CORPORATE GOVERNANCE AND ETHICS

LUPIN PHARMACEUTICALS

PGPEM 2018-20 – GROUP11

Indranil Basu (1816007)

Sareetha Kanchan (1816020)

Vijay Kanna (1816023)

Vikas Kulkarni (1816028)

Hagar Sudha (1816062)

Contents
Lupin – A Brief History .................................................................................................................................. 3
Context of the Report ................................................................................................................................... 4
Ownership structure .................................................................................................................................... 4
Board of Directors ........................................................................................................................................ 5
Percentage of Independent Directors ...................................................................................................... 5
Presence of Non-Executive or Promoter Chairman ................................................................................. 6
Board Representation External Investors ................................................................................................. 6
The audit committee .................................................................................................................................... 6
The Auditor .................................................................................................................................................. 6
Executive Compensation .............................................................................................................................. 7
Non-Executive Compensation ...................................................................................................................... 7
Overall scoring of Lupin ................................................................................................................................ 7
Conclusion .................................................................................................................................................... 8
Appendix ...................................................................................................................................................... 9
Exhibit 1 .................................................................................................................................................... 9
Exhibit 1a .............................................................................................................................................. 9
Exhibit 1b .............................................................................................................................................. 9
Exhibit 2 .................................................................................................................................................. 10
Exhibit 3 .................................................................................................................................................. 11
Exhibit 4 .................................................................................................................................................. 12
Exhibit 5 .................................................................................................................................................. 12
References .................................................................................................................................................. 13

Lupin – A Brief History
Lupin was incorporated by DB Gupta in the year 1968 in Mumbai with a seed investment of Rs. 5000 from
his wife Manju Gupta, the intention being able to use it as a weapon to fight the life-threatening diseases
that plagued the nation [1]. Lupin started out as API player for anti-tuberculosis segment before venturing
out into formulations, Lupin’s main focus remained mainly one anti TB drug, rifampicin a low margin
product with strict government price controls [2]. In the interim Lupin remained a promoter driven
company even after being publicly listed. However, a failed diversification into an unrelated real estate
sector, led to the company being saddled with a mountain of debt [3]. To pare of debt a portion of the
promoter stake was sold to CVC international, a Citigroup company in 2003, which resulted in Kamal K
Sharma being brought in as MD of Lupin.

With a 12.5% of shareholding stake sold to CVC international, the promoters’ stake dropped to around
55% [4]. With Sharma at the helm of affairs Lupin diversified into a range of affordable generics and
branded formulations in many markets. Lupin has also grown inorganically via a stream of acquisition of
pharmaceutical companies across the world.

The promoter group holds a significant share in Lupin. Over the years, it has come down from 67% to 46%.
Even though the promoters have divested of their majority stake, it is still considerable enough to wield
influence over the corporate decisions. The next higher stake is held by the institutional investors in which
the FII’s form the major part. The “Others” comprise the diffused shareholders like the general public.

Lupin shareholding Pattern

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%
Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Percentage of dispersed ownership

Percentage of domestic financial institution ownership

Percentage of foreign institutional ownership

Percentage of promoter ownership

Even after promoter stake dilution, the promoters continue to hold significant sway in the affairs of the
company by virtue of a significant stake in company shares and being part of the board of directors.
As can be seen, the percentage of independent directors on the board continue to hover around 50%

Independence Of Lupin Board

90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2000 2005 2010 2015 2020

% of outside directors % of independent directors

The promoter group is conveniently able to drive the board to serve its own interests. The possibility of
board capture is very much probable in this case

Context of the Report

Lupin is essentially a promoter driven company. And, as the Naresh Chandra Committee on Audit and
Governance observed in its report, “while a promoter who controls the management and owns a majority
stake is not expected to perform in a ‘value-destroying manner’, the promoter, by virtue of being in control,
can nevertheless act in a way that deprives minority shareholders of their de jure ownership rights without
necessarily affecting company profitability”. The distributed ownership among the general public is about
20%, FII’s about 20% and Institutional Investors in India having a shareholding of about 10%. This
distributed ownership on one hand and a concentrated ownership by the promoter leads to free-riding
phenomenon with none of the non-promoter shareholders being able to stake a decision-making claim.
Nor does a condition where these distributed shareholders join hands to place their representative on the
board arise. So, the resulting skewed board structure can lead to expropriation of the minority
shareholders. It is in this context that we look at Lupin’s operations and attempt to analyze its operations
and the governance mechanisms in place.

