of formulations in India increased by 7.7% to Rs.3,993.1 million in fiscal 2002 from Rs.3,708.9 million in fiscal 2001. Among our existing brands, the overall increase in revenues was primarily due to the increased volume of sales of Nise, our brand of nimesulide, Stamlo, our brand of amlodipine besylate, and Omez, our brand of omeprazole. This was offset by a decrease in revenues from Ciprolet, our brand of ciprofloxacin. We launched 19 new products in fiscal 2002. New products launched in the year include Gaity, our brand of gatifloxacin, Plagril, our brand of clopidogrel and Fiona, our brand of raloxifine.

     Sales outside India increased by 23.3% to Rs.2,042.1 million in fiscal 2002 from Rs.1,656.1 million in fiscal 2001. Sales of formulations to Russia constituted 64.3% of our formulation sales outside India in fiscal 2002 and 59.9% in fiscal 2001. Sales of formulations to Russia increased by 32.2% to Rs.1,312.3 million in fiscal 2002 from Rs.992.8 million in fiscal 2001. Omez, our brand of omeprazole, Enam, our brand of enalapril maleate, Ciprolet, our brand of ciprofloxacin, and Ketorol, our brand of ketorolac, contributed to the increase in revenues in Russia and other former Soviet Union countries. This was offset by a decrease in revenues from Cetrine, our brand of cetrizine.

     Active pharmaceutical ingredients and intermediates. In fiscal 2002, we received 31.5% of our total revenues from this segment, compared to 45.3% in fiscal 2001. Revenues in this segment increased

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by 5.2% to Rs.5,237.2 million in fiscal 2002 from Rs.4,977.4 million in fiscal 2001. Gross margin in this segment decreased to 26.2% in fiscal 2002 from 38.0% in fiscal 2001.

     During fiscal 2002, sales in India constituted 31.5% of our revenue from this segment compared to 31.2% in fiscal 2001. Sales in India increased by 6.2% to Rs.1,648.4 million in fiscal 2002 from Rs.1,551.8 million in fiscal 2001. The increase in domestic revenues was primarily due to a rise in sales volume of ciprofloxacin and sparfloxacin. This was partially offset by a decrease in revenues from terbinafine attributable to reduced volume of sales and a decline in price for terbinafine. We launched 20 new products in fiscal 2002. New products introduced in the year that materially contributed to revenues in this segment include gatifloxacin and clopidogrel sesquihydrate.

     Sales outside India increased by 4.8% to Rs.3,588.8 million in fiscal 2002 from Rs.3,425.5 million in fiscal 2001. Sales in the United States decreased by 0.1% to Rs.1,559.8 million in fiscal 2002 from Rs.1,560.6 million in fiscal 2001. Sales in Europe decreased by 19.4% to Rs.404.5 million in fiscal 2002 from Rs.501.9 million in fiscal 2001. The increase in export revenues was primarily due to an increase in sales of nizatidine, ciprofloxacin and ranitidine. However, this was offset to some extent by a decrease in sales of terbinafine and sertraline.

     Generics. In fiscal 2002, this segment accounted for 27.2% of our total revenues as compared to 2.1% in fiscal 2001. Revenues increased by 1,871.6% to Rs.4,526.8 in fiscal 2002 from Rs.229.6 in fiscal 2001. Gross margin in this segment increased to 89.3% in fiscal 2002 from 45.4% in fiscal 2001.

     The substantial growth in revenues and gross margin in this segment was primarily due to revenues from fluoxetine 40mg capsules, for which the U.S. FDA granted us 180 days marketing exclusivity during fiscal 2002. Sales from fluoxetine amounted to Rs.3,664.5 for fiscal 2002. This volume of sales may not continue in subsequent fiscal years as marketing exclusivity has ended and therefore our revenues and gross margins in this segment may not be sustainable.

     Diagnostics, critical care and biotechnology. In fiscal 2002, we received 2.6% of our total revenues from this segment compared to 3.1% in fiscal 2001. Revenues in this segment increased by 25.4% to Rs.429.1 million in fiscal 2002 from Rs.342.2 million in fiscal 2001. Gross margin in this segment decreased to 45.0% in fiscal 2002 from 50.1% in fiscal 2002.

     Revenues in this segment increased largely due to an increase in sales of our critical care products by 18.6% to Rs.230.2 million in fiscal 2002 from Rs.194.1 million in fiscal 2001. This was primarily due to an increase in sales volumes of Cytogem, our brand of gemcitabine, and Pamired, our brand of pamidronate. This was partially offset by a decrease in sales volume of Dacotin, our brand of oxaliplatin. During fiscal 2002, we launched Lomtin, our brand of lomustine, and Tabi, our brand of bicalutamide. Revenues from sales in our diagnostics division increased by 9.0% to Rs.161.4 million in fiscal 2002 from Rs.148.1 million in fiscal 2001. This was primarily due to an increase in the volume of sales of Velocit. We also expanded our biotechnology division and launched our new product Grastim, our brand of filgrastim, during fiscal 2002. Revenues from this product amounted to Rs.37.5 million in fiscal 2002.

     Drug discovery. In fiscal 2002, revenues from drug discovery amounted to Rs.124.8 million. This consists of Rs.107.9 million as a milestone payment from Novo Nordisk as part of our licensing agreement for the molecule DRF 2725 and amortization of upfront license fees of Rs.16.9 million. We recognized no revenue from drug discovery in fiscal 2001.

     Other. Revenues from our other business include income from services, which we recognize when the services are performed. However, these did not constitute a significant portion of our total revenues in fiscal 2002 and fiscal 2001.

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     Cost of Revenues

     Cost of revenues increased by 19.8% to Rs.6,868.9 million for fiscal 2002 from Rs.5,735.8 million for fiscal 2001. Cost of revenues as a percentage of total revenues was 41.3% for fiscal 2002 compared to 52.3% for fiscal 2001.

     Formulations. Cost of revenues in the formulations segment amount to 35.9% of revenues for that segment as compared to 42.5% for fiscal 2001. Cost of revenues as a percentage of sales declined due to a 2.0% reduction in bulk drug prices, a 2.0% increase in margin from sales of new products, a 0.1% increase of revenue from sales of existing brands, a 1.8% increase in revenue from exports, and a 0.7% increase in revenue from outsourcing of finished formulations We outsourced Bio E, Ovista, GLA, Antoxid and Styptovit. We believe that outsourcing of certain finished formulations is a cost effective proposition as compared to production at our own manufacturing facilities.

     Active pharmaceutical ingredients and intermediates. Cost of revenues in this segment increased to 73.8% of this segment’s revenues in fiscal 2002 compared to 62.0% of the segment’s revenue in fiscal 2001. The costs of raw materials as a percentage of revenue in this segment increased to 46.5% of the segment’s revenue in fiscal 2002 from 37.4% in fiscal 2001. This increase was principally attributable to a sharp reduction in the selling prices of doxazosin, terbinafine and sertraline.

     Generics. Cost of revenues was 10.7% of this segment’s revenues in fiscal 2002 as compared to 54.6% in fiscal 2001. Cost of revenue increased by 286.0% to Rs.483.6 million in fiscal 2002 from Rs.125.3 million in fiscal 2001. The significant decrease in the cost of revenue as percentage of this segments revenues was primarily due to the 180 days exclusivity received for fluoxetine 40 mg capsules which started in August 2001 and ended in January 2002.

     Diagnostics, critical care and biotechnology. Cost of revenues in this segment increased to 55.0% of this segment’s revenues in fiscal 2002 compared to 49.9% in fiscal 2001. This increase was primarily due to a decline in selling prices of most products in the Critical Care and Diagnostic Divisions as well as an increase in low-margin institutional sales.

     Gross Profit

     As a result of the trends described above, our gross profit increased by 86.2% to Rs.9,753.7 million in fiscal 2002 from Rs.5,239.0 million in fiscal 2001. Gross margin was 58.7% in fiscal 2002 compared to 47.7% in fiscal 2001.

     Selling, General and Administrative Expenses

     Selling, general and administrative expenditures as a percentage of total revenues were 22.1% in fiscal 2002, compared to 25.7% in fiscal 2001. Selling, general and administrative expenses increased by 30.1% to Rs.3,667.6 million in fiscal 2002 from Rs.2,818.9 million in fiscal 2001. This increase was largely due to an increase in employee cost, marketing expenses, software development fees, legal and professional fees and provision for doubtful accounts receivable. Employee costs increased by 83.4% to Rs.947.5 million in fiscal 2002 from Rs.516.5 million in fiscal 2001, primarily due to recruitment, including several senior level executives in our United States subsidiaries, Dr. Reddy’s Laboratories, Inc., annual wage adjustments and an increase in field staff. Marketing expenses increased by 15.1% to Rs.1,570.9 million in fiscal 2002 from Rs.1,364.9 million in fiscal 2001. Marketing expenses increased due to an increase in activities at our representative offices in various countries. Software development expenses were incurred towards acquiring software user licenses. Legal expenses increased due to ANDA filings that we made requiring us to defend patent cases in the United States and other patent matters relating to drug discovery. Professional expenses were incurred in designing the business plan and organization structure for Aurigene Discovery Technologies Private Limited, our subsidiary in the field of proteomics, structural biology, structure-based-drug-design and medicinal chemistry.

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     Research and Development Expenses

     Research and development costs increased by 45.8% to Rs.741.6 million for fiscal 2002 from Rs.508.8 million for fiscal 2001. The increase was primarily due to increased in-house research activities as well as increased research activities in Reddy US Therapeutics, Inc., our subsidiary in the United States.

     Amortization Expenses

     Amortization expenses increased by 1.1% to Rs.487.7 million in fiscal 2002 from Rs.482.3 million in fiscal 2001 due to amortization of the cost of brands acquired in that year. However, amortization as a percentage of sales decreased to 2.9% for fiscal 2002 from 4.4% in fiscal 2001. This decrease was primarily due to the amortization of non-compete fees during fiscal 2001. The fees have now been completely written down.

     Foreign Exchange Gain/Loss

     Foreign exchange gain was Rs.208.9 million in fiscal 2002 in comparison with foreign exchange gain of Rs.62.1 million in fiscal 2001. Gains on the dollar proceeds of the ADS offering contributed significantly to the increase in foreign exchange gain for fiscal 2002. An increase in sales outside India also contributed to the increase.

     Operating Income

     As a result of the foregoing, our operating income increased by 239.8% to Rs.5,065.7 million in fiscal 2002 from Rs.1,491.0 million in fiscal 2001. Operating income as a percentage of total revenue was 30.5% in fiscal 2002 compared to 13.6% in fiscal 2001.

     Other Expenses/Income, Net

     For fiscal 2002, our income from other sources was Rs.154.4 million, as compared to an expense of Rs.387.0 million for fiscal 2001. This was primarily due to decrease in interest expenses resulting from settlement of debts, to the extent of Rs.277.0 million. In addition, we earned an interest income of Rs.71.9 million on the deposit of our ADS offering proceeds. Also, there was an increase in the entitlement to export benefits of Rs.71.0 million resulting from an increase in exports.

     Equity in Loss of Affiliates

     Our equity in the loss of our affiliates increased to Rs.130.5 million in fiscal 2002 from Rs.31.5 million in fiscal 2001. This was attributable to an increase in the share of the loss from Kunshan Rotam Reddy Pharmaceutical, our equity investee in China, and from Pathnet India Private Limited, our equity investee. In addition, our investment in Aurantis Farmaceutica Ltda, our equity investee in Brazil, has been written down to nil due to absorption of our share of losses.

     Income Before Income Taxes and Minority Interest

     As a result of the foregoing, income before income taxes and minority interest increased by 374.6% to Rs.5,089.7 million in fiscal 2002 from Rs.1,072.5 million in fiscal 2001. As a percentage of revenues, income before income taxes and minority interest is 30.6% of revenues in fiscal 2002 as against 9.8% of revenues in fiscal 2001.

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     Income Tax Benefit/Expense

     For fiscal 2002, we recorded an income tax expense of Rs.153.8 million as against Rs.321.4 million for fiscal 2001. The decrease in income tax was primarily due to the increase in income exempt from tax to Rs.1,582.3 million for fiscal 2002 from Rs.270.3 million for fiscal 2001. Income exempt from tax represents export earnings exempt for tax purposes and earnings derived from units set up in backward areas for which we are eligible for tax concessions under the local laws. In fiscal 2002, export earnings exempt for tax purposes increased by Rs.1,136.9 million and an increase in earnings derived from units set up in backward areas for which we are eligible for tax concessions by Rs.138.3 million. The weighted deduction of research and development expenses and the reduction in enacted tax rate from 39.6% to 35.7% also contributed to a reduction in the effective tax expense.

     Minority Interest

     Minority interest increased by 60.9% to Rs.14.8 million for fiscal 2002 from Rs.9.2 million for fiscal 2001. This was due to our minority interest in the profits of American Remedies. This represents 13% of profits attributable to the minority interest up to October 26, 2001, the date of our acquisition of the entire minority interest in American Remedies. We issued 56,694 (113,388 post split) shares pursuant to the scheme of amalgamation to the minority shareholders of American Remedies for this acquisition.

     Net Income

     As a result of the above our net income increased by 563.3% to Rs.4,921.0 million in fiscal 2002 from Rs.741.9 million in fiscal 2001. Net income as a percentage of total revenue increased to 29.6% in fiscal 2002 from 6.8% in fiscal 2001.

5.B. Liquidity and capital resources

     We have primarily financed our operations through cash flows generated from operations and to a lesser extent through borrowings for working capital. Our principal liquidity and capital needs are for making investments, the purchase of property, plant and equipment, regular business operations and drug discovery.

     Our principal sources of short-term liquidity are our existing cash and internally generated funds, which we believe are sufficient to meet our working capital requirements and anticipated capital expenditures over the near term. As part of our growth strategy, we continue to review opportunities to acquire companies, complementary technologies or product rights. To the extent that any such acquisitions involve cash payments, rather than the issuance of shares, we may need to borrow from banks or raise additional funds from the debt or equity markets.

