It is little wonder that Aurobindo Pharma is trading near its all time high-a look at the company's performance justifies the price. The company has reported a 106.32 per cent jump in its bottomline to Rs 18.59 crore, an increase which is generally seen in companies with a small profit base and is hardly expected of one of the top five pharma companies in the country.

Additionally, one has to consider that 50 per cent of Aurobindo's products though under the DPCO, retail for prices much lower than the cap imposed. How then has Aurobindo managed the growth? As has been the case with most of the domestic pharmaceutical companies, Aurobindo's growth has been fuelled by strong exports. Reflecting this is the company's exports which increased 108 per cent to Rs 77 crore.

Additionally, what makes the performance impressive is the fact that the company is mainly a bulk drug manufacturer, and such kind of growth is normally witnessed in the formulation segments.

Even more surprising isthe fact that the company has shown a sharp growth in the heavily overcrowded semi-synthetic penicillins (SSPs) segment. Bulk SSPs have recorded a growth of 52 per cent. Cephalosporins and quinolines have also been the growth drivers for the company. Domestic sales of the company have shown a growth of 58 per cent to Rs 105.3 crore.

One of the main reasons for the high growth rate at Aurobindo, is that it provides the bulk to some of the large domestic players like Ranbaxy, Cipla, Dr Reddy's and Lupin Labs among others. Given that these companies feature amongst the top pharma players, in terms of formulation sales, thus any growth on their end is directly compounded on the performance of Aurobindo.

Further, being one of the lowest cost producers in the country with world scale plants, has helped the company at a time when businesses were being affected due to increased competition and recession.

Aurobindo Pharma is not considering increasing its domestic presence in the formulation business.Interestingly, formulations account for only 3 per cent of the company's turnover. However, two new formulation plants are being set up in Andhra Pradesh at a cost of Rs 25 crore. Further, the company is entering the high realisation market of cardiovascular and new generation cephalosporins. Aurobindo is also pumping in Rs 50 crore towards R&D for development of products going off-patent.

Thus considering that Aurobindo already has a very strong presence in the international market and is on the procurement list of most of the top pharmaceutical companies, the company seems to be batting on a firm wicket. Additionally, the increased stress on formulations will also assure a robust growth for the company in future.

Income Tax-Proposed Amendments

If a caretaker government can take politically sensitive decisions like the hike in farmer support prices, why cannot some basic decisions related to corporate restructuring be taken? Apparently, acting on FICCI initiative, the changes are sought to becarried out through an ordinance on fine-tuning some of the provisions concerning amalgamations, demergers and slump sales.

The demand for extending a reduced taxation rate of 10 per cent on long-term capital gains to unlisted securities has apparently been found unacceptable by the ministry. This concession, however, will be provided to schemes of the UTI and other mutual funds subject to a clearance from the law ministry. Albeit with a rider attached, the benefit of indexation can not be availed of, if the capital gains tax rate is 10 per cent.

On demergers, the ministry is of the view that the definition can be narrowed down substantially, to include only those assets and liabilities relatable to the undertaking which are mutually agreed upon for transfer. If done, this will be a boon as the present requirement does not make much sense.

As for slump sales, the ministry is in agreement over the issue, that the provision of the cost of acquisition of the assets to the buyer, should be the lump sumconsideration plus the value of the liabilities undertaken.

Moreover, the resultant depreciation benefits would be made available to the buyer on that basis. Comments Dr Pravin P Shah, chartered accountant, "as regards the benefit of unabsorbed depreciation(UA) in slump sale, it is a logical move. UA is allowed in amalgamation, demerger but not in slump sale.

The more logical thing to do would be to allow the UA to be added back. It makes no sense to levy capital gains tax on one hand and allow UA on the other. If, for the inadequacy of profits, the seller has UA, why should the benefit not be available to the buyer? Instead the UA should be added back to the block so that the cost of acquisition of the buyer also goes up and the capital gains is reduced for the seller." The buyer of course gets the benefit of depreciation even now.

Another proposal is to allow demerger through Sec 293 of the Companies Act route instead of Sec 391 & 394 route. This would entail an ordinary resolution, unlike thespecial resolution and court approval required now. The average period for obtaining the court approval is 330 days and demerger in any case is the internal affair of the company.

One proposal that has not found favour, is that a resulting company in a demerger should be allowed to pay the consideration partly by way of equity shares and partly by way of debt to equity holders of the demerged company.

Irrespective of this, the issue that needs to be considered is whether exemption (transfer not considered as transfer) from capital gains tax under Sec 47 (vi) of the I-T Act is available. In case of issue of consideration (either debenture, bond or cash) by an amalgamated company, the legal position is not clear and hence for a demerger also, the problem will arise.

The Gujarat HC in Gautam Sarabhai(173 ITR 216) has held that exemption is restricted to issue of shares only. A divergent view is taken by Madras HC in M.C.T.M. Corporation P. Ltd(221 ITR 524).

The question of how to compute capital gainstax in the event of a consideration being paid partly in equity and partly in debentures is also not clearly answered. It is possible to take a view that exemption u/s 47 (vii) will be available. The other view based on a decision of the Supreme Court in A. R. Krishnamurthy (176 ITR 417), is that the difficulty in computing is no reason for exemption. Thus because of the divergent views of HCs, the matter will have to be decided by SC or clarified by CBDT.

EMCEE (With contributions from Shishir Asthana & Urmik Chhaya)