The corporate governance structure of Lupin is evaluated on the basis of the following mechanisms:

1. Ownership structure
2. Board of Directors
3. Audit Committee
4. External Auditor
5. Executive Compensation

Ownership structure
From the shareholding pattern of Lupin (Exhibit 2), it is amply clear that the promoter group has a
significant shareholding in Lupin and plays an important role in all the corporate decisions at Lupin. Barring
a period of time from 2003to 2013, when Kamal K Sharma was brought from outside in deference to the
wishes of CVC international, the position of the managing director has remained primarily with the
promoter group. This makes Lupin susceptible to Type–II agency problem due to the disproportionate role
of the promoter in the decisions at Lupin. A case can be observed on the floundering of Lupin’s earnings
due to issues arising out of acquisition of the US pharmaceutical firm Gavis [6]. Inorganic growth of Lupin
via global acquisitions has been the preferred growth strategy of Nilesh & Vinita Gupta who head Lupin.
Due to higher shareholding stake of promoters in Lupin, and the top positions in the organization being
dominated by the promoter group, Lupin’s score in this attribute is 57.

The ownership held by promoters, foreign institutional investors, domestic financial institutions and the
dispersed shareholders shown in Exhibit 2 indicates significant dispersion without sufficient board
representation. This is a significant deviation from an ideal situation since the collective ownership of 53%
does not have any representation on the board.

Board of Directors
The Clause 49 of the listing agreement of the Indian stock exchange states that ‘there should be an
optimum combination of executive and non-executive directors in a company board with the non-executive
directors comprising at least half of the overall board strength, should the chairman and CEO be the same
or at least one third the board strength if the chairman is the non-executive director’ [5].

The Lupin’s board is found to be barely complying with the requirements with the strength of independent
directors being around 50% of the overall board composition (Exhibit 1a). The overall board size is
observed to be hovering around 10-13, which is in the optimal range. There’s significant promoter
presence on the board, which indicates a disproportionate representation of the promoters interest on
the board. On the other hand, the other concentrated blocks of owners like FII’s and the domestic
institutions, do not have their nominees on board. The board meetings are observed to be adequate with
at the bare minimum one meeting per quarter. The attendance of the independent directors in the board
meetings has improved to around 85% in recent years which is an indicative sign of the directors keeping
themselves abreast with the events and issues in Lupin on a regular basis, but it has also been observed
that the independent directors hold multiple directorships varying from 1-22. This may be an impediment
in the way of the independent director’s fiduciary duties towards Lupin’s shareholders.

The evaluation of Lupin based on ten important attributes encapsulating the state of governance with
respect to the board of directors and the scores are demonstrated in Exhibit 1b. Lupin’s overall score is
67, it has improved over the previous years, though still being low from the score in the year 2005.

We will analyze some of the key aspects on the Board Composition below.

Percentage of Independent Directors

Lupin has maintained its board size between 10 and 13, with the current size of 11 in 2018. In this the
percentage of independent directors has generally hovered around 55%, with a minimum of 45% and a
maximum of 67%. This is not very healthy given the fact that Lupin has been foraying into investments in
strategic acquisitions and given the situation where the promoters have a vested interest in growing the
product portfolio, it is possible that while some of the acquisitions may be good towards product
diversification, such a diversification may not be in the best interest of the shareholders. A wider
representation on the board is therefore essential to ensure such decisions are taken after considerable
due diligence keeping the interests of the minority shareholders in consideration.

Presence of Non-Executive or Promoter Chairman

Until very recently (2017) the founder of Lupin – Dr. Desh Bandhu Gupta was the promoter-chairman of
the company and his wife Mrs. Manju D Gupta held the position of Executive Director. After the death of
Dr. Gupta, Mrs. Gupta was conveniently moved to a non-executive director position. This led to a
reduction in board size from 12 to 11. Had the board size been maintained at 12 by bringing in a new
independent director the promoter’s concentration on the board would have reduced further.

Board Representation External Investors

One of the key issues in a dispersed ownership structure is the possibility of free-riding. As can be seen
from Exhibit 2 there is no representation on the board from either the Foreign Institutional Investors or
from the Domestic Financial Institutions and it is highly unexpected of the dispersed general public to
have a unanimous representative on the board. This leads to the promoters having a free-hand in choosing
the Directors and could thus lead to a mismatch in the “fiduciary duty” of the independent directors –
should it be towards the external investors whom they have no relation with or should it be towards the
promoters who hired them!

The audit committee

Clause 49 regulations require the minimum size of the audit committee to be 3, with two thirds of its
members and the chairman being independent directors.