     The following table summarizes our statements of cash flows for the periods presented:

                                   
      Year Ended March 31,
     
      2001   2002   2003   2003
     
 
 
 
      (Rs. in millions, U.S.$ in thousands)
Net cash provided by/(used in):
                               
 
Operating activities
  Rs. 617.1     Rs. 4,652.8     Rs. 4,366.7     U.S.$ 91,873  
 
Investing activities
    (689.4 )     (1,532.9 )     (1,954.7 )     (41,126 )
 
Financing activities
    (87.7 )     1,421.8       (153 )     (3,219 )
 
Effect of exchange rate changes on cash
    81.5       88.7       (95 )     (1,999 )
 
 
   
     
     
     
 
Net increase/(decrease) in cash and cash equivalents
  Rs. (78.5 )   Rs. 4,680.4     Rs. 2,164     U.S.$ 45,530  
 
 
   
     
     
     
 

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Cash Flow From Operating Activities

     Net cash provided by operating activities was Rs.4,366.7 million and Rs.4,652.8 million for fiscal 2003 and fiscal 2002, respectively. Net cash provided by operating activities consisted primarily of net income, depreciation and amortization and changes in working capital.

     During fiscal 2003, our cash inflow increased due to improved collection in our active pharmaceutical ingredients and intermediates and formulations segments, resulting in a decrease of Rs.159.7 million in our accounts receivable , compared to an increase of Rs.1,451.6 million for fiscal 2002. The increase in fiscal 2002 was primarily due to the increase in our revenues.

     During fiscal 2003, our cash outflow increased due to an increase of Rs.440.9 million in our inventories as compared to an increase of Rs.365.1 million in fiscal 2002, primarily due to an increase in our business operations and product pipeline. Further, the government of India announced that a Value Added Tax (“VAT”) was being considered for implementation in April 2003. Due to uncertainty as to whether India would implement the VAT, or the effect of such tax system on businesses, we had higher inventories of finished goods in our formulations segment. In April 2003, the government of India decided not to implement the VAT.

     Trade accounts payable increased by Rs.585.0 million and Rs.364.3 million for fiscal 2002 and fiscal 2003, respectively. This was primarily due to an increase in material creditors.

Cash Flow From Investment Activities

     Cash used by investment activities was Rs.1,954.7 million in fiscal 2003, primarily accounted for by expenditures in property, plant and equipment, and cash paid for the acquisition of BMS Laboratories Ltd. and Merdian Healthcare (UK) Ltd.

     Cash used by investment activities was Rs.1,532.9 million in fiscal 2002, primarily due to expenditures in property, plant and equipment and intangibles. Expenditures on intangibles were mainly related to our acquisition of Group Pharma brands, our acquisition of marketing know-how and our purchase of Nectar brands.

Cash Flows From Financing Activities

     Net cash used by financing activities for fiscal 2003 was Rs.153.0 million, primarily due to dividend payments.

     Cash flow from financing activities for fiscal 2002 was Rs.1,421.8 million, primarily due to proceeds from our issuances of ADSs. This was offset to some extent by repayment of short-term loans and long term loans and by dividend payments. The principal repayments were with respect to debentures, foreign currency loans and rupee term loans prior to their contractual maturities.

     The following table provides a list of our principal debts outstanding as of March 31, 2003:

                           
      Principal Amount   Annual Interest Rate
     
 
      (in millions)        
Debt
                       
Working capital loans
  Rs. 146.3     U.S.$ 3.1       10.5%
Long term loan (including current portion)
    184.7       3.9     2 %* to 12%
 
   
     
         
 
Total
  Rs. 331.0     U.S.$ 7.0          
 
   
     
         

*  Loan received at a subsidized rate of interest from Indian Renewable Energy Development Agency Limited promoting use of alternative sources of energy.

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     Subject to obtaining certain regulatoy approvals, there are no legal or economic restrictions on the transfer of funds between us and our subsidiaries or for the transfer of funds in the form of cash dividends, loans or advances.

     The maturities of our short term borrowings vary from one month to approximately one year. With respect to our long-term debt, the maturity is ten years. Our objective in determining the borrowing maturity is to ensure a balance between flexibility, cost and the continuing availability of funds. All of our debts except for short-term working capital loans from banks are at fixed rates of interest.

     Cash and cash equivalents are held in Indian rupees, U.S. dollars, U.K. pounds sterling, Singapore dollars, Brazilian reais, Euros, Netherlands guilders, Russian roubles, Chinese yuan and Hong Kong dollars.

     As of March 31, 2002 and 2003, we committed to spend approximately Rs.821.9 million and Rs.356.8 million, respectively, under agreements to purchase property and equipment and other capital commitments. The amount is net of capital advances paid in respect of such purchases and is expected to be funded from internal accruals.

5.C. Research and development, patents and licenses, etc.

Research and Development

     Our research and development activities can be categorized into several categories, which parallel the activities in our principal areas of operations:

    Formulations, where our research and development activities are directed at the development of product formulations, process validation, bioequivalency testing and other data needed to prepare a growing list of drugs that are equivalent to numerous brand name products for sale in the emerging markets.
 
    Active Pharmaceutical Ingredients and Intermediates, where our research and development activities concentrate on development of chemical processes for the synthesis of active pharmaceutical ingredients for use in our generics and formulations segments and for sales in the emerging and developed markets.
 
    Generics, where our research and development activities are directed at the development of product formulations, process validation, bioequivalency testing and other data needed to prepare a growing list of drugs that are equivalent to numerous brand name products whose patents and U.S. FDA exclusivity periods have expired or are nearing expiry in the regulated markets.
 
    Drug Discovery.

     In fiscal 2001, 2002 and 2003, we incurred Rs.508.8 million, Rs.741.6 million and Rs.1374.9 million, respectively, towards research and development activities.

Patents, Trademarks and Licenses

     We have filed and been issued several patents in our principal areas of operations: drug discovery, active pharmaceutical ingredients and intermediates and generics. We expect to continue to file patent applications seeking to protect our innovations and novel processes in several countries, including the United States. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may even be challenged, invalidated or circumvented by our competitors. In addition, such patent rights may not prevent our competitors from developing, using or

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commercializing products that are similar or functionally equivalent to our products. We have filed over 450 trademarks with the Registrar of Trademarks in India. We also have non-U.S. trademarks in other countries in which we do business.

     We market several products under licenses and registered trademarks in several countries where we operate.

5.D. Trend information

     Formulations. During fiscal 2003, in India, we grew by 16.3% compared with the average industry growth rate of 5.6% (Operations Research Group, March Moving Annual Total report for the 12 month period ending March 31, 2003). This was primarily due to a general slowdown in the growth rates of key therapeutic segments and the uncertainty as to whether India would implement a new VAT system, as announced by the government of India in March 2003, and as to the effect of such tax system on businesses.

     The competitive environment in the emerging markets is changing with most countries moving towards recognizing product patents. This has the effect of shrinking the window of opportunity in terms of new product launches. In order to compete effectively in such a challenging environment, we are focusing on our key therapeutic categories on a global basis while at the same time focusing on niche segments. As part of our global business development program, we will continue to explore in-licensing and other opportunities to strengthen our product pipeline. In addition, we will continue to consolidate and expand our presence in Russia and other countries of the former Soviet Union. We are also preparing for the launch of our oncology portfolio in Brazil, one of the largest markets in Latin America.

     Active Pharmaceutical Ingredients and Intermediates. In this segment, we are focused on the regulated markets of North America and Europe. In the United States, we will continue to expand our product pipeline to capitalize on the opportunities presented by numerous products coming off patent over the next few years. Further, in Europe, we intend to step up our business development effort and anticipate launch of additional products during fiscal 2004.

     Generics. During fiscal 2003, we completed the acquisition of two companies in the United Kingdom. These acquisitions added to our revenue base and also provided a platform for expanding into other European markets. In early 2003, we launched two products through our own sales and marketing network in the United States. We also entered into a 15-year strategic alliance with Leiner Health Products, LLC to develop and market over the counter products in the United States. While we anticipate the launch of new products in the United States and the United Kingdom, the success of our existing products is contingent upon the extent of competition in the generics market, which we anticipate will continue to be significant. Further, we expect that we will continue to expand our ANDA pipeline.

     Diagnostics, Critical Care and Biotechnology. We expect that we will continue to market our existing products and develop additional products. The success of our existing products is contingent upon the extent of competition in this segment.

Stock Based Compensation

     In the first quarter of fiscal 2004, we adopted the fair value accounting retroactive method as described in FSAB Statement No. 148, Accounting for Stock Based Compensation — Transition and Disclosure, for accounting of stock option compensation. In accordance with the retroactive method of adoption, all prior periods presented will be modified to reflect the compensation cost that would have been recognized had the recognition provisions of Statement 123 been applied to all awards granted to employees after January 1, 1995.

Recent Accounting Pronouncements

     In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of certain other obligations undertaken in issuing a guarantee. The recognition requirements are effective for guarantees issued or modified after December 31, 2002. Adoption of FIN No. 45 did not have any impact on the consolidated

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financial statements of the Company. The disclosure provisions of FIN No. 45 have been adopted by the Company for the year ended March 31, 2003.

     In November 2002, the EITF issued Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Alternatively, the Company may elect to report the change in accounting as a cumulative-effect adjustment. Adoption of EITF Issue No. 00-21 will not have a material impact on the consolidated financial statements of the Company.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are applicable for fiscal periods beginning after December 15, 2002. The Company uses the intrinsic value based method of APB Opinion No. 25 to account for its employee stock based compensation plans. The disclosure provisions of SFAS No. 148 have been adopted by the Company for the year ended March 31, 2003.

     In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities- an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 is applicable to all variable interest entities created after January 31, 2003. In respect of variable interest entities created before February 1, 2003, FIN No. 46 will be applicable from fiscal periods beginning after June 15, 2003. Adoption of FIN No. 46 will not have any impact on the consolidated financial statements of the Company.

     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company is evaluating the impact of adoption of SFAS No. 149 on its consolidated financial statements.

     On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both liabilities and Equity. The Statement requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer.

     The Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 will not have any impact on the consolidated financial statements of the Company.

Critical Accounting Policies

     Critical accounting policies are those most important to the portrayal of our financial condition and results and that require the most exercise of our judgment. We consider the policies discussed under the following paragraphs to be critical for an understanding of our financial statements. Our significant accounting policies and application of these are discussed in detail in Note 2 to the Consolidated Financial Statements.

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     Accounting Estimates

     While preparing financial statements we make estimates and assumptions that affect the reported amount of assets, liabilities, disclosure of contingent liabilities at the balance sheet date and the reported amount of revenues and expenses for the reporting period. Financial reporting results rely on our estimate of the effect of certain matters that are inherently uncertain. Future events rarely develop exactly as forecast and the best estimates require adjustments, as actual results may differ from these estimates under different assumptions or conditions. We continually evaluate these estimates and assumptions based on the most recently available information. Specifically, we make estimates of:

  Ø   the useful life of property, plant and equipment;
 
  Ø   impairment of long-lived assets, including identifiable intangibles and goodwill;
 
  Ø   our future obligations under employee retirement and benefit plans;
 
  Ø   allowances for sales returns;
 
  Ø   allowances for doubtful accounts receivable; and
 
  Ø   inventory write-downs.

     We depreciate property, plant and equipment over their useful lives using the straight-line method. Estimates of useful life are subject to changes in economic environment and different assumptions. Assets under capital leases are amortized over their estimated useful life or lease term as appropriate. We review long-lived assets, including identifiable intangibles and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual outcomes could vary significantly from such estimates. Factors such as changes in the planned use of buildings, machinery or equipment or lower than anticipated sales for products with capitalized rights could result in shortened useful lives or impairment.

     In accordance with applicable Indian laws, we provide a defined benefit retirement plan (“Gratuity Plan”) covering certain categories of employees. The Gratuity Plan provides a lump sum payment to vested employees at retirement or termination of employment, in an amount based on the respective employee’s last drawn salary and the years of employment with us. Liabilities with regard to the Gratuity Plan are determined by an actuarial valuation, based upon which we make contributions to the Gratuity Fund. In calculating the expense and liability related to the plans, assumptions are made about the discount rate, expected rate of return on plan assets, withdrawal and mortality rates and rate of future compensation increases as determined by us, within certain guidelines. The assumptions used may differ materially from actual results, resulting in a probable significant impact to the amount of expense recorded by us.

     Allowances for sales returns are estimated and provided for in the year of sales. Such allowances are made based on our historical trends. We have the ability to make a reasonable estimate of the amount of future returns due to our large volume of homogeneous transactions and historical experience with similar types of sales of products. In respect of new products launched or expected to be launched, the sales returns are not expected to be different from the existing products as such products relate to the theraupeutic categories where established products exist and are sold in the market. Further, we evaluate

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the sales returns of all products at the end of each reporting period and necessary adjustments, if any, are made. However, no significant revisions have been determined to be necessary to date.

     We make allowance for doubtful accounts receivable, including receivables sold with recourse, based on the present and prospective financial condition of the customer and ageing of the accounts receivable after considering historical experience and the current economic environment. Actual losses due to doubtful accounts may differ from the allowances made. However, we believe that such losses will not materially affect our consolidated results of operations.

     We provide for inventory obsolescence, expired inventory and inventories with carrying values in excess of realizable values based on our assessment of future demands, market conditions and our specific inventory management initiatives. If the market conditions and actual demands are less favorable than our estimates, additional inventory write-downs may be required. In all cases, inventory is carried at the lower of historical costs or realizable value.

     Litigation

     We are involved in various lawsuits, claims, investigations and proceedings, including ANDA filings and other patent and commercial matters, which arise in the ordinary course of our business. However, we evaluate specific risks related to the foregoing based on current conditions and, at the balance sheet date, there are no such matters pending that we expect to be material in relation to our business.

     Revenue Recognition

     Product Sales. Revenue is recognized when significant risks and rewards in respect of ownership of the products are transferred to the customer, generally stockists or formulations manufacturers, and when the following criteria are met:

    Persuasive evidence of an arrangement exists;
 
    The price to the buyer is fixed and determinable; and
 
    Collectibility of the sales price is reasonably assured.

     Revenue from domestic sales of formulation products is recognized on dispatch of the product to the stockist by our consignment and clearing and forwarding agent. Revenue from domestic sales of active pharmaceutical ingredients and intermediates is recognized on dispatch of products to customers, from our factories. Revenue from export sales is recognized when significant risks and rewards are transferred to the customers, generally on shipment of products.

     We have entered into marketing arrangements with certain marketing partners for the sale of goods. Under such arrangements, we sell generic products to our marketing partners at the price agreed in the arrangement. Revenue is recognized on these transactions upon delivery of products to the marketing partners, as all of the conditions under SAB 101 are then met. Subsequently, the marketing partners remit an additional amount to us upon sales made by them to the end customer. Such amount is determined as per the terms of the arrangement and is recognized by us when the realization is certain under the guidance given in SAB 101.

