SYNGENE Notes to Accounts

1. Company Overview


1.1 Reporting entity


Syngene International Limited (“Syngene” or “the Company”), is engaged in providing contract research and manufacturing services in early stage drug discovery and development to pharmaceutical and biotechnology companies worldwide. Syngene’ s services include discovery chemistry and biology services, toxicology, pharmaceutical development, process development /manufacture of advanced intermediates, active pharmaceutical ingredients and bio-therapeutics. The Company is a public limited company incorporated and domiciled in India and has its registered office in Bengaluru, Karnataka, India. The Company’s shares are listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India.


1.2 Basis of preparation of financial statements


a) Statement of compliance


The financial statements have been prepared in accordance with Indian Accounting Standards (Ind AS) as per the Companies (Indian Accounting Standards) Rules, 2015 notified under Section 133 of Companies Act, 2013, (the ‘Act’) and other relevant provisions of the Act.


The Company’s financial statements up to and for the year ended March 31, 2016 were prepared in accordance with the Companies (Accounting Standards) Rules, 2006, notified under Section 133 of the Act, read together with paragraph 7 of the Companies (Accounts) Rules, 2014 (“Previous GAAP”).


Is these are the Company’s first financial statements prepared in accordance with Indian Accounting Standards (Ind AS), Ind AS 101, First-time Adoption of Indian Accounting Standards has been applied. An explanation of how the transition to Ind AS has affected the previously reported financial position and financial performance of the Company is provided in Note 30.


These financial statements have been prepared for the Company as a going concern on the basis of relevant Ind AS that are effective at the Company’s annual reporting date, March 31, 2017. These financial statements were authorised for issuance by the Company’s Board of Directors on April 27, 2017.


Details of the Company’s accounting policies are included in Note 2.


b) Functional and presentation currency


These financial statements are presented in Indian rupees (INR), which is also the functional currency of the Company. All amounts have been rounded-off to the nearest million, unless otherwise indicated.


c) Basis of measurement


These financial statements have been prepared on the historical cost basis, except for the following items:


- Certain financial assets and liabilities (including derivative instruments) are measured at fair value;


- Net defined benefit assets/(liability) are measured at fair value of plan assets, less present value of defined benefit obligations;


d) Use of estimates and judgements


The preparation of the financial statements in conformity with Ind AS requires management to make estimates, judgements and assumptions. These estimates, judgements and assumptions affect the application of accounting policies and the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the period. Accounting estimates could change from period to period. Actual results could differ from those estimates. Appropriate changes in estimates are made as management becomes aware of changes in circumstances surrounding the estimates. Changes in estimates are reflected in the financial statements in the period in which changes are made and, if material, their effects are disclosed in the notes to the financial statements.


Judgements


Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the financial statements is included in the following notes:


- Note 2(a) and 28 — Financial instruments;


- Note 2(b) and 2(c) — Useful lives of property, plant and equipment and intangible assets;


- Note 27 — Assets and obligations relating to employee benefits;


- Note 35 — Share based payments; and


- Note 2(k) and 31 — Provision for income taxes and related tax contingencies.


1.3 Assumptions and estimation uncertainties


Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ending March 31, 2018 is included in the following notes:


— Note 28 - impairment of financial assets; and


— Note 16 and 32 - recognition and measurement of provisions and contingencies: key assumptions about the likelihood and magnitude of an outflow of resources.


A number of the Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities.


Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows.


— Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.


— Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).


— Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).


When measuring the fair value of an asset or a liability, the Company uses observable market data as far as possible. If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.


The Company recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.


Further information about the assumptions made in measuring fair values is included in the following notes:


— Note 35 - share based payment arrangements; and


— Note 2(a) and 28 - financial instruments.


2(a). Other equity


Securities premium


Securities premium is used to record the premium received on issue of shares. It is utilised in accordance with the provisions of the Companies Act, 2013.


General reserve


General reserve is used from time to time to transfer profits from retained earnings for appropriation purposes.


Share based payment reserve


The Company has established share based payment plan for certain categories of employees of the Company. Also refer Note 35 for further details on these plans.


Cash flow hedging reserves


The cash flow hedging reserve represents the cumulative effective portion of gains or losses (net of tax) arising on changes in fair value of designated portion of hedging instruments entered into for cash flow hedges


3. Employee benefit plans


(i) T he Company has a defined benefit gratuity plan as per the Payment of Gratuity Act, 1972 (‘Gratuity Act’). Under the Gratuity Act, employee who has completed five years of service is entitled to specific benefit. The level of benefit provided depends on the employee’s length of service and salary at retirement/termination age. The gratuity plan is a funded plan and the Company makes contributions to a recognised fund in India.