Size of the Audit Committee

As is observed from Exhibit 3 Lupin has for most of the years met the criteria specified by Clause 49.
However due to moving from exceeding the requirements of Clause 49 previously, to barely meeting the
requirements, Lupin’s score has declined from 90 to 71.

Percentage of Independent Directors

One of the striking observations of the audit committee from Exhibit 3 is that Lupin has moved from a
100% independent audit committee to a 66% independent representation. And, it is clearly questionable
regarding the grounds on which this decision was taken. As a peer comparison it was found that Sun has
5 members on the Audit committee, Dr. Reddy’s has 4, Cipla has 4. This can be taken as a cue to increasing
the committee size and improving on the transparency.

Presence off Executive Director

Dr. Kamal Sharma, the Vice Chairman of Lupin, is a member of the Audit committee which would give rise
to transparency issues with respect to audit function of the firm.

There were 6 meetings held by the committee and all the meetings were attended by all 3 members.

The Auditor
Lupin has always engaged the top Auditors (previously Deloitte Haskins & Sells and more recently BSR Co
LLP (KPMG)). The external auditor is among the highest paid with many clients, and this can be an
important factor in determining the quality of audit performed by the external auditor. A more reputed
external auditor with a wider client base and top notch fees charged for the audit process can be expected
to perform a very thorough audit because the auditor’s reputation will be at stake in case of any
discrepancy in the audit process. However, Lupin has retained the same auditor for more than 10 years
and has only recently changed the auditor. Also, as shown from the data gleaned from the annual reports
of Lupin, the percentage of overall auditor fees that can be attributed to Lupin has been increasing over
the years.

AUDIT FEES AS % OF TOTAL FEES TO
AUDITOR

80.00

70.00
60.00

50.00
40.00
30.00
20.00

10.00
0.00
2004 2006 2008 2010 2012 2014 2016 2018 2020

This is a favorable attribute from the corporate governance perspective, as there appears to be no
inducements from the organization to perform an audit to suit the organization’s requirements. The score
of Lupin has improved to 81 in the recent years, due to change in the external auditor and audit fees
comprising the major share of overall total fees to the auditor

Executive Compensation
It is observed from the past 5 annual reports of Lupin that the company has maintained a Remuneration
Committee, which is a non-mandatory requirement, to look into the salary and other compensation.
Exhibit 5 shows the trends in total salary paid to the Executive Directors. It is observed that while the
salary/total package is not aligned with the company performance (total sales) for Mr. Kamal Sharma
(Vice-Chairman), Mr. Nilesh Gupta’s total package has seen a steady rise, also without any direct relation
to the company performance.

Non-Executive Compensation
Lupin’s non-executive directors have received near stable total package (sitting fees and commission) over
the past 3 years. This leads us to believe that the company has maintained its non-executive compensation
package in check as required under the Clause 49 related to Director Remuneration.

Overall scoring of Lupin

The overall lupin score obtained as an average of all the attribute scores is as follows:
 Overall Lupin score

74.00

68.00 68.00 68.00

67.00 67.00 67.00
66.00 66.00
65.00 65.00 65.00
64.00

2018 2017 2016 2015 2013 2012 2011 2010 2009 2008 2007 2006 2005

Lupin with an overall score of 68 in 2018 has moved to group 3 from group 4 as reported previously [7].

Conclusion
Lupin has improved on its corporate governance in recent years but has some way to go. Its executive
compensation, an increase in independent director’s presence on the board, being more transparent on
their acquisition strategies can go a long way in making the company more acceptable in terms of
governance and thereby increasing shareholder confidence and trust.

Appendix
Exhibit 1
Exhibit 1a
Name of Director Promoter/Executive/Independent Director Comment
Since
Late Dr. Desh Bandhu Promoter and Executive 23/Mar/1988 Was chairman upto his
Gupta Chairman death on 26/Jun/17
Manju D Gupta Promoter and Non-Executive 1/Apr/2014 Was moved to Non-
Director executive position
after the death of Desh
Bandhu Gupta
Kamal Sharma Executive Director 25/Aug/2003
Vinita D Gupta CEO, Executive Director 17/Aug/2001 Desh Bandhu Gupta’s
daughter
Nilesh D Gupta Promoter, Executive Director 1/Sep/2013 Desh Bandhu Gupta’s
Son
Ramesh Swaminathan CFO, Executive Director 26/Sep/2007
Vijay Kelkar Independent Non-Executive 29/Jan/2010
Director
R A Shah Independent Non-Executive 25/Jul/2006
Director
Richard Zahn Independent Non-Executive 29/Jan/2010
Director
K U Mada Independent Non-Executive 27/Jun/2001
Director
Dileep Choksi Independent Non-Executive 23/Oct/2012
Director
Jean-Luc Belingard Independent Non-Executive 27/Oct/2015
Director