     License Fees. Non-refundable milestone payments are recognized in the statement of income when earned, in accordance with the terms prescribed in the license agreement, and where we have no future obligations or continuing involvement pursuant to such milestone payment. Non-refundable up-front license fees are deferred and recognized when the milestones are earned, in proportion that the amount of each milestone earned bears to the total milestone amounts agreed in the license agreement. As the upfront license fees are a composite amount and cannot be attributed to a specific molecule, they are amortized over the development period. The milestone payments during the development period increase as the risk involved decreases. The agreed milestone payments reflect the progress of the development of the molecule and may not be spread evenly over the development period. Further, the milestone payments are a fair representation of the extent of progress made in the development of these molecules. Hence, the upfront license fees are amortized over the development period in proportion to the milestone payments received.

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     Revenue from services is recognized according to the terms of the contracts when the services are performed.

     Income Taxes

     Deferred taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits the future realization of which is uncertain.

     Functional currency

     Our foreign subsidiaries have different functional currencies, determined based on the currency of the primary economic environment in which they operate. For subsidiaries that operate in a highly inflationary economy, the functional currency is determined as the Indian rupee. Due to various subsidiaries operating in different geographic locations, a significant level of judgment is involved in evaluating the functional currency for each subsidiary.

     In respect of our foreign subsidiaries which market our products in their respective countries/regions, the functional currency has been determined as Indian rupee, based on an individual and collective evaluation of the various economic factors listed below.

     The operations of these foreign subsidiaries are largely restricted to importing finished goods from us in India, sale of these products in the foreign country and remitting the sale proceeds to us. The cash flows realized from sale of goods are readily available for remittance to us and cash is remitted to us on a regular basis. The costs incurred by these subsidiaries are primarily the cost of goods imported from us. The financing of these subsidiaries is done directly or indirectly by us.

     In respect of other subsidiaries, the functional currency is determined as the local currency, being the currency of the primary economic environment in which they operate.

     Income Taxes

     As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We are subject to tax assessments in each of these jurisdictions. A tax assessment can involve complex issues, which can only be resolved over extended time periods. Additionally, the provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. Although we have considered all these issues in estimating our income taxes, there could be an unfavorable resolution of such issues that may affect our results of operations.

     We also assess the temporary differences resulting from differential treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recognized in our consolidated financial statements. We also assess our deferred tax assets on an ongoing basis by assessing our valuation allowance we consider the future taxable incomes and the feasibility of tax planning initiatives. If we estimate that the deferred tax assets cannot be realized at the recorded value, a valuation allowance is created with a charge to the statement of income in the period in which such assessment is made.

5.E. Off-Balance Sheet Arrangements

     Guarantees. We adopted the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. The Interpretation requires that we recognize the fair value of guarantee and indemnification arrangements issued or modified by us after December 31, 2002, if these arrangements are within the scope of that Interpretation. In addition, under previously existing generally accepted accounting principles, we continue to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses can be estimated.

     For details of the guarantees provided, see Note 26 – “Commitments and Contingencies” of notes to consolidated financial statements under Item 18.

5.F. Tabular Disclosure of Contractual Obligations

     The following summarizes our contractual obligations as of March 31, 2003 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

                                         
    Payments Due by Period
    (rupees in millions)
   
            Less than                   After
Financial Contractual Obligations   Total   1 year   2-3 years   4-5 years   5 years
   
 
 
 
 
Long term debt
    184.7                          
....current portion*
    143.8       143.8                    
....Non current portion
    40.9             14.3       13.3       13.3  


*   Includes a loan note in the principal amount of Rs.136.7 million which is payable on demand.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A. Directors and senior management

Directors

     Our directors and executive officers, their respective ages and positions as of March 31, 2003 are as follows:

             
Name(1)
  Age (in yrs)  
Position
Dr. K. Anji Reddy(2)     63     Chairman
Mr. G. V. Prasad(2),(3)     42     Chief Executive Officer and Executive Vice Chairman
Mr. Satish Reddy Kallam(2),(4)     35     Chief Operating Officer and Managing Director
Mr. Anupam Puri     57     Director
Dr. A. Venkateswarlu(5),(6)     63     Director
Prof. Krishna G. Palepu     50     Director
Dr. Omkar Goswami     46     Director

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Name(1)
  Age (in yrs)     Position
Mr. P.N. Devarajan     67     Director
Dr. P. Satyanarayana Rao     70     Director
Mr. Ravi Bhoothalingam     56     Director
Dr. V. Mohan     48     Director

(1)   Except for Dr. K. Anji Reddy, Mr. G.V. Prasad, Mr. Satish Reddy Kallam and Dr. A Venkateswarlu, all of the directors are independent directors as defined under the New York Stock Exchange Corporate Governance guidelines and the U.S. Sarbanes-Oxley Act of 2002.
 
(2)   Full-time directors.
 
(3)   Son-in-law of Dr. Anji Reddy.
 
(4)   Son of Dr. Anji Reddy.
 
(5)   Dr. A. Venkateswarlu, former President of Dr. Reddy’s Research Foundation, currently is a Technical Advisor to Dr. Reddy’s Research Foundation. Hence, he is not considered an independent director under New York Stock Exchange Corporate Governance guidelines.
 
(6)   Dr. A Venkateswarlu retired by rotation at the Annual General Meeting held on August 25, 2003. He has not been replaced.

Executive Officers

     We have a Management Council, which consists of various business and functional heads and is a top management body of our company. As of March 31, 2003, the Management Council consists of:

             
Name
  Age  
Position
Mr. G. V. Prasad(1)     42     Chief Executive Officer and Executive Vice Chairman
Mr. Satish Reddy Kallam(2)     35     Chief Operating Officer and Managing Director
Mr. Abhijeet Mukherjee(3)     44     President (Custom Chemical Service–Strategic Business Unit)
Mr. Adam Levitt     46     Executive Vice-President (Specialty Business)
Mr. Andrew J. Miller     47     General Counsel (Dr. Reddy Laboratories, Inc.)
Mr. Arun Sawhney     48     President (Bulk- Strategic Business Unit)
Mr. Cameron Reid     49     President (Business Development)
Mr. Mark R. Hartman     45     Executive Vice-President (Generic-Strategic Business Unit)
Dr. R. Rajgopalan     52     President (Drug Discovery)
Mr. Saumen Chakraborty     41     Senior Vice President (Strategic Human Resources)
Mr. Timothy C. Crew     42     Executive Vice-President (Business Development)
Dr. Uday Saxena     45     Chief Scientific Officer
Mr. V. S. Vasudevan     51     Chief Financial Officer
Dr. Jayaram Chigurupati(4)     39     Executive Vice-President (Emerging Business)

(1)   Son-in-law of Dr. K. Anji Reddy.
 
(2)   Son of Dr. K. Anji Reddy.
 
(3)   Joined in January 2003.
 
(4)   Resigned as of April 3, 2003. He has not been replaced.

In addition, the following new member joined the Management Council after March 31, 2003:

             
Name
  Age  
Position
Mr. Jaspal S. Bajwa(1)     50     President (Branded Formulations- Strategic Business Unit)

(1)    Joined in April 2003.

Biographies

     Directors

     Dr. Anji Reddy is the Founder and Chairman of the Board of Directors of Dr. Reddy’s Laboratories. He is also the Founder of Dr. Reddy’s Research Foundation and Dr. Reddy’s Foundation for Human and Social Development. Dr. Anji Reddy has a Bachelor’s degree in Science from Andhra Christian College, Guntur. He received his B.Sc. (Tech) in Pharmaceutical Science from Bombay University and Ph.D. from the National Chemical Laboratory, Pune. Dr. Anji Reddy had six years experience with Indian Drugs and Pharmaceuticals Limited (“IDPL”) in the manufacture and implementation of new technologies in bulk drugs. Dr. Anji Reddy is a member of both the Board of Trade and the Prime Minister’s Taskforce on pharmaceuticals and knowledge-based industries. The

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Government of India bestowed the Padmashri Award upon Dr. Anji Reddy for his distinguished service in the field of trade and commerce. In addition to positions held with our subsidiaries, he is a Director in Diana Hotels Limited and Biotech Consortium India Limited.

     Mr. G. V. Prasad is a member of the board of directors of Dr. Reddy’s Laboratories Limited and serves as Executive Vice-Chairman and CEO. He was the Managing Director of Cheminor Drugs Ltd., a Dr. Reddy’s Group Company, prior to its merger with Dr. Reddy’s Laboratories Limited. Mr. Prasad has a Bachelor of Science degree in Chemical Engineering from Illinois Institute of Technology, Chicago, U.S.A. and an M.S. in Industrial Administration from Purdue University, U.S.A. He is also an active member of several associations including the National Committee on Drugs & Pharmaceuticals. In addition to positions held with our subsidiaries, he is a Director of Diana Hotels Limited, Nipuna Services Ltd., Dr. Reddy’s Exports Ltd., Vijaya Productions Ltd., Diana Projects and Engineers Ltd., Green Park Hotels and Resorts Ltd. and Leiner Health Products, LLC. Mr. Prasad joined Dr. Reddy’s group of companies in 1989 as Managing Director of Cheminor Drugs Limited.

     Mr. Satish Reddy is Managing Director and Chief Operating Officer of Dr. Reddy’s Laboratories Limited. He has a Master of Science degree in Medicinal Chemistry from Purdue University, U.S.A. and a Bachelor of Technology degree in Chemical Engineering from Osmania University, Hyderabad. Mr. Reddy is the Chairman of the Confederation of Indian Industries for Andhra Pradesh. He is also Director of Diana Hotels Limited and Dr. Reddy’s Exports Ltd., in addition to certain of our subsidiaries and joint ventures. Mr. Reddy joined us as Executive Director in charge of the manufacturing operations of active pharmaceutical ingredients and formulations, research and development activities, and new product development.

     Mr. Anupam Puri retired from McKinsey & Company in late 2000. Mr. Puri was a Director and played a variety of other leadership roles during his 30-year career there. Before joining McKinsey & Company, Mr. Puri was Advisor for Industrial Development to the President of Algeria, and consultant to General Electric’s Center for Advanced Studies. He holds a Bachelor of Arts degree in Economics from St. Stephen’s College, Delhi University, and Master of Arts and M. Phil. degrees from Oxford University. Mr. Puri is now on the Board of Godrej Consumer Products Limited (Audit and Human Resource Committee member), ICICI Bank Limited, and Mahindra British Telecom Limited (Audit Committee member), and Mahindra and Mahindra Limited.

     Dr. A. Venkateswarlu was formerly President of Dr. Reddy’s Research Foundation and was also responsible for our corporate research and development. Dr. Venkateswarlu has a Bachelor of Science degree in chemistry from WGB College in India, a Master of Science degree in organic chemistry from Andhra University in India and a Ph.D. in organic chemistry from Wayne State University and the University of Pennsylvania. He has also conducted post-doctoral research in organic synthesis at Harvard University. Dr. A. Venkateswarlu currently holds the post of Governing Council member of Dr. Reddy’s Research Foundation and trustee of Dr. Reddy’s Foundation for Human and Social Development.

     Professor Krishna G. Palepu is the Ross Graham Walker Professor of Business Administration at the Harvard Business School. He holds the title of Senior Associate Dean, Director of Research. Professor Palepu has a Masters degree in physics from Andhra University, an M.B.A. from the Indian Institute of Management and a Ph.D. from the Massachusetts Institute of Technology. He is also a recipient of an honorary M.A. from Harvard, and an honorary Doctorate from the Helsinki School of Economics. Professor Palepu teaches finance, control, and strategy in Harvard’s M.B.A. and Executive programs. He has published numerous research papers and is also the co-author of “Business Analysis & Valuation: Text and Cases.” Professor Palepu serves as a consultant to a wide variety of businesses, and is on the boards of Satyam Computer Services Limited and Exetor Group.

     Dr. Omkar Goswami has been a senior consultant and chief economist at the Confederation of Indian Industry since August 1998. He has also served as editor of Business India, associate professor at the Indian Statistical Institute, Delhi, and as an honorary advisor to the Ministry of Finance. Dr. Goswami

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holds a Bachelor of Economics degree from St. Xavier’s College, Calcutta University, a Master of Economics degree from the Delhi School of Economics, Delhi University and a Doctor of Economics degree from Oxford University. He is also a director of Infosys Technologies Limited (Audit and Compensation Committee member), DSP-Merrill Investment Managers Limited and Infrastructure Development Finance Company Limited.

     Mr. P.N. Devarajan has previously served as a Director of Cheminor Drugs Limited. He is also currently a member of the Planning Board of Madhya Pradesh, Chairman of Research at the Council of National Environment Engineering Research Institute, member of the Assessment Committee of the Council of Scientific and Industrial Research and a member of the Research Council of National Chemical Laboratory. He has previously served as a Director of the Bank of Baroda, a member of the Central Board of Directors of the Reserve Bank of India and Group President and consultant of Reliance Industries Limited. He is currently a Director on the Boards of Kothari Petro-Chemicals Limited, Sriram Tower Tech Limited, Shiram PPR Technologies Limited, Sriram Investments Limited, Infinite Softcom Solutions Ltd. and Tropical Technologies Limited.

     Dr. P. Satyanarayana Rao has been a Director since 1994. Dr. Rao is a professor emeritus of cardiology at Osmania Medical College, honorary cardiologist at Nizam’s Institute of Medical Sciences and a consultant cardiologist at St. Theresa’s Hospital. He has a Bachelor of Science degree, a Bachelor of Medicine and Surgery degree and a Doctor of Medicine degree from Andhra University and a Diplomat Cardiology degree from the University of Copenhagen. He also serves as the Director of Sarathi Studios Private Limited and is Chairman of Anil Prabhas Private Limited.

     Mr. Ravi Bhoothalingam has served as the President of The Oberoi Group and was responsible for the operations of the Group worldwide. He has also served as the Head of Personnel at BAT Plc, Managing Director of VST Industries Ltd, and as a Director of ITC Limited. Mr. Bhoothalingam holds a Bachelor of Science degree in physics from St. Stephens College, Delhi and a Master of experimental psychology degree from Gonville and Caius College, Cambridge University. He is also a Director of Nicco Internet Ventures Pvt. Limited and Sona Koyo Steering Systems Ltd. (Audit Committee member).