Based on the actuarial valuation obtained in this respect, the following table sets out the status of the gratuity plan and the amounts recognised in the Company’s financial statements as at balance sheet date:


Fair value of liquid mutual funds are based on quoted price. Derivative financial instruments are valued based on quoted prices for similar assets and liabilities in active markets or inputs that are directly or indirectly observable in the market place.


Sensitivity analysis


For the fair values of forward/option contracts of foreign currencies, reasonably possible changes at the reporting date to one of the significant observable inputs, holding other inputs constant, would have the following effects.


B. Financial risk management


The Company’s activities expose it to a variety of financial risks : credit risk, market risk and liquidity risk.


(i) Risk management framework


The Company’s risk management is carried out by the treasury department under policies approved by the Board of Directors. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative and non-derivative financial instruments and investment of excess liquidity.


(ii) Credit risk


Credit risk is the risk that the counterparty will not meet its obligation under a financial instrument or customer contract, leading to financial loss. The credit risk arises principally from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks and financial institutions and other financial instruments.


The Company has established a credit mechanism under which each new customer is analysed individually for creditworthiness before the Company’s standard payment and delivery terms and conditions are offered. The Company’s review includes external ratings, where available, and other publicly available financial information. Outstanding customer receivables are regularly monitored.


The Company establishes an allowance for impairment that represents its estimate of expected losses in respect of trade and other receivables. The maximum exposure to credit risk as at reporting date is primarily from trade receivables amounting to Rs.1,987 (March 31, 2016: Rs.1,852, April 01, 2015: Rs.1,799). The movement in allowance for impairment in respect of trade receivables during the year was as follows:


Receivable from one customer of the Company’s trade receivables is Rs.222 [March 31, 2016 - Rs.492(two customers)] which is more than 10 percent of the Company’s total trade receivables.


Credit risk on cash and cash equivalent is limited as the Company generally invest in deposits with banks having high credit ratings assigned by international and domestic credit rating agencies. Investments primarily include investment in liquid mutual fund units.


(iii) Liquidity risk


Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.


The Company believes that the working capital is sufficient to meet its current requirements. Accordingly, no liquidity risk is perceived. In addition, the Company maintains line of credits as stated in Note 13.


(iv) Market risk


Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices, such as foreign exchange rates, interest rates and equity prices.


Foreign currency risk


The Company operates internationally and a major portion of the business is transacted in several currencies and consequently, the Company is exposed to foreign exchange risk through operating and borrowing activities in foreign currency. The Company holds derivative instruments such as foreign exchange forward and option contracts to mitigate the risk of changes in exchange rates and foreign currency exposure.


Sensitivity analysis


The sensitivity of profit or loss to changes in exchange rates arises mainly from foreign currency denominated financial instruments from foreign exchange forward/option contracts designated as cash flow hedges.


Cash flow and fair value interest rate risk


The Company’s main interest rate risk arises from long-term borrowings with variable rates, which expose the Company to cash flow interest rate risk. During the year ended March 31, 2017 and March 31, 2016 the Company’s borrowings at variable rate were mainly denominated in USD.


(a) Interest rate risk exposure


The exposure of the Company’s borrowing to interest rate changes at the end of the reporting period are as follows:


(b) Sensitivity


The Company policy is to maintain most of its borrowings at fixed rate using interest rate swaps to achieve this when necessary. They are therefore not subject to interest rate risk as defined under Ind AS 107, since neither the carrying amount nor the future cash flows will fluctuate because of change in market interest rates.


4. Capital management


The key objective of the Company’s capital management is to ensure that it maintains a stable capital structure with the focus on total equity to uphold investor, creditor, and customer confidence and to ensure future development of its business. The Company focused on keeping strong total equity base to ensure independence, security, as well as a high financial flexibility for potential future borrowings, if required without impacting the risk profile of the Company,


The Company’s goal is to continue to be able to return excess liquidity to shareholders by continuing to distribute annual dividends in future periods.


The amount of future dividends/buy back of equity shares will be balanced with efforts to continue to maintain an adequate liquidity status.


5. First-time adoption of Ind AS


These financial statement have been prepared in accordance with the Ind AS. For the purpose of transition from previous GAAP to Ind AS, the Company has followed the guidance prescribed under Ind AS 101 - First time adoption of Indian Accounting Standards (“Ind AS 101”), with effect from April 01, 2015 (“transition date”).


In preparing its Ind AS balance sheet as at April 1, 2015 and in presenting the comparative information for the year ended March 31, 2016, the Company has adjusted amounts reported previously in financial statements prepared in accordance with previous GAAP. This note explains how the transition from previous GAAP to Ind AS has affected the Company’s balance sheet and financial performance.


Optional exemptions availed and mandatory exceptions


In preparing these financial statements, the Company has applied the below mentioned mandatory exceptions.


Mandatory exemptions availed


(1) Estimates


As per Ind AS 101, an entity’s estimates in accordance with Ind AS at the date of transition to Ind AS shall be consistent with estimates made for the same date in accordance with the previous GAAP unless there is objective evidence that those estimates were in error.