Exhibit 1b
Evaluation of Lupin on important attributes describing corporate governance with respect to the board
of directors
Parameters/Year 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005
Board Size 11 12 12 10 10 11 11 11 13 11 11 13 12 12
% of outside directors 72.73% 66.67% 66.67% 60.00% 60.00% 63.64% 63.64% 63.64% 69.23% 64% 73% 77% 75% 75.00%
% of independent directors 54.55% 50.00% 50.00% 50.00% 50.00% 54.55% 54.55% 55% 62% 55% 45% 54% 67% 66.67%
Prescence of nominee directors No No No No No No No No No No No No No Yes(2)
Presence of non executive or promoter chair man P&NE P&E P&E P&E P&E P&E P&E P&E P&E P&E P&E P&E P&E P&E
Presence of promoter on board Yes Yes Yes yes yes yes yes yes yes yes yes yes yes yes
Total number of directorships held by independent directors 37 37 40 37 not avlbl 44 44 44 50 44 53 69 68 40
Average number of directorships held by independent directors 6.2 6.2 6.7 7.4 not avlbl 7.3 7.3 7.3 6.3 7.3 10.6 9.9 8.5 5.0
Number of board meetings held 6 6 5 4 not avlbl 4 5 4 5 5 6 5 9 5
% of board meetings attended by independent direcors 89% 86% 90% 90% not avlbl 79% 87% 92% 45% 57% 73% 57% 51% 77%
% of independent directors who attended agm 83% 100% 83% 80% not avlbl 83% 100% 100% 38% 50% 100% 71% 13% 71%

Parameters/Year 2018 2017 2016 2015 2013 2012 2011 2010 2009 2008 2007 2006 2005
Board Size 4.5 4.5 4.5 4 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5
% of outside directors 3.64 3.33 3.33 3.00 3.18 3.18 3.18 3.46 3.18 3.64 3.85 3.75 3.75
% of independent directors 2.73 2.50 2.50 2.50 2.73 2.73 2.73 3.08 2.73 2.27 2.69 3.33 3.33
Prescence of nominee directors 2 2 2 2 2 2 2 2 2 2 2 2 4
Presence of non executive or promoter chair man 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
Prescence of non executive and promoter chairman 3 3 3 3 3 3 3 3 3 3 3 3 3
Presence of promoter on board 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
Total number of directorships held by independent directors 3 3 2.5 2.5 3 3 3 2.5 3 2.5 2 2 4
Number of board meetings held 4.5 3.5 4.5 4 4 4 4 4.5 4.5 4.5 4.5 4.5 4.5
% of board meetings attended by independent direcors 4.44 4.31 4.50 4.50 3.96 4.33 4.58 2.25 2.83 3.67 2.86 2.57 3.86
% of independent directors who attended agm 4.17 5.00 4.17 4.00 4.17 5.00 5.00 1.88 2.50 5.00 3.57 0.63 3.57
Overall score 67.00 65.00 65.00 62.00 64.00 66.00 67.00 58.00 60.00 65.00 61.00 56.00 71.00

Exhibit 2
Evaluation of Lupin on important attributes describing corporate governance with respect to the
ownership structure.

Parameters/Year 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
Percentage of promoter ownership 47.01% 46.69% 46.52% 46.63% 46.57% 46.84% 46.75% 46.98% 47.14% 50.64% 51.12% 52.34% 52.45% 52.51% 50.54% 67.22% 67.22% 66.34%
Percentage of foreign institutional ownership 25.39% 31.87% 35.14% 34.69% 31.86% 28.80% 27.52% 21.97% 17.96% 13.94% 17.82% 13.82% 12.77% 17.03% 12.71% 0.25% 0.14% 0.00%
Percentage of domestic financial institution ownership 12.20% 9.38% 6.28% 8.67% 11.31% 14.33% 16.71% 20.06% 23.51% 24.48% 10.12% 11.33% 8.80% 5.94% 5.28% 4.29% 7.19% 2.65%
Percentage of dispersed ownership 15.40% 12.06% 12.06% 10.01% 10.08% 10.04% 9.02% 10.99% 11.39% 10.94% 20.94% 22.51% 25.98% 24.52% 31.47% 28.24% 25.45% 31.01%