     Dr. V. Mohan has been a Director since 1996. He is also the Chairman and Managing Director of M.V. Diabetes Specialties Centre Private Limited, a Director of Madras Diabetes Eye Research Centre Private Limited and the President of the Madras Diabetes Research Foundation. He is also a visiting professor of Diabetology at Sri Ramachandra Medical College and a professor of International Health at the University of Minnesota, U.S.A. Dr. Mohan holds a Bachelor of Medicine degree, Doctor of Medicine degree, Ph.D. and a Doctor of Science degree from Madras University.

     Executive Officers

     Mr. Abhijit Mukherjee joined us in January 2003 as President of the Custom Chemicals Services Strategic Business Unit. Having graduated with a degree in Chemical Engineering from the Indian Institute of Technology, Kharagpur, Mr. Abhijit brings with him 23 years of experience. He previously held numerous positions of responsibility at Atul Limited. His last assignment was as President, Bulk Chemicals and Intermediates Business and Managing Director, Amal Products Limited. Prior to joining Atul Limited, Abhijit worked with Hindustan Lever Limited for 13 years, where he was instrumental in the commissioning of Jammu FCU, several process development projects in Quest (Unilever Company), and commissioning of a sulphur based sulphonation plant.

     Mr. Adam Levitt is Executive Vice President of our Specialty Product Business. He has 22 years of experience in sales and marketing. Prior to joining us in July, 2002, Mr. Levitt served as Senior Vice President - Brand Business for Schein Pharmaceutical. Thereafter, Mr. Levitt served as a consultant to Élan Pharmaceutical Technologies, the drug delivery business unit of Elan Pharma. Mr. Levitt started his career with Becton Dickinson after graduating from the Massachusetts College of Pharmacy with a B.S. degree in Pharmacy. He held a number of sales and marketing positions of increasing responsibility

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during this time. He then left to join Enzymatics, a biotechnology start up, where he was responsible for establishing the sales and marketing organization and assisted in growing the company. He went on to finish his graduate studies and completed a Masters program in Business Management at Johns Hopkins University.

     Mr. Andrew J. Miller has been General Counsel of our United States subsidiary, Dr. Reddy Laboratories, Inc., since August 2002. He is a senior partner at Budd Larner Rosenbaum Greenberg & Sade, P.C., our regular external legal counsel and has represented us since the formation of our first United States subsidiary in 1992. In fiscal 2003 we paid U.S.$7.2 million in fees and U.S.$0.7 million in disbursements to Budd Larner Rosenbaum Greenberg & Sade, P.C. for legal services rendered. Mr. Miller is a graduate of the University of Michigan Law School where he was an Editor of Michigan’s Journal of Law Reform. He holds a B.A. from the State University of New York at Buffalo, where he graduated summa cum laude in 1977 and was elected a member of Phi Beta Kappa.

     Mr. Arun Sawhney joined us in 2001 as President of our Bulk Actives Strategic Business Unit from Max-Gb Ltd. where he was Chief Executive Officer. Prior to Max-Gb Ltd., he headed the Global Business Development function at Ranbaxy Laboratories Limited. He has also been employed as Manager of Exports with Hindustan Ciba Geigy and as Regional Sales Manager with Bayer India, earlier in his career. Mr. Sawhney holds an M.B.A. from the International Management Institute, New Delhi, and has a Bachelor’s degree in Commerce from Sydenham College of Commerce and Economics, Mumbai.

     Mr. Cameron Reid has been President of Dr. Reddy’s Laboratories, Inc. since 1992. Mr. Reid has a Bachelor of Science degree in chemistry and geology from the University of Calgary. He is also a graduate of the executive management program at Insead in France.

     Mr. Mark R. Hartman is Executive Vice President, in charge of our generics business. In this position, he heads the commercialization team of this business. Mr. Hartman has 17 years of experience in the pharmaceutical industry, with the past five years at Watson Laboratories. His last three positions at Watson were Director of Marketing for Trade and Managed Care, Executive Director, Sales and Marketing – Watson Generics, and Vice President, Sales and Marketing, Watson Generics. Mr. Hartman was involved in multiple product and company acquisitions during his tenure with Watson. Prior to Watson, he was Director of Marketing for Alpharma USPD, Marketing Manager at Geneva Pharmaceuticals, and held various brand and generic sales and marketing positions during his 10 years at Lederle Laboratories. Mr. Hartman holds a B.S. degree in Dairy Science from Virginia Tech, Virginia. Mr. Hartman joined us in March 2002.

     Dr. R. Rajagopalan is the President of our Discovery Research Strategic Business Unit. He started his professional career with Hoechst India Limited and was associated with their drug discovery program in various capacities for over two decades. He was the principal research scientist in Hoechst when he chose to join us to head our Pharmacology research and development group in 1994. Dr. Rajagopalan was instrumental in building the discovery biology capabilities at Discovery Research and was made Senior Vice-President, Discovery Biology in 2000. He was appointed President in 2001. Dr. Rajagopalan graduated in 1970 from Madras University with a Bachelor of Science degree with Chemistry as a major, and went on to obtain a Master’s degree in Pharmacology at the same university. He undertook Doctoral study in pharmacology at the Bombay University. Dr. Rajagopalan has several research publications and patents to his credit. In addition, he is associated with several academic and professional organizations.

     Mr. Saumen Chakraborty joined us in 2001 as Head of Strategic Human Resources. Saumen started his career with CMC, followed by C-DOT, Eicher Limited and Tecumseh Products Company. He has held positions in fields other than Human Resources in each one of these organizations and has hands-on experience in information technology, total quality management, finance and accounts, management consultancy, corporate communications and manufacturing operations. Saumen is a management graduate from the Indian Institute of Management (“IIM”), Ahmedabad. He graduated with a BSc honors

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(Physics) from Visva-Bharati University and was the valedictorian of his class. Saumen has experience in both operational and management areas, heading consultancy assignments in IT and engineering sectors. Saumen has been a member of various industry forums including CII National Committee on Industrial Relations and CII State Council.

     Mr. Timothy C. Crew is Executive Vice President in Corporate Business Development located in the United States. He leads the identification, negotiation and consummation of external commercial opportunities in the United States and other regulated markets. Tim is also involved with the human resources and finance functions within the United States. Tim joined us following a 12-year stint with Bristol-Myers Squibb, where he held a number of positions of increasing responsibility in sales, marketing, strategic planning and business development. His last three key executive positions there included Senior Director of Marketing and Business Development at Apothecon (a subsidiary of Bristol-Myers Squibb), Senior Director of U.S. Managed Health Care Marketing, and Senior Director of Global Marketing. Prior to joining Bristol-Myers Squibb, Tim served as a Captain in the United States Army. He holds a B.A. in Economics from Pomona College, California, and an M.B.A. in Marketing and Management from Columbia University, New York.

     Dr. Uday Saxena is our Chief Scientific Officer. Uday has been the President and CEO of Reddy US Therapeutics, Inc. one of our subsidiaries since 2002. Reddy US Therapeutics, Inc., located in Atlanta, Georgia, is engaged in drug discovery in the areas of diabetes, inflammation and cardiovascular disease. Uday has been in the pharmaceutical/biotech industry for over a decade. From 1997 to early 2000, Uday was Vice President of Research and a corporate officer and a member of the executive committee at AtheroGenics, Inc. a publicly traded biopharmaceutical company located in Alpharetta, Georgia. While at AtheroGenics, he directed several drug discovery and early development programs that lead to identification of novel compounds currently in late phase clinical trails for restenosis, atherosclerosis and chronic inflammation. Prior to that, he was at Parke-Davis Research Division, Ann Arbor, Michigan, where he was responsible for establishing a discovery program in inflammation and atherogenesis. He is an elected fellow of the Council on Arteriosclerosis, American Heart Association since 1991. He has over 45 full publications in peer-reviewed journals and invited review articles. He is also an inventor on several patents related to cardiovascular disease and inflammation. He obtained his Ph.D. from Memorial University of Newfoundland in Canada and was a post-doctoral fellow at Columbia University in New York.

     Mr. V. S. Vasudevan is our Chief Financial Officer. He has been with us since 1986. Apart from the integration of American Remedies Limited, Cheminor Drugs Limited and Standard Equity Fund Limited, Vasudevan has spearheaded our two IPOs in India as well as our Global Depository Receipts and American Depository Receipts issues. He is the Director of Compact Electric Ltd., a subsidiary of ours, and has handled company takeovers and brand acquisitions. Vasudevan has been at the head of our finance team prior to and post merger, under centralized as well as Strategic Business Unit arrangements. He heads the finance, investors relations, and legal and secretarial functions.

     Mr. Jaspal S. Bajwa joined us in April 2003 as the President of the Branded Formulations Strategic Business Unit. Mr. Bajwa brings with him 26 years of diverse experience in the consumer and healthcare products industry having worked with two global leaders in Asia Pacific, Europe and North America. He has a Bachelor’s degree in Food Technology and an M.B.A. from IIM, Ahmedabad. He started his career with Nestle, the world’s largest food company. After spending 15 years with Nestle as a Sales and Marketing professional, including a 3 year stint at the corporate headquarters at Switzerland, he exited as the Chief of Marketing in India. Subsequently he spent over 10 years in Bausch & Lomb, where he held several senior management positions, including Managing Director of Bausch & Lomb, India/SAARC and Head of the Canadian subsidiary of the parent company. Most recently, Mr. Bajwa was the Executive Director and Chief Operating Officer of Marico Industries Ltd.

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6.B. Compensation of directors and executive officers

Directors’ Remuneration

     General. The maximum amount of remuneration payable in aggregate to our directors is limited by the Indian government. A director who is in our full-time employment may be paid remuneration either by way of a monthly payment or at a specified percentage of our net profits or partly by one way and partly by the other, provided that except with the approval of the Government of India, such remuneration may not exceed 5% of the net profits for one such director and if there is more than one such director, 10% for all of them together. Further, the total remuneration to all full-time and non-full time directors is restricted to 11% of our company’s net profits. Any change in the remuneration of the directors requires approval of our shareholders at the general meeting.

     Full-Time Directors. With respect to our Chairman, Chief Executive Officer and Chief Operating Officer (who we refer to as our “full-time directors”) compensation is divided into base salary, commission and benefits. The categories are determined based on the experience level and achievements of the director. The remuneration committee of directors initially recommends compensation for a particular director. The board then approves the recommendation. The level of benefits awarded to directors must also be submitted to our shareholders for approval. Our shareholders have approved the salary, benefits and maximum amount of commission for each of our full-time directors. Our Chief Operating Officer and Chief Executive Officer are each entitled to receive a maximum commission of up to 0.5% of our net profit at the end of the fiscal year. Our Chairman is entitled to receive a maximum commission of up to 1.0% of our net profit at the end of the fiscal year. The remuneration committee, which is composed of independent directors, recommends the commission for our Chairman, Chief Executive Officer and Chief Operating Officer within the limits of 1%, 0.5% and 0.5%, respectively. During the fiscal year ended March 31, 2003, the full-time directors were paid the following amounts as compensation:

                                 
Name of Director   Compensation in rupees in thousands

 
    Salary   Benefits   Commission   Total
Dr. K. Anji Reddy
  Rs. 1,800     Rs. 244     Rs. 44,167     Rs. 46,211  
Mr. G. V. Prasad
    1,080       254       22,084       23,418  
Mr. Satish Reddy
    1,080       254       22,084       23,418  

     Non-Full Time Directors. Each of our non-employee directors receive an attendance fee of Rs.5,000 (U.S.$105.20) for every Board meeting they attend. In the fiscal year ended March 31, 2003, we paid an aggregate of Rs.370,000 (U.S.$7,784.56) to our non-employee directors. Non-full time directors are also eligible to receive a commission on our net profit. Our shareholders have approved a commission limit of 0.5% for all non-full time directors in a year. The Board determines the entitlement of each of the non-full time directors to a commission. For the fiscal year ended March 31, 2003, non-full time directors were entitled to commissions of Rs.10,960,000 (U.S.$230,591.20) in the aggregate.

     Seven non-full time directors, who are each members of the Audit Committee, were paid commissions of Rs.1,429,500 (U.S.$30,075.74) each, and one non-full time director, who is not a member of the Audit Committee, was paid a commission of Rs.953,000 (U.S.$20,050.49).

     Total Compensation. Total compensation to our full-time and non-full time directors for fiscal 2003 was Rs.104,377,000 (U.S.$2,196,023.56), which represents approximately 3% of our net profits.

     Stock Options to Directors. We introduced the Dr. Reddy’s Employee Stock Option Scheme, 2002 in fiscal 2002. Our full-time directors are not eligible to participate in this plan. None of the non-full time directors have been granted any options under this plan.

     During fiscal 2003, the following management council members were issued options:

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    No. of Options                        
Name of   granted in fiscal                        
Executive Officer   2003   Grant Date   Grant Price   Expiry Date

 
 
 
 
Adam Levitt
    36,000     31-Jul-02     911.00     31-Jul-10
Arun Sawhney
    7,700     9-May-02     1063.00     9-May-11
Mark R. Hartman
    60,000     9-May-02     1063.00     9-May-10
Dr. R. Rajgopalan
    8,200     9-May-02     1063.00     9-May-11
Saumen Chakraborty
    5,500     9-May-02     1063.00     9-May-11
Dr. Uday Saxena
    80,270     31-Jul-02     911.00     31-Jul-08
V. S. Vasudevan
    5,740     9-May-02     1063.00     9-May-11

The foregoing management council members were the only key executives who were issued options during fiscal 2003.

Employment Arrangements for Employees

     Compensation to all our employees is determined through standard-form appointment letters issued at the time of employment. Thereafter raises are determined through a performance apprisal system, depending on our profitability. The standard provisions of each appointment letter include a probation period on commencement of employment, during which time employment may be terminated by either party without providing notice or reason. The appointment letter also provides the amount of salary and benefits the employee will receive as well as a confidentiality provision and a non-compete provision applicable during the course of the employee’s employment with us.

     We provide certain standard benefits to our employees, including rent for accommodation or house rent allowance, medical reimbursements (including coverage for the employee’s family), leave travel assistance, personal accident insurance, contributions to a provident fund gratuity benefit to certain categories of employees and Superannuation benefit to our senior officers.