The Company’s estimates under Ind AS are consistent with the above requirement. Key estimates considered in preparation of the financial statements that were not required under the previous GAAP are listed below:


- Fair valuation of financial instruments carried at FVTPL and/ or FVOCI.


- Impairment of financial assets based on the expected credit loss model.


- Determination of the discounted value for financial instruments carried at amortised cost.


(2) Classification and measurement of financial assets


Ind AS 101 requires an entity to assess classification of financial assets on the basis of facts and circumstances existing as on the date of transition. Further, the standard permits measurement of financial assets accounted at amortised cost based on facts and circumstances existing at the date of transition if retrospective application is impracticable,


Accordingly, the Company has determined the classification of financial assets based on facts and circumstances that exist on the date of transition. Measurement of the financial assets accounted at amortised cost has been done retrospectively except where the same is impracticable.


(3) Hedge accounting


Hedge accounting can only be applied prospectively from the transition date to transactions that satisfy the hedge accounting criteria in Ind AS 109, Financial Instruments, at the date of transition. Hedging relationships cannot be designated retrospectively, and the supporting documentation cannot be created retrospectively. As a result, only hedging relationships that satisfied the hedge accounting criteria as on the date of transition are reflected as hedges in the financial statements under Ind AS,


Reconciliations


The following reconciliations provides the effect of transition to Ind AS from previous GAAP in accordance with Ind AS 101 - First-time adoption of Ind AS.


6. Disclosure on Specified Bank Notes (SBNs)


During the year, the Company had SBNs or other denomination note as defined in the MCA notification G.S.R. 308(E) dated March 31, 2017 on the details of SBN held and transacted during the period from November 8, 2016 to December, 30 2016, the denomination wise SBNs and other notes as per the notification is given below:


7. Segmental Information


Operating segments


The Company is engaged in a single operating segment of providing contract research and manufacturing services. Accordingly, there are no additional disclosures to be provided Ind AS 108 ‘Operating Segments’ other than those already provided in the financial statements.


Geographical information


The geographical information analyses the Company’s revenues and non-current assets by the Company’s country of domicile (i.e. India) and other countries. In presenting the geographical information, segment revenue has been based on the geographic location of the customers and segment assets which have been based on the geographical location of the assets.


8. Share based payments to employees


Syngene ESOP Plan


On July 20, 2012, Syngene Employee Welfare Trust (‘Trust’) was created for the welfare and benefit of the employees and directors of the Company. The Board of Directors approved the employee stock option plan of the Company. On October 31, 2012 the Trust subscribed 6,680,000 equity shares (Face Value of Rs.10 per share) of the Company using the proceeds from interest free loan of Rs.150 obtained from the Company, adjusted for the consolidation of shares and bonus issue. As at March 31, 2017, the Trust holds 4,513,525 (March 31, 2016: 5,919,219; April 1, 2015 - 6,680,000) equity shares of face value of Rs.10/- each, adjusted for the consolidation of shares and bonus issue. As at March 31, 2017, the Trust transferred 2,166,475 (March 31, 2016 - 760,781) equity shares to the employees on exercise of their stock options.


Grant


Pursuant to the Scheme, the Company has granted options to eligible employees of the Company under Syngene Employee Stock Option Plan -2011. Each option entitles for one equity share. The options under this grant will vest to the employees as 25%, 35% and 40% of the total grant at end of second, third and fourth year from the date of grant, respectively, with an exercise period of three years for each grant. The vesting conditions include service terms and performance of the employees. These options are exercisable at an exercise price of Rs.22.50 per share (Face Value of Rs.10 per share).


9. Exceptional item


Pursuant to a fire incident on 12 December 2016, certain fixed assets, inventory and other contents in one of the buildings was damaged. The Company lodged an initial estimate of loss with the insurance company and the survey is currently ongoing. During the year ended 31 March 2017, the Company has written off the net book value of assets aggregating to Rs.795 million and recognised a minimum Insurance claim receivable for an equivalent amount. During the current year, the Company has received an initial disbursement of Rs.200 from the insurance company and the same has been adjusted with the amount recoverable from the insurance company.


In addition, the Company is in the process of determining its claim for Business Interruption and has accordingly not recorded any claim arising there from at this stage.


10. Corporate social responsibility


As per Section 135 of the Companies Act, 2013, a company, meeting the applicability threshold, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility (CSR) activities.


11. Events after reporting period


On April 27, 2017, the Board of Directors of the Company has recommended a final dividend of Rs.1/- per equity share on face value of Rs.10/- each. The recommended dividend is subject to the approval of the shareholders in the Annual General Meeting of the Company,


12. Prior years’ comparatives


Previous year’s figures have been regrouped / reclassified, where necessary, to conform to current year’s classification.

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