Parameters/Year 2018 2017 2016 2015 2013 2012 2011 2010 2009 2008 2007 2006 2005
Percentage of promoter ownership 2.65 2.67 2.67 2.67 2.66 2.66 2.65 2.64 2.47 2.44 2.38 2.38 2.37
Percentage of foreign institutional ownership 3.13 3.30 3.38 3.37 3.22 3.19 3.05 2.95 2.85 2.95 2.85 2.82 2.93
Percentage of domestic financial institution ownership 2.81 2.73 2.66 2.72 2.86 2.92 3.00 3.09 3.11 2.75 2.78 2.72 2.65
Percentage of dispersed ownership 2.89 2.80 2.80 2.75 2.75 2.73 2.77 2.78 2.77 3.02 3.06 3.15 3.11
Overall Score 57.37 57.49 57.56 57.51 57.44 57.47 57.38 57.32 56.01 55.83 55.37 55.33 55.31

Exhibit 3
Evaluation of Lupin on important attributes describing corporate governance with respect to the audit
committee

Parameters/Year 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005
Size of audit commit ee 3 3 3 3 3 4 3 3 3 3 3 4 3 3
% of independent directors 66.67% 66.67% 66.67% 66.67% 66.67% 75.00% 66.67% 67% 67% 67% 67% 75% 100% 100%
Presence of executive directors in audit commit ee Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No
Number of meetings held 5 5 7 5 not avlbl 7 5 6 6 6 4 7 6 6
Parameters/Year 2018 2017 2016 2015 2013 2012 2011 2010 2009 2008 2007 2006 2005
Size of audit commit ee 3 3 3 3 4 3 3 3 3 3 4 3 3
% of independent directors 3 3 3 3 4 3 3 3 3 3 4 5 5
Presence of executive directors in audit commit ee 3 3 3 3 3 3 3 3 3 3 3 5 5
Number of meetings held 5 5 5 5 5 5 5 5 5 5 5 5 5
Overal score 71 71 71 71 78 71 71 71 71 71 78 90 90

Exhibit 4
Evaluation of Lupin on important attributes describing corporate governance with respect to the
external auditor

Parameters/Year
Top auditor in terms of audit fees (in crores)
Top auditor in terms of audit clients
Top auditor in terms of total fees
% of overall auditor fees attributed to audit for Lupin
change in auditor from last year
2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005
N(110.08) Y(245.65) Y(224.89) Y(172.03) Y(142.14)
Y(135) Y(84) Y(158) Y(147) Y(149) Y(140)
N(146.89) Y(333.67) Y302.03) Y(251.72) Y(196.61)
67.23 69.75 67.70 63.11 60.32 56.79 47.18 66.47 63.16 43.21 31.82 47.27 34.48 74.07
No Yes No No No No No No No No No No No No

Parameters/Year 2018 2017 2016 2015 2013 2012 2011 2010 2009 2008 2007 2006 2005
Top auditor in terms of audit fees (in crores) 4 4 4 4 4 4 4 4 4 4 4 4 4
Top auditor in terms of audit clients 4 4 4 4 4 4 4 4 4 4 4 4 4
Top auditor in terms of total fees 4 4 4 4 4 4 4 4 4 4 4 4 4
% of overall auditor fees attributed to audit for Lupin 3.36 3.49 3.39 3.16 2.84 2.36 3.32 3.16 2.16 1.59 2.36 1.72 3.70
change in auditor from last year 4.75 5 2.5 2.75 3 3.25 3.5 3.75 4 4.25 4.5 4.75 5
Overall score 80 81 71 71 71 70 75 75 72 71 75 73 82

Exhibit 5
Compensation of Executives in Million INR

Name/Year 2018 2017 2016 2015

Dr. Desh Bandhu Gupta 124.44 476.61 447.79 375.77
Manju Gupta 14.38 5.1 5.09 5.05
Kamal Sharma 187.22 190.4 257.36 166.07
Vinita Gupta 172.2 173.13 190.17 NA
Nilesh Gupta 90.66 81.78 75.91 82.35
Ramesh Swaminathan 69.46 53.21 23.42 NA

Exhibit 6

References
1. https://www.lupin.com/our-world/our-founders-story/
2. https://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/lupin-
founder-db-gupta-a-self-made-maverick-who-wanted-to-take-out-tb-in-india-
dead/articleshow/59320216.cms
3. http://www.forbesindia.com/printcontent/47377
4. https://www.businesstoday.in/magazine/cover-story/india-best-ceo-2013-pharma-kk-sharma-
lupin-success/story/201392.html
5. http://indianboards.com/files/clause_49.pdf
6. https://www.businesstoday.in/magazine/the-hub/healing-lupin/story/294456.html
7. A Corporate Governance Index for Large Listed Companies in India, Jayati Sarka, subrata
Sarkar,Kaustav Sen