     We also have an employee stock option scheme. The scheme is applicable to all of our employees and employees and directors of our subsidiaries. The scheme is not applicable to promoter directors, promoter employees and persons holding 2% or more of our outstanding share capital. The Compensation Committee of the Board of Directors awards options pursuant to the scheme based on the employee’s performance appraisal. Some employees have also been granted options upon joining us.

     Executive compensation

     The following table presents the annual compensation paid for services rendered to us for fiscal 2003 and stock options held by our directors and officers as of May 13, 2003:

                                 
            No. of Stock                
Name   Compensation   Options held*   Grant Price Rs.   Expiry Date

 
 
 
 
    (Rs. in thousands)                        
Mr. G. V. Prasad(1)
    23,418                      
Mr. Satish Reddy Kallam(1)
    23,418                      
Mr. Adam Levitt(2)
    12,951       36,000       911.00       (6 )
 
            8,000       883.00       (6 )
Mr. Andrew J. Miller(3)
    13,055       30,000       977.30       1/28/07  
 
            7,000       883.00       (6 )
Mr. Arun Sawhney
    5,183       7,700       1,063.02       (6 )
 
            12,000       883.00       (6 )

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            No. of Stock                
Name   Compensation   Options held*   Grant Price Rs.   Expiry Date

 
 
 
 
    (Rs. in thousands)                        
Mr. Cameron Reid
    19,321       50,000       977.30       1/28/07  
 
            25,000       883.00       (6 )
 
            12,000       883.00       (6 )
Mr. Mark R. Hartman
    18,222       60,000       1,063.02       (6 )
 
            10,000       883.00       (6 )
Dr. R. Rajgopalan
    3,500       8,200       1,063.02       (6 )
 
            8,000       883.00       (6 )
Mr. Saumen Chakraborty
    3,853       5,500       1,063.02       (6 )
 
            10,000       883.00       (6 )
Mr. Timothy C. Crew
    19,032       44,500       977.30       1/28/07  
 
            12,000       883.00       (6 )
Dr. Uday Saxena
    9,993       80,270       911.00       (6 )
 
            10,000       883.00       (6 )
Mr. V. S. Vasudevan
    3,924       5,740       1,063.02       (6 )
 
            10,000       883.00       (6 )
Mr. Abhijeet Mukherjee(4)
    599       0                

In addition, the following table presents the annual compensation paid for services rendered to us and stock options held by our new member of the Management Council, who joined after March 31, 2003:

                                 
            No. of Stock                
Name   Compensation   Options held   Grant Price Rs.   Expiry Date

 
 
 
 
    (Rs. in thousands)                        
Mr. Jaspal S. Bajwa(5)
    0       10,000       883.00       (6 )

(1)   Not eligible for grant of options under Stock Option Scheme.
 
(2)   Joined in August, 2002.
 
(3)   Joined in August, 2002.
 
(4)   Joined in January, 2003.
 
(5)   Joined in April, 2003.
 
(6)   The expiry period is 5 years from the date of vesting. 25% of the options vest each year over a period of 4 years.

     Retirement benefits

     We provide the following benefit plans to our employees:

     Gratuity benefits: In accordance with applicable Indian laws, we provide a defined benefit retirement plan (the “Gratuity Plan”) covering all of our permanent employees. The Gratuity Plan provides a lump sum payment to vested employees at retirement or termination of employment in an amount based on the respective employee’s last drawn salary and the years of employment with us. Effective September 1, 1999, we established Dr. Reddy’s Laboratories Gratuity Fund (the “Gratuity Fund”). Liabilities with regard to the Gratuity Plan are determined by an actuarial valuation, based upon which we make contributions to the Gratuity Fund. Trustees administer the contributions made to the Gratuity Fund. The amounts contributed to the Gratuity Fund are invested in specific securities as mandated by law and generally consist of federal and state government bonds and the debt instruments of government-owned corporations.

     In respect of certain of our other employees, the gratuity benefit is provided through annual contribution to a fund managed by the Life Insurance Corporation of India (“LIC”). Under this scheme, the settlement obligation remains with us, although the LIC administers the fund and determines the

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contribution premium required to be paid by us. The net contribution amounts recognized by us were Rs.7.28 million, Rs.16.38 million and Rs.23.96 million during the years ended March 31, 2001, 2002 and 2003, respectively.

     Superannuation benefits: Apart from being covered under the Gratuity Plan described above, our senior officers also participate in a superannuation, a defined contribution plan administered by the LIC. We make annual contributions based on a specified percentage of each covered employee’s salary. We have no further obligations under the plan beyond our annual contributions. We contributed Rs.5.28 million, Rs.11.09 million and Rs.19.39 million to the superannuation plan during the years ended March 31, 2001, 2002 and 2003, respectively.

     Provident fund benefits: In addition to the above benefits, all employees receive benefits from a provident fund, a defined contribution plan. Both the employee and employer each make monthly contributions to the plan each equal to 12% of the covered employee’s salary. We have no further obligations under the plan beyond our monthly contributions. We contributed Rs.31.59 million, Rs.43.37 million, and Rs.47.45 million to the provident fund plan during the years ended March 31, 2001, 2002 and 2003, respectively.

6.C. Board practices

Board Composition

     Our Articles of Association require us to have a minimum of three and a maximum of 20 directors. As of March 31, 2003, we had 11 directors on our board, of which eight are non-full time directors, as described in the table below. Seven out of the eight non-full time directors are independent as defined under the New York Stock Exchange Corporate Governance guidelines and the U.S. Sarbanes-Oxley Act of 2002.

     The Indian Companies Act and our articles of association require that at least two-thirds of our directors be subject to re-election by our shareholders in rotation. At every annual general meeting of our company (the “Annual General Meeting”), one-third of the directors who are subject to re-election must retire and, if eligible for re-election, may be reappointed at the Annual General Meeting. Our managing director and other full time directors are directors who are not subject to re-election.

     The terms of each of our directors and their expiration dates are provided in the table below.

         
    Expiration of Current    
Name   Term of Office   Term of Office

 
 
Dr. K. Anji Reddy (1)   July 13, 2006   5 years
Mr. Satish Reddy Kallam (1)   September 30, 2007   5 years
Mr. G. V. Prasad (1)   January 30, 2006   5 years
Dr. P. Satyanarayana Rao (2)(3)   Retirement by rotation   Due for retirement by rotation in 2004
Dr. V. Mohan (2)(3)   Retirement by rotation   Due for retirement by rotation in 2005
Dr. Omkar Goswami (2)(3)   Retirement by rotation   Due for retirement by rotation in 2006
Mr. Ravi Boothalingam (2)(3)   Retirement by rotation   Due for retirement by rotation in 2005
Mr. P. N. Devarajan (2)(3)   Retirement by rotation   Due for retirement by rotation in 2004
Dr. A. Venkateswarlu (2)   Retirement by rotation   Retired in August 2003
Dr. Krishna J. Palepu (2)(3)   Retirement by rotation   Due for retirement by rotation in 2004
Mr. Anupam Puri (2)(3)   Retirement by rotation   Due for retirement by rotation in 2005

(1)   Full time Director.
 
(2)   Non-full time Director.
 
(3)   Independent director, as defined under the New York Stock Exchange Corporate Governance guidelines and the U.S. Sarbanes-Oxley Act of 2002.

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     Committees appointed by the Board focus on specific areas and take decisions within the authority delegated to them. The Committees also make specific recommendations to the Board on various matters from time-to-time. All decisions and recommendations of the Committees are placed before the Board for information or approval. We have seven Board-level Committees:

    Audit Committee.
 
    Remuneration Committee.
 
    Compensation Committee.
 
    Nomination Committee.
 
    Shareholders’ Grievances Committee.
 
    Management Committee.
 
    Investment Committee.

     The terms of the contracts with our full-time directors are disclosed to all the shareholders in the notice of the general meeting.

     The non-full time directors retire by rotation and seek reappointment by the shareholders at the Annual General Meeting.

     None of our independent directors are eligible to receive any termination benefits.

Committees of the Board

     Audit Committee. Our management is primarily responsible for our internal controls and the financial reporting process. Our statutory auditors are responsible for performing independent audits of our financial statements in accordance with generally accepted auditing standards and for issuing reports based on such audits. The Board of Directors has entrusted the Audit Committee to supervise these processes and thus ensure accurate and timely disclosures that maintain the transparency, integrity and quality of financial control and reporting.

     The Audit Committee consists of the following seven non-full time Directors: Dr. Omkar Goswami (Chairman), Mr. Anupam Puri, Dr. A. Venkateswarlu (who retired in August 2003), Prof. Krishna G. Palepu, Mr. P. N. Devarajan, Dr. P. Satyanarayana Rao and Mr. Ravi Bhoothalingam. Each of them except Dr. A. Venkateswarlu is independent as defined under the New York Stock Exchange Corporate Governance guidelines and the U.S. Sarbanes-Oxley Act of 2002.

     Prof. Krishna G. Palepu and Mr. Anupam Puri joined the Audit Committee on October 24, 2002. The Company Secretary is the secretary of the Audit Committee. The Chief Executive Officer, Chief Financial Officer and Chief Intenral Auditor are permanent invitees at all the Audit Committee meetings. The statutory auditors of our company were present at all the Audit Committee meetings during the year.

     This Committee met on four occasions during fiscal 2003. The agendas for the Audit Committee meetings, among other things, included the following items:

    Detailed presentation of performance, including budget versus actuals, segregated at the level of each strategic business unit (“SBU”), and business performance of each SBU including working capital management.
 
    Internal audit, control matters and risk management, including action-taken reports.
 
    The status of SAP and other IT systems that assist financial and operational reporting, and how these could be further optimized to increase speed of reporting and create improved management information systems.

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    Discussion with statutory auditors, including new accounting standards and policies relating to Indian as well as United States accounting principles and practices.
 
    Detailed operational and financial risk appraisals, as well as risks relating to legal compliance.

The primary responsibilities of the Audit Committee are to:

    Effectively supervise the financial reporting process;
 
    Review the quarterly and annual financial results before placing them before the Board;
 
    Review the adequacy of our internal controls, including the plan, scope and performance of the internal audit function;
 
    Review our financial and other operational risk management policies;
 
    Hold discussions with statutory auditors on the nature and scope of audits, and any views that they have about the financial control and reporting processes;
 
    Ensure compliance with accounting standards and with listing requirements with respect to the financial statements;
 
    Recommend the appointment and removal of external auditors and their fees;
 
    Review the independence of auditors;
 
    Ensure that adequate safeguards have been taken for legal compliance both for our company and our other domestic as well as foreign subsidiaries; and
 
    Review related party transactions.

     Remuneration Committee. Our Remuneration Committee consists of the following four non-full time directors: Mr. P. N. Devarajan (Chairman), Dr. A. Venkateswarlu (who retired in August 2003), Dr. Omkar Goswami and Mr. Ravi Bhoothalingam. All of them are independent as defined under the New York Stock Exchange Corporate Governance guidelines and the U.S. Sarbanes-Oxley Act of 2002. The head of our human resources function is the secretary of this Committee.

     The Renumeration Committee met on one occasion during fiscal 2003.

     The Remuneration Committee considers and recommends the compensation of the full-time directors and executives above Vice President level and also reviews the remuneration package offered by us to different grades of its employees. While deciding the remuneration of a full-time director, the Remuneration Committee takes into account the following:

    Our financial position,
 
    Trends in the industry,
 
    Appointee’s qualification,
 
    Experience,

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    Past performance,
 
    Past remuneration, etc.

     In determining remuneration packages, the Renumeration Committee strikes a balance between our interests and the interests of the shareholders.

     This Committee met once during fiscal 2003 to discuss our recruitment and compensation strategy.

     Compensation Committee. The Compensation Committee administers our employee stock option scheme (“ESOS”) and consists of the following directors: Mr. Ravi Bhoothalingam (Chairman), Dr. A. Venkateswarlu (who retired in August 2003), Mr. G. V. Prasad, Mr. P. N. Devarajan and Mr. Satish Reddy. The Company Secretary is the secretary of this Committee.

     The Compensation Committee met on three occasions during fiscal 2003 and all members of the Committee attended each meeting.

     Nomination Committee. The Nomination Committee was constituted on October 24, 2002. The Nomination Committee consists of the following directors: Mr. Anupam Puri (Chairman), Prof. Krishna G Palepu and Mr. Ravi Bhoothalingam.

     The role of the Nomination Committee is to:

    Establish the procedure for selection of nominees for our Board;
 
    Shortlist nominees for induction to our Board;
 
    Recommend appointment of members to the Board for its consideration; and
 
    Plan long term succession planning for Executives and Independent Directors.

No meetings were held by this Committee during fiscal 2003.

     Shareholders’ Grievance Committee. Our Shareholders’ Grievance Committee consists of the following directors: Dr. P. Satyanarayana Rao (Chairman), Mr. G. V. Prasad and Mr. Satish Reddy. Dr. P. Satyanarayana Rao, the Chairman of this Committee, is a non-full time director and is independent as defined under the New York Stock Exchange Corporate Governance guidelines and the U.S. Sarbanes-Oxley Act of 2002.

     The Company Secretary is the secretary of the Shareholders’ Grievance Committee. The Shareholders’ Grievance Committee met four times during fiscal 2003 and all members were present at each meeting.

     The major discussions and recommendations of the Shareholders’ Grievance Committee were:

    Review of investor complaints and their redressal;
 
    Review of the queries received from investors;
 
    Review of corporate actions related work; and
 
    Outsourcing of investor services for investors holding shares in physical form.

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     Management Committee. Our Management Committee consists of the following full time directors: Dr. K. Anji Reddy (Chairman), Mr. G. V. Prasad and Mr. Satish Reddy.

     The Company Secretary is the secretary of the Management Committee. The Management Committee reviews strategic business unit operations and capital budgets and gives necessary direction to the senior management team based on strategy approved by the Board. This Committee held six meetings during fiscal 2003.

     Investment Committee. Our Investment Committee is comprised the following directors: Mr. G. V. Prasad (Chairman), Dr. A. Venkateswarlu (who retired in August 2003) and Mr. Satish Reddy.

     The Company Secretary is the secretary of this Committee. The Investment Committee reviews our investment proposals and ongoing projects and recommends investment proposals to the Board. This Committee held three meetings during fiscal 2003.

6.D. Employees

     The following table sets forth the number of our employees during fiscal 2001, 2002 and 2003.

                                         
Year ended   Employees in   Sales and                        
March 31,   Manufacturing (1)   Marketing Staff (2)   R&D   Others (3)   Total

 
 
 
 
 
2003
    2,254       2,104       833       661       5,852  
2002
    2,126       2,002       744       571       5,443  
2001
    2,056       1,863       682       528       5,129  
 
(1)   Includes quality, technical services and warehouse.
 
(2)   Includes business development.
 
(3)   Includes shared services, corporate business development and the intellectual property management team.

     We have not experienced any material work stopages in the last three fiscal years and we consider our relationship with our employees to be good. Approximately 12.4% of our employees belong to a number of different labor unions. We have experienced strikes at facilities by some of our employees. These strikes may cause a slight reduction in the productivity of facilities, which may be minimized by the employment of replacement workers.

6.E. Share ownership

     The following table sets forth, as of September 5, 2003 and as of March 31, 2003, for each of our directors and executive officers, the total numbers of equity shares owned:

                                 
    As of September 5, 2003   As of March 31, 2003
   
 
    No. of   % of   No. of   % of
Name   Shares   Total Shares   Shares (4)   Total Shares

 
 
 
 
Dr. K. Anji Reddy (1)(2)
    400,478       0.50       600,478       0.75  
Mr. G. V. Prasad (1)
    690,772       0.90       690,772       0.90  
Mr. Satish Reddy Kallam (1)
    597,916       0.78       597,916       0.78  
Mr. Anupam Puri (3)
    2,000       0.00       2,000       0.00  
Dr. A. Venkateswarlu
    18       0.00       18       0.00  
Prof. Krishna G. Palepu
    0       0.00       0       0.00  
Dr. Omkar Goswami
    0       0.00       0       0.00  
Mr. P. N. Devarajan
    0       0.00       0       0.00  
Dr. P. Satyanarayana Rao
    1,000       0.00       1,000       0.00  
Mr. Ravi Bhoothalingam
    0       0.00       0       0.00  
Dr. V. Mohan
    0       0.00       0       0.00  
Mr. Adam Levitt (3)
    5,000       0.00       5,000       0.00  
Mr. Andrew J. Miller
    0       0.00       0       0.00  

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    As of September 5, 2003   As of March 31, 2003
   
 
    No. of   % of   No. of   % of
Name   Shares   Total Shares   Shares (4)   Total Shares

 
 
 
 
Mr. Arun Sawhney
    0       0.00       0       0.00  
Mr. Cameron Reid
    12,100       0.01       12,100       0.01  
Mr. Mark R. Hartman
    0       0.00       0       0.00  
Dr. R. Rajgopalan
    0       0.00       0       0.00  
Mr. Saumen Chakraborty
    30       0.00       30       0.00  
Mr. Timothy C. Crew
    0       0.00       0       0.00  
Dr. Uday Saxena
    416       0.00       416       0.00  
Mr. V. S. Vasudevan
    0       0.00       0       0.00  
Mr. Abhijeet Mukherjee
    0       0.00       0       0.00  
 
(1)   Shares held in their individual name only.
 
(2)   Does not include shares held beneficially. See Item 7.A. for beneficial ownership of shares by this individual.
 
(3)   Held through American Depositary Shares.
 
(4)   All shares have voting rights.

In addition, Mr. Jaspal S. Bajwa, our new member on the Management Council who joined after March 31, 2003, did not own any equity shares as of August 31, 2003.

Employee Stock Incentive Plans

     Dr. Reddy’s Employees Stock Option Plan 2002. We announced our employee stock option scheme in fiscal 2002 (the “2002 Plan”). The 2002 Plan is applicable to our employees and directors and employees and directors of our subsidiaries. The 2002 Plan is not applicable to promoter directors, promoter employees and the persons holding 2% or more of our outstanding share capital.

     The minimum vesting period of the options is 12 months. The options cannot be traded in the markets. The options have been issued at an exercise price which is not less than the fair market value of the shares on the Stock Exchange, Mumbai on the date of grant. The fair market value of a share on each grant date is defined as the weighted average closing price for 30 days prior to the grant in the stock exchange where there is highest trading volume during that period. We granted 124,500 stock options to our employees in the year ended March 31, 2002.

     During the year ended March 31, 2003, we issued an aggregate of 433,945 additional options under the 2002 Plan. The vesting period for these options varies from 12 to 48 months. The dates of grant, exercise price and the number of options granted have been shown in the table below.

                 
Date of Grant   No. of Options Granted   Exercise Price

 
 
May 9, 2002
    259,400       1063.02  
July 31, 2002
    172,732       911.00  
August 26, 2002
    1,813       884.00  

Out of the total options granted, 14,574 options were forfeited due to certain employees leaving our employment.

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     Reddy US Therapeutics, Inc. 2000 Equity Ownership Plan. In the year ended March 31, 2001, Reddy US Therapeutics, Inc. (“Reddy US”) adopted the Reddy US Therapeutics, Inc. 2000 Equity Ownership Plan (the “U.S. Plan”) to provide for issuance of stock options to employees and certain non-employees. When the U.S. Plan was established, Reddy US reserved 500,000 shares for issuance. Under the U.S. Plan, stock options may be granted at a price per share not less than the fair market value of the underlying equity shares on the date of grant.

     Under the U.S. Plan, a total of 293,500 options were granted to eligible employees, out of which 2000 options were forfeited due to an employee leaving the services of Reddy U.S. Under this U.S. Plan, the exercise price of the options is U.S.$0.18 per share. The options vest in a graded manner over a period of 4 years from the date of the grant with 25% of the options vesting at the end of each year. As of March 31, 2003, options to purchase 153,685 equity shares were vested and exercisable at U.S.$0.18 per share.

     In the first quarter of fiscal 2004, we adopted the fair value accounting retroactive method as described in FASB Statement No. 148, Accounting for Stock Based Compensation – Transition and Disclosure, for accounting of stock option compensation. In accordance with the retroactive method of adoption, all prior periods presented have been modified to reflect the compensation cost that would have been recognized had the recognition provisions of Statement 123 been applied to all awards granted to employees after January 1, 1995.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A. Major shareholders

     The following table sets forth information regarding the beneficial ownership of our shares as of March 31, 2003 by:

    each shareholder known by us to be the beneficial owner of more than 5.0% of our shares,
 
    the Chief Executive Officer,
 
    the Chief Operating Officer, and
 
    all directors and executive officers as a group.
                 
            Percentage of Equity
    Equity Shares   Shares Beneficially
Name   Beneficially Owned (1)   Owned (2)

 
 
Dr. K. Anji Reddy
    18,062,208  (3)     23.61 %
Satish Reddy Kallam
    597,916       0.78 %
G. V. Prasad
    690,772       0.88 %
All directors and executive officers as a group
    19,371,460       25.32 %

(1)  Beneficial ownership is determined in accordance with rules of the SEC, which provide that shares are beneficially owned by any person who has or shares voting or investment power with respect to the shares. All information with respect to the beneficial ownership of any principal shareholder has been furnished by that shareholder and, unless otherwise indicated below, we believe that persons named in the table have sole voting and sole investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable.

(2)  Percentage ownership is calculated based on an aggregate of 76,515,948 shares issued and outstanding on March 31, 2003.

(3)  Dr. Reddy’s Holdings Private Limited owns 17,461,730 shares of Dr. Reddy’s Laboratories Limited. Dr. K. Anji Reddy owns 40.71% of Dr. Reddy’s Holdings Private Limited. The remainder is owned by various members of his family, and his brother-in-law, Mr. A. Subba Reddy, is the managing director of Dr. Reddy’s Holdings Private Limited. The entire amount beneficially owned by Dr. Reddy’s Holdings Private Limited is included in the amount shown as beneficially owned by Dr. K. Anji Reddy.

     Pursuant to Sub Regulation (3) of Regulation 7 of the Securities Exchange Board of India (“SEBI”) (Substantial Acquisition of Shares and Takeover) Regulations, 1997, Life Insurance Corporation of India notified us that it acquired certain shares and voting rights in our company which, taken together with the shares and voting rights previously held by it, would entitle it to more than 5% of

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the outstanding shares or voting rights in our company. The number of shares held by Life Insurance Corporation of India as of March 31, 2003 was 5,038,583, which is equivalent to 6.59% of the issued and outstanding equity shares of our company.

     The following shareholders hold more than 1% of the equity shares of our company as of fiscal 2001, 2002 and 2003.

                                                 
            Equity
Shares
Owned as of
September 5,
  Percentage of
Equity Shares
Owned as of
September 5,
  Percentage of
change of
equity shares
  Percentage
change of
equity shares
  Percentage
change of
equity shares
Name   2003*   2003   fiscal 2003   fiscal 2002   fiscal 2001
1
  Dr. Reddy's Holdings Private Limited     17,461,730       22.82 %     0.00 %     0.00 %     -4.82 %
2
  Life Insurance Corporation of India     5,688,373       7.43 %     0.85 %     3.78 %     -1.50 %
3
  Fidelity Management and Research Co.     3,173,758       4.15 %     0.12 %     2.20 %     1.15 %
4
  Emerging Markets Growth Fund Inc.     1,614,239       2.11 %     -0.40 %     0.24 %     1.74 %
5
  Schroder Investment Management     1,152,728       1.51 %     -0.34 %     0.96 %     0.28 %
6
  Top 50 Asien     984,288       1.29 %     0.00 %     0.13 %     -0.11 %
7
  Unit Trust of India     583,619       0.76 %     -0.47 %     -1.50 %     -0.77 %
8
  Watson Pharmaceuticals Inc.     750,000       0.98 %     -0.13 %     -0.77 %     -0.40 %
9
  Madabhushini Investments Private Ltd     635,417       0.83 %     -0.16 %     -0.36 %     -0.55 %

*   Does not include ADS holding.

     As of March 31, 2003, we had 76,515,948 issued and outstanding equity shares. As of March 31, 2003 there were 54,210 record holders of our equity shares listed and traded on the Indian stock exchanges. Our American Depositary Shares are listed on the New York Stock Exchange. One ADS now represents one equity share, par value Rs.5 per share. As of August 1, 2003, 22.12% of our issued and outstanding equity shares were held by ADS holders.

     Our equity shares can be held by Foreign Institutional Investors (“FIIs”), Overseas Corporate Bodies (“OCBs”) and Non-Resident Indians (“NRIs”) who are registered with the Securities Exchange Board of India (“SEBI”) and Reserve Bank of India (“RBI”). As of August 1, 2003, over 26.74% of our company’s equity shares were held by these FIIs, OCBS and NRIs, of which some of them may be residents or bodies corporate registered in the United States and elsewhere. We are not aware of which FIIs, OCBs and NRIs hold our equity shares as residents or as corporate entities registered in the United States.

7.B.   Related party transactions

     The Company has entered into transactions with the following related parties:

    Diana Hotels Limited for availing hotel services, AR Chlorides for availing processing services of raw materials and intermediates, Dr. Reddy’s Holdings Limited for purchase and sale of active pharmaceutical ingredients and intermediates, Madras Diabetes Research Foundation for undertaking research on our behalf, Dr. Reddy’s Heritage Foundation for purchase of services, SR Enterprises for transportation services and Manava Seva Dharma Samvardhani Trust social contribution to which the Company has made contribution. The directors of the Company have either a significant ownership interest, controlling interest or exercise significant influence over these entities (Significant interest entities); and
 
    Employees, directors of the Company and their relatives.

Loans to Employees

     We provide loans to employees who are not executive officers or directors to meet specified exigencies. These loans are all interest free and are repayable over fixed periods ranging from one month to eight years. As of March 31, 2001 and 2002, there were Rs.41.5 million (U.S.$0.9 million) and Rs.69.4

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million (U.S.$1.4 million) in loans outstanding to employees. As of March 31, 2003, there were Rs.63.2 million (U.S.$1.3 million) in loans outstanding to employees.

Dr. Reddy’s Holdings Private Limited

     Dr. Reddy’s Holdings Private Limited is 100.0% owned by Dr. K. Anji Reddy and his family and is engaged in the business of manufacturing active pharmaceutical ingredients. It holds approximately 22.80% of our shares. In fiscal 2001, 2002 and 2003, we purchased products from Dr. Reddy’s Holdings in the amount of, Rs. 3.1 million (U.S.$0.1 million), Rs.11.9 million (U.S.$0.2 million) and Rs.37.3 million (U.S.$ 0.8 million) respectively. In fiscal 2003, we sold products to Dr. Reddy’s Holdings Private Limited in the amount of Rs.0.8 million (U.S.$0.02 million).

AR Chloride

     AR Chloride is a partnership firm in which the sister-in-law of our chairman, Dr. Anji Reddy, is a partner. The firm undertakes processing of raw materials and intermediates for us. In fiscal 2001, 2002 and 2003, we purchased Rs. 3.7 million (U.S.$0.1 million), Rs.3.9 million (U.S.$0.1 million) and Rs.7.1 million (U.S.$ 0.15 million) worth of processing services from them.

S.R. Enterprises

     S.R. Enterprises is a partnership firm in which the sister-in-law of our chairman, Dr. Anji Reddy, is a partner. This firm is engaged in the business of transportation and undertakes transport of raw materials and finished goods for us. In fiscal 2001, 2002 and 2003, we spent Rs.0.02 million (U.S.$364.0), Rs.4.5 million (U.S.$92,156) and Rs.4.3 million (U.S.$ 0.1 million) respectively on transportation services from S.R. Enterprises.

Diana Hotels Limited

     Dr. K. Anji Reddy, Mr. G.V. Prasad and Mr. Satish Reddy Kallam are directors of Diana Hotels Limited. In fiscal 2001, 2002 and 2003 we spent Rs. 7.7 million (U.S.$0.2 million) Rs.5.7 million (U.S.$0.1 million) and Rs.7.1 million (U.S.$0.15 million) respectively on hotel services from Diana Hotels.

     The following is a summary of significant related party transactions:

                             
        Year ended March 31,
       
        2001   2002   2003
       
 
 
        (In thousands)   (In thousands)   (In thousands)
Purchases from:
                       
   
Significant interest entities
Rs. 6,792     Rs. 20,335     Rs. 50,943  
Sales to:
                       
   
Affiliates
    2,791              
   
Significant interest entities
    2,480       525       763  
Administrative expenses paid to:
                       
   
Significant interest entities
    7,701       11,400       7,749  
   
Directors and their relatives
    8,245       14,671       16,807  
Consulting fees paid to a director
    4,540              

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     We have the following amounts due from related parties:

                 
    As of March 31,
   
    2002   2003
 
 
 
 
    (In thousands)   (In thousands)
Significant interest entities
  Rs. 390     Rs.  
Directors and their relatives
    2,270       3,680  
Employee loans
    69,409       63,230  
 
   
     
 
 
  Rs. 72,069     Rs. 66,910  
 
   
     
 

     We have the following amounts due to related parties:

                 
    As of March 31,
   
    2002   2003
   
 
    (In thousands)   (In thousands)
Significant interest entities
  Rs. 3,500     Rs. 4,388  
 
   
     
 

     Certain employee loans amounting to Rs.7,000 and Rs.Nil as of March 31, 2002 and 2003, respectively, do not have any fixed repayment terms. Accordingly, the fair value of such loans cannot be determined. The estimated fair value amounts of other employee loans were Rs.46,096 and Rs.50,516 as of March 31, 2002 and 2003, respectively. These amounts have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to develop the estimates of fair value. Thus, the estimates provided herein are not necessarily indicative of the amounts we could realize in the market.

     As of March 31, 2003, the required repayments of employee loans, other than those that do not have any fixed repayment terms, granted for purchase of vehicles and property are given below:

     Repayable in the year ending March 31:

         
    (In thousands)
2004
  Rs. 22,863  
2005
    14,836  
2006
    12,807  
2007
    8,220  
2008
    3,905  
Thereafter
    599  
 
   
 
 
  Rs. 63,230  
 
   
 

     Also, in February 2003, we entered into an agreement with Leiner Health Products, LLC (“Leiner”) pursuant to which Leiner will exclusively market our over-the-counter drug products in the United States for a term of 15 years. Mr. G. V. Prasad, our Executive Vice-Chairman and Chief Executive Officer, serves as a member of Leiner’s board of directors. No revenues were received from this agreement in fiscal 2003.

7.C.   Interests of experts and counsel

     Not applicable.

ITEM 8. FINANCIAL INFORMATION

8.A.   Consolidated statements and other financial information

     The following financial statements and auditors report for fiscal 2003 are incorporated herein by reference and are included in Item 18 of this report on Form 20-F:

  Ø   Independent Auditors Report.
 

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  Ø   Consolidated Balance Sheets as of March 31, 2002 and 2003.
 
  Ø   Consolidated Statements of Income for the years ended March 31, 2001, 2002 and 2003.
 
  Ø   Consolidated Statements of Stockholders Equity and comprehensive income for the years ended March 31, 2001, 2002 and 2003.
 
  Ø   Consolidated Statements of Cash Flow for the years ended March 31, 2001, 2002 and 2003.
 
  Ø   Notes to the Consolidated Financial Statements.

Amount of Export Sales

     For the fiscal year ended March 31, 2003, our export revenues were Rs.11,581.2 million, contributing 64% to our total revenues.

Legal Proceedings

     See Item 4.B. – “Legal Proceedings”

Dividend Policy

     In the fiscal year ended March 31, 2001, we declared a cash dividend of Rs.3.87 per equity share prior to stock split. In the fiscal years ended March 31, 2002 and 2003, we declared cash dividends of approximately Rs.7.50 and Rs.5.0, respectively, per equity share. Future dividend policy will be reviewed by the board of directors based upon conditions then existing, including our earnings, financial condition, capital requirements and other factors.

     Holders of ADSs will be entitled to receive dividends payable on equity shares represented by such ADSs. Cash dividends on equity shares represented by ADSs are paid to the Depositary in Indian rupees and are generally converted by the Depositary into U.S. dollars and distributed, net of depositary fees, taxes, if any, and expenses, to the holders of such ADSs.

8.B.   Significant changes

     Except as otherwise disclosed in this annual report, there has been no significant change in our financial position since March 31, 2003.

ITEM 9. THE OFFER AND LISTING

9.A.   Offer and listing details

Information Regarding Price History

     The following tables set forth the price history for our shares on The Stock Exchange, Mumbai, (“BSE”) and for our ADSs on the New York Stock Exchange (“NYSE”). Stock prices per share have been restated to reflect a 2 for 1 stock split effective on October 25, 2001.

                                 
    BSE   NYSE*
   
 
    Price Per Equity Share   Price Per ADS
   
 
Fiscal Year
Ended March 31,
  High (Rs.)   Low (Rs.)   High ($)   Low ($)

 
 
 
 
2003
    1,149.90       675.00       24.00       13.30  
2002
    1,120.00       432.00       25.64       10.04  

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    BSE   NYSE*
   
 
    Price Per Equity Share   Price Per ADS
   
 
Fiscal Year
Ended March 31,
  High (Rs.)   Low (Rs.)   High ($)   Low ($)

 
 
 
 
2001
    813.50       536.90              
2000
    850.00       343.50              
1999
    449.10       171.50              
                                 
    BSE   NYSE*
   
 
    Price Per Equity Share   Price Per ADS
   
 
Quarter Ended   High (Rs.)   Low (Rs.)   High ($)   Low ($)

 
 
 
 
June 30, 2002
    1,149.90       910.50       24.00       18.40  
September 30, 2002
    1,017.00       700.00       21.60       16.00  
December 31, 2002
    932.00       675.00       19.50       13.30  
March 31, 2003
    1,003.00       851.05       21.00       18.00  
                                 
    BSE   NYSE*
   
 
    Price Per Equity Share   Price Per ADS
   
 
Quarter Ended   High (Rs.)   Low (Rs.)   High ($)   Low ($)

 
 
 
 
June 30, 2001
    870.00       432.00       19.20       10.04  
September 30, 2001
    1,007.50       627.50       26.00       17.05  
December 31, 2001
    1,150.00       863.00       25.35       17.05  
March 31, 2002
    1,120.00       921.00       24.55       18.91  
                                 
    BSE   NYSE*
   
 
    Price Per Equity Share   Price Per ADS
   
 
Month Ended   High (Rs.)   Low (Rs.)   High ($)   Low ($)

 
 
 
 
January 31, 2003
    1,003.00       851.05       21.00       18.10  
February 28, 2003
    934.00       848.25       19.30       18.10  
March 31, 2003
    923.00       861.00       19.70       18.00  
April 30, 2003
    935.75       845.00       19.82       18.45  
May 31, 2003
    899.00       808.00       19.35       17.58  
June 30, 2003
    1109.50       850.00       23.53       18.77  
July 31, 2003
    1218.90       1078.00       27.90       23.50  
August 31, 2003
    1161.00       994.00       25.48       21.85  

* ADSs listed on April 11, 2001.

Source: BSE and adrwise, respectively.

     As of March 31, 2003, we had 76,515,948 issued and outstanding equity shares. As of March 31, 2003, there were 54,210 record holders of our equity shares listed and traded on the Indian stock exchanges.

9.C.   Markets

Markets on Which Our Shares Trade

     Our equity shares are traded on The Stock Exchange, Mumbai (“BSE”), the Hyderabad Stock Exchange Ltd. (“HSE”), The Stock Exchange, Ahmedabad (“ASE”), The Madras Stock Exchange Ltd. (“MSE”), The Kolkata Stock Exchange Association Limited, and National Stock Exchange Limited (“NSE”), or collectively, the “Indian Stock Exchanges”. A significant portion of our equity shares are

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traded on the BSE and the NSE. Our American Depositary Shares, as evidenced by American Depositary Receipts (or “ADRs”), are traded in the United States on the New York Stock Exchange (“NYSE”), under the ticker symbol “RDY”. Each ADS represents one equity share. Our ADSs began trading on the NYSE on April 11, 2001.

9.D.   Selling shareholders
 
     Not applicable.
 
9.E.   Dilution
 
     Not applicable.
 
9.F.   Expenses of the issue
 
     Not applicable.

ITEM 10. ADDITIONAL INFORMATION

10.A.   Share capital
 
     Not applicable.
 
10.B.   Memorandum and articles of association

     Dr. Reddy’s Laboratories Limited was incorporated under the Indian Companies Act, 1956. We are registered with the Registrar of Companies, Andhra Pradesh, and Hyderabad, India as Company No. 01-4507. Our registered office is located at 7-1-27, Ameerpet, Hyderabad – 500 016 and the telephone number of our registered office is +91-040-23731946. The summary of our Articles of Association and Memorandum of Association that is included in our registration statement on Form F-1 filed with the SEC on April 11, 2001, together with copies of the Articles of Association and Memorandum of Association that are included in our registration statement on Form F-1, are incorporated herein by reference.

     Our Memorandum of Association and Articles of Association were amended at the 17th Annual General Meeting as follows:

  (1)   The Memorandum of Association was altered by substituting for the present clause V(a), the following new clause:
 
      “V(a) The Authorised Share Capital of the Company is Rs.50,00,00,000/- (Rs. Fifty Crores Only) divided into 10,00,00,000 Equity Shares of Rs.5/- (Rupees Five Only) each.”
 
  (2)   The Articles of Association were altered by substituting for Article 3(a) the following new Article:
 
      “3(a) The Authorised Share Capital of the Company shall be as stated in Clause V of the Memorandum of Association of the Company.”
 
  (3)   The Articles of Association were altered by addition of the following new articles after the existing Article 3.(d):

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      “Sub-Division of shares (e) Sub-divide its shares or any of them into shares of smaller amount than is fixed by the memorandum, so however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced shares shall be the same as it was in the case of the shares from which the reduced share is derived;
 
      Cancellation of shares (f) The shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so cancelled provided however the cancellation of shares in pursuance of the exercise of this power shall not be deemed to be a reduction of share capital within the meaning of the Act.
 
      Powers to be exercised in the General Meeting (g) The powers conferred under the Articles 3, a, b, c, d, e, and f shall be exercised by the Company in General Meeting and shall not require to be confirmed by the Court.”

     Our Articles of Association were amended at our 18th Annual General Meeting by inserting the following Article 115A after Article 115:

      “115A Subject to the applicable provisions of the Companies Act, 1956 or any other applicable provisions as may be stipulated by the regulatory authorities, the Company shall have powers to hold the meeting of Board and Committees thereof through video conferencing or tele-conferencing.”

     Share Capital

     Our authorized share capital is 100,000,000 equity shares, par value Rs.5 per share. As of March 31, 2003, 76,515,948 equity shares were issued and outstanding. The equity shares are the only class of share capital. We currently have no convertible debentures or warrants outstanding.

10.C.   Material contracts

     Novo Nordisk Contract Status

     Novo Nordisk is a world leader and a pioneer in diabetes management and also one of the largest insulin producers. Under an amended and restated agreement with Novo Nordisk dated September 21, 1999, two of our molecules have been licensed to Novo Nordisk for further development and conducting clinical trials.

     In February 2003, Novo Nordisk decided not to pursue further development of Ragaglitazar (DRF 2725). The decision was reached after Novo Nordisk performed a renewed benefit/risk assessment of the compound, including analysis of both the clinical Phase 3 data and the tumour findings in the long-term animal studies. This compound was out-licensed by us to Novo Nordisk in August 1998. The financial terms and conditions of the original agreement remain unchanged.

     In respect of the second insulin sensitiser Balaglitazone (DRF 2593), in February 2003, Novo Nordisk announced the completion of the analysis of Phase 2 data. Based on the good clinical efficacy and safety profile obtained in these studies, Novo Nordisk has decided to continue the development of Balaglitazone. This compound was out-licensed by us to Novo Nordisk in March 1997.

     Novartis Contract Status

     In May 2001, Novartis Pharma AG (Novartis) entered into a licensing agreement with us for our insulin sensitiser, DRF 4158. Under the terms of the agreement, we granted Novartis worldwide exclusive

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rights to development and commercialization of our insulin sensitiser DRF 4158 in return for up to U.S.$55 million in upfront and milestone payments for specific clinical and regulatory endpoints, as well as royalties. We have co-promotion rights for DRF 4158 in India.

     In January 2003, Novartis decided to discontinue further development of DRF 4158, but continued its collaboration with us for an additional dual acting insulin sensitizer compound. Under the terms of the agreement, Novartis has rights for an additional development compound that is a dual-acting insulin sensitizer. The terms and conditions of the original agreement remain unchanged. We will independently assess all data on DRF 4158. We also intend to carry out additional pre-clinical studies to determine the appropriate development path for the molecule.

10.D.   Exchange controls

     The India Foreign Exchange Management Act, 1999 (“FEMA”) generally regulates investments in Indian securities. FEMA permits foreign exchange transactions and empowers the Reserve Bank of India (“RBI”) to prohibit or regulate such transactions. The scheme of FEMA is to permit most transactions involving foreign exchange except those prohibited or restricted by the RBI. FEMA has eased restrictions on current accounts transactions. However, the RBI continues to exercise control over capital account transactions, which are those that alter the assets or liabilities, including contingent liabilities, of persons. The RBI has issued regulations under FEMA to regulate various kinds of capital account transactions. The RBI has also issued a scheme for foreign direct investment that enables Indian companies to issue shares to persons residing outside India without prior permission of the RBI, subject to certain conditions.

ADS Guidelines

     Pursuant to recent changes in Indian policy, Indian companies issuing ADSs are no longer required to obtain approval of the Ministry of Finance under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depositary Receipt Mechanism) Scheme, 1993, as amended from time to time. Pursuant to the regulations issued under FEMA, Indian companies issuing ADSs are no longer required to obtain the approval of the RBI, subject to certain exceptions. We obtained the approval from the Foreign Investment Promotion Board (the “FIPB”) on July 3, 2000. A copy of the FIPB approval will be made available for public inspection at our registered office, or provided upon written request to our Chief Financial Officer.

     The Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme is distinct from other policies described below relating to investments in Indian companies by foreign investors. The issuance of ADSs pursuant to the Issue of Foreign Currency Convertible Bonds and Ordinary Shares Scheme also affords to holders of ADSs the benefits of Section 115AC of the Income-tax Act, 1961, for purposes of the application of Indian tax law.

     RBI has notified that Indian companies may utilize up to 100% of ADR proceeds realized from sale of ADSs for overseas investments.

Two-way fungibility of ADS

     By notification dated March 2, 2002, the RBI authorized SEBI registered stock brokers to acquire domestic shares on behalf of the overseas investors for placing with the domestic custodian for conversion into ADSs. The domestic custodian is required to ascertain the head room available. Head room is the number of Global Depository Receipts (“GDRs”) or American Depository Receipts (“ADRs”) originally issued minus number of ADRs/GDRs outstanding, further adjusted for ADRs/GDRs redeemed into underlying shares and registered in the name of non-resident investors. The reissuance of ADRs is permissible only to the extent of the head room available. After completing the formalities, the domestic

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custodian would advise the overseas depository on the custody of domestic shares and that corresponding ADRs/GDRs may be issued to the non-resident investor.

Foreign Direct Investment

     In July 1991, the Government of India raised the limit on foreign equity holdings in Indian companies from 40% to 51% in certain high priority industries. The RBI gave automatic approval for such foreign equity holdings within specified limits in certain priority industries. The Foreign Investment Promotion Board, currently under the Ministry of Industry, was thereafter formed to negotiate with large foreign companies wishing to make considerable long-term investments. Over a period of time, the Government of India has relaxed the restrictions on foreign investment considerably. Currently, subject to certain exceptions, foreign direct investment by individuals of Indian nationality or origin residing outside India, or NRIs or OCBs, up to 49% in most sectors of industry do not require the prior approval of the Foreign Investment Promotion Board. Some sectors of industry have recently been relaxed to allow up to 74% investment. Foreign equity participation in excess of 51% in certain high priority industries and in excess of percentages prescribed by the Ministry of Industry is currently allowed only with the approval of the Foreign Investment Promotion Board.

     Proposals involving the public sector and other sensitive areas require the approval of the Cabinet Committee on Economic Affairs. The Department of Industrial Policy and Promotion, a part of the Ministry of Industry, issued detailed guidelines in January 1997 for consideration of foreign direct investment proposals by the Foreign Investment Promotion Board (the “Guidelines”). Under the Guidelines, sector specific guidelines for foreign direct investment and the levels of permitted equity participation have been established. In February 2000, the Department of Industrial Policy and Promotion, issued a notification that foreign ownership of up to 50%, 51%, 74% or 100%, depending on the category, would be allowed without prior permission of the Foreign Investment Promotion Board and, in certain cases, without prior permission of the RBI. The issues to be considered by the Foreign Investment Promotion Board, and the Foreign Investment Promotion Board’s areas of priority in granting approvals, are also set out in the Guidelines. These guidelines have been substantially modified/relaxed under the current Foreign Exchange Management Act dispensation.

     The basic objective of the Guidelines is to improve the transparency and objectivity of the Foreign Investment Promotion Board’s consideration of proposals. However, since these are administrative guidelines and have not been codified as either law or regulations, they are not legally binding with respect to any recommendation made by the Foreign Investment Promotion Board or with respect to any decision taken by the Government of India in cases involving foreign direct investment.

     In May 1994, the Government of India announced that purchases by foreign investors of ADSs, as evidenced by ADRs, and foreign currency convertible bonds of Indian companies would be treated as direct foreign investment in the equity issued by Indian companies for such offerings. Therefore, offerings that involve the issuance of equity that results in Foreign Direct Investors holding more than the stipulated percentage of direct foreign investments (which depends on the category of industry) would require approval from the Foreign Investment Promotion Board.

     In addition, offerings by Indian companies of any such securities to foreign investors require Foreign Investment Promotion Board approval, whether or not the stipulated percentage limit would be reached if the proceeds will be used for investment in specified industries.

Portfolio Investment by Non-Resident Indians and Overseas Corporate Bodies

     A variety of methods for investing in shares of Indian companies are available to non-resident Indians and to overseas corporate bodies. These methods allow non-resident Indians and overseas corporate bodies to make portfolio investments in existing shares and other securities of Indian companies on a basis not generally available to other foreign investors. In addition to portfolio investments in Indian

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companies, non-resident Indians and overseas corporate bodies may also make foreign direct investments in Indian companies pursuant to the foreign direct investment route discussed above.

Portfolio Investment by Foreign Institutional Investors

     In September 1992, the Government of India issued guidelines that enable Foreign Institutional Investors (“FIIs”), including institutions such as pension funds, investment trusts, asset management companies, nominee companies and incorporated/institutional portfolio managers, to invest in all the securities traded on the primary and secondary markets in India. Under the guidelines, FIIs are required to obtain an initial registration from the Securities and Exchange Board of India (“SEBI”), and a general permission from the RBI to engage in transactions regulated under the Foreign Exchange Management Act. FIIs must also comply with the provisions of the SEBI Foreign Institutional Investors Regulations, 1995. When it receives the initial registration, the FII also obtains general permission from the RBI to engage in transactions regulated under the Foreign Exchange Management Act. Together, the initial registration and the RBI’s general permission enable the registered FII to: (i) buy (subject to the ownership restrictions discussed below) and sell unrestricted securities issued by Indian companies; (ii) realize capital gains on investments made through the initial amount invested in India; (iii) participate in rights offerings for shares; (iv) appoint a domestic custodian for custody of investments held; and (v) repatriate the capital, capital gains, dividends, interest income and any other compensation received pursuant to rights offerings of shares. The current policy with respect to purchase or sale of securities of an Indian company by an FII is in Schedule 2 and Regulation 5(2) of the Foreign Exchange Management (Transfer or Issue of Securities by a Person Resident Outside India) Regulations, 2000.

Ownership Restrictions

     Foreign institutional investors, non-resident Indians and overseas corporate bodies.

     The SEBI and the RBI regulations restrict portfolio investments in Indian companies by foreign institutional investors, non-resident Indians and overseas corporate bodies, all of which we refer to as “foreign portfolio investors”. Under current Indian law, foreign institutional investors in the aggregate may hold no more than 24.0% of the equity shares of an Indian company, and non-resident Indians and overseas corporate bodies in the aggregate may hold no more than 10.0% of the shares of an Indian company through portfolio investments. The 24.0% limit referred to above may be increased to 49.0% if the shareholders of the company pass a special resolution to that effect. The 10.0% limit referred to above may be increased to 24.0% if the shareholders of the company pass a special resolution to that effect. No single foreign institutional investor may hold more than 10.0% of the shares of an Indian company and no single non-resident Indian or overseas corporate body may hold more than 5.0% of the shares of an Indian company.

     Under the SEBI (Substantial Acquisition of Shares and takeovers) Regulations, 1997, upon the acquisition of more than 5%, 10% or 14% of the outstanding shares of a public Indian company, a purchaser is required to notify the company and all the stock exchanges on which the shares of the company are listed. Upon the acquisition of 15% or more of such shares or a change in control of the company, the purchaser is required to make an open offer to the other shareholders offering to purchase at least 20% of all the outstanding shares of the company at a minimum offer price as determined pursuant to SEBI (Substantial Acquisition of Shares and takeovers) Regulations, 1997. Upon conversion of ADSs into equity shares, a holder of ADSs will be subject to the Takeover Code.

10.E.   Taxation

Indian Taxation

     General. The following summary is based on the law and practice of the Indian Income-tax Act, 1961 (the “Income-tax Act”), including the special tax regime contained in Sections 115AC and 115ACA

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of the Income-tax Act read with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 (the “Scheme”), as amended on January 19, 2000. The Income-tax Act is amended every year by the Finance Act of the relevant year. Some or all of the tax consequences of Sections 115AC and 115ACA may be amended or changed by future amendments to the Income-tax Act.

     We believe this information is materially complete as of the date hereof. However, this summary is not intended to constitute a complete analysis of the individual tax consequences to non-resident holders or employees under Indian law for the acquisition, ownership and sale of ADSs and equity shares. Each prospective investor should consult tax advisors with respect to taxation in India or their respective locations on acquisition, ownership or disposing of equity shares or ADSs.

     Residence. For purposes of the Income-tax Act, an individual is considered to be a resident of India during any fiscal year if he or she is in India in that year for:

    a period or periods amounting to at least 182 days; or
 
    at least 60 days and, within the four preceding years has been in India for a period or periods amounting to at least 365 days.

     The period of 60 days referred to above shall be read as 182 days or more in case of a citizen of India or a Persons of Indian Orgin (“PIO”) living abroad who visits India and within the four preceding years has been in India for a period or periods amounting to 365 days or more.

     A company is a resident of India if it is incorporated in India or the control and the management of its affairs is situated wholly in India. Individuals and companies that are not residents of India would be treated as non-residents for purposes of the Income-tax Act.

     Taxation of Distributions. The Finance Bill, 2003 provides that after April 1, 2003, dividend income will be exempt from tax for shareholders and that domestic companies will be liable to pay a dividend distribution tax at the rate of 12.5% plus a surcharge at the rate of 2.5% at the time of the distribution. Any distributions of additional ADSs or equity shares to resident or non-resident holders will not be subject to Indian tax.

     Taxation of Capital Gains. The following is a brief summary of capital gains taxation of non-resident holders and resident employees relating to the sale of ADSs and equity shares received upon redemption of ADSs. The relevant provisions are contained mainly in sections 45, 47(vii)(a), 115AC and 115ACA, of the Income-tax Act, in conjunction with the Scheme. Effective April 1, 2002, the Finance Act 2001 introduced a new section 115AC in place of the prevailing section 115AC of the Income-tax Act. You should consult your own tax advisor concerning the tax consequences of your particular situation.

     Gains realized upon the sale of ADSs and/or shares that have been held for a period of more than thirty-six months and/or twelve months, respectively, are considered long-term capital gains. Gains realized upon the sale of ADSs and/or shares that have been held for a period of thirty six months or less and/or twelve months or less, respectively, are considered short-term capital gains. Capital gains are taxed as follows:

    gains from a sale of ADSs outside India by a non-resident to another non-resident are not taxable in India;
 
    long-term capital gains realized by a resident employee from the transfer of the ADSs will be subject to tax at the rate of 11%; short-term capital gains on such a transfer will be taxed at graduated rates with a maximum of 33%, including the applicable surcharge;

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    long-term capital gains realized by a non-resident individual holder upon the sale of equity shares obtained from the redemption of ADSs are subject to tax at a rate of 11%;
 
    long-term capital gains realized by a non-resident corporate holder upon the sale of equity shares obtained through the redemption of ADSs are subject to taxation at the rate of 10.25%; and
 
    short-term capital gains realized upon the sale of equity shares obtained from the redemption of ADSs will be taxed (i) at variable rates with a maximum of 41%, including the prevailing surcharge, in case of foreign companies and (ii) in the range of 30% to 33%, including the applicable surcharge, in the case of resident employees and of non-resident individuals with taxable income over Rs.150,000.

     The Finance Bill, 2003 exempts long-term capital gains from tax when they are derived from the transfer of equity shares in a company listed on a recognized stock exchange in India and acquired on or after March 1, 2003, but before March 1, 2004.

     The above rates may be offset by the applicable credit mechanism allowed under double tax avoidance agreements in the case of non-residents. The capital gains tax is computed by applying the appropriate tax rates to the difference between the sale price and the purchase price of the equity shares or ADSs. Under the Scheme, the purchase price of equity shares in an Indian listed company received in exchange for ADSs will be the market price of the underlying shares on the date that the Depositary gives notice to the custodian of the delivery of the equity shares in exchange for the corresponding ADSs, or the “stepped up” basis purchase price. The market price will be the price of the equity shares prevailing on the Stock Exchange, Mumbai or the National Stock Exchange. There is no corresponding provision under the Income-tax Act in relation to the “stepped up” basis for the purchase price of equity shares. However, the tax department in India has not denied this benefit. In the event that the tax department denies this benefit, the original purchase price of ADSs would be considered the purchase price for computing the capital gains tax.

     According to the Scheme, a non-resident holder’s holding period for the purposes of determining the applicable Indian capital gains tax rate relating to equity shares received in exchange for ADSs commences on the date of the notice of the redemption by the Depositary to the custodian. However, the Scheme does not address this issue in the case of resident employees, and it is therefore unclear as to when the holding period for the purposes of determining capital gains tax commences for such a resident employee.

     The Scheme provides that if the equity shares are sold on a recognized stock exchange in India against payment in Indian rupees, they will no longer be eligible for the preferential tax treatment.

     It is unclear as to whether section 115AC and the Scheme are applicable to a non-resident who acquires equity shares outside India from a non-resident holder of equity shares after receipt of the equity shares upon redemption of the ADSs.

     It is unclear as to whether capital gains derived from the sale of subscription rights or other rights by a non-resident holder not entitled to an exemption under a tax treaty will be subject to Indian capital gains tax. If such subscription rights or other rights are deemed by the Indian tax authorities to be situated within India, the gains realized on the sale of such subscription rights or other rights will be subject to Indian taxation. The capital gains realized on the sale of such subscription rights or other rights, which will generally be in the nature of short-term capital gains, will be subject to tax (i) at variable rates with a maximum rate of 41%, including the prevailing surcharge, in the case of a foreign company and (ii) in the range of 30% to 33%, including the applicable surcharge, in the case of resident employees and of non-resident individuals with taxable income over Rs.150,000.

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     Withholding Tax on Capital Gains. Any gain realized by a non-resident or resident employee on the sale of equity shares is subject to Indian capital gains tax, which, in the case of a non-resident is to be withheld at the source by the buyer.

     Buy-back of Securities. Indian companies are not subject to any tax on the buy-back of their shares. However, the shareholders are taxed on any resulting gains. We are required to deduct tax at source according to the capital gains tax liability of a non-resident shareholder.

     Stamp Duty and Transfer Tax. Upon issuance of the equity shares underlying our ADSs, we are required to pay a stamp duty of 0.1% per share of the issue price of the underlying equity shares. A transfer of ADSs is not subject to Indian stamp duty. A sale of equity shares in physical form by a non-resident holder is also subject to Indian stamp duty at the rate of 0.5% of the market value of the equity shares on the trade date, although customarily such tax is borne by the transferee. Shares must be traded in dematerialized form. The transfer of shares in dematerialized form is currently not subject to stamp duty.

     Wealth Tax. The holding of the ADSs and the holding of underlying equity shares by resident and non-resident holders will be exempt from Indian wealth tax. Non-resident holders are advised to consult their own tax advisors regarding this issue.

     Gift Tax and Estate Duty. Currently, there are no gift taxes or estate duties. These taxes and duties could be restored in future. Non-resident holders are advised to consult their own tax advisors regarding this issue.

     Service Tax. Brokerage or commission paid to stock brokers in connection with the sale or purchase of shares is subject to a service tax of 8%. The stock broker is responsible for collecting the service tax from the shareholder and paying it to the relevant authority. The Finance Bill, 2003 has proposed an increase in th