The credit policy of Cipla



Cipla is a pharmaceuticals company being founded in the year 1935 and has its headquarters at Mumbai, India. The chairman of the company is Y. K. Hamied. Cipla, originally founded by Khwaja Abdul Hamied as The Chemical, Industrial & Pharmaceutical Laboratories is a prominent Indian pharmaceutical company, best-known outside its home country for producing low-cost anti-AIDS drugs for HIV-positive patients in developing countries. Cipla makes drugs to treat cardiovascular disease, arthritis, diabetes, weight control, depression and many other health conditions, and its products are distributed in more than 180 countries worldwide. Among the hundreds of generic medications it produces for international distribution are atorvastatin, amlodipine, fluoxetine, venlafaxine hydrochloride and metformin.


Meaning: Guidelines that spell out how to decide which customers are sold on open account, the exact payment terms, the limits set on outstanding balances and how to deal with delinquent accounts.


  1. To study the credit policy, in depth, of Cipla.
  2. To find out the advantages of a good and effective credit policies of a company.
  3. To find out if the credit policy adopted by Cipla is apt or not.


INTRODUCTION: In order to achieve the above mentioned objectives, an intense study of the company's profile, its objectives, goal, mission, vision and its financial reports.

LITERATURE REVIEW: The following articles have been read to get to the final conclusions and recommendations and also to get maximum information about the company:

  1. Cipla launches generic drug to treat H1N1
  2. The article was a help in knowing the latest news of the company.

    The link for the same is:

  3. Cipla to export anti-swine flu drugs to US.
  4. The article talks about the Cipla-US deal for anti-Swine Flu drugs.

    The article is available at the following link:

  5. Managing Credit: Is your Credit Policy Profitable?
  6. The article talks about making the Credit Policy Profitable for a company.

    The article is available at the following site and a few information is taken from the same.

  7. Sharekhan launches real time trading application- "P1+" reaffirmed for Cipla, Pfizer CP's
  8. The article talks about the CRISIL ratings of the company.

    The article was of a great help and is available at:

DATA COLLECTION: The data so collected is a secondary data, been collected from different sites, citing the information about the company and credit policy. Also, financial reports of the company had been of great help in the analysis part.

STATISTICAL TOOLS: The statistical tools used in my report are the different financial ratios of Cipla which lead to all my analysis, conclusions and recommendations.


Background: Cipla was established in 1935 as the chemical, Industrial & Pharmaceutical Laboratories by Khwaja Abdul Hamied. The company had launched its first product in 1937 and has since then expanded to establish multi-locational manufacturing units in India which manufacture more than 1500 drugs. The company started exporting its products in 1964 and today, has presence in about 180 countries across globe. Dr. Yusuf Hamied, Chairman and Managing Director of the company, looks after the day-to-day operations of the company. He is assisted by a team of qualified and experienced professionals.

Code of Conduct

As required under revised Clause-49 of the Listing Agreement (LA) the following code of conduct has been approved by the Board of Directors and is applicable to the Directors and Senior Management of the Company.

  1. Ethical conduct
  2. All directors and senior management employees shall deal on behalf of the Company with professionalism, honesty, integrity as well as high moral and ethical standards. Such conduct shall be fair and transparent and be perceived to be as such by third parties.

  3. Conflict of interest
  4. Any director or senior management employee of the Company shall not engage in any business, relationship or activity, which might detrimentally conflict with the interest of the Company.

  5. Transparency
  6. All directors and senior management employees of the Company shall ensure that their actions in the conduct of business are totally transparent except where the needs of business security dictate otherwise. Such transparency shall be brought about through appropriate policies, systems and processes.

  7. Legal compliance
  8. All directors and senior management employees of the Company shall at all times ensure compliance with all the relevant laws and regulations affecting operations of the Company. They shall abreast of the affairs of the Company and be kept informed of the Company's compliance with relevant laws, rules and regulations. In the event that the implication of law is not clear, the course of action chosen must be supported by eminent legal counsel whose opinion should be documented.

  9. Rightful use of company's assets
  10. All the assets of the Company both tangible and intangible shall be employed for the purpose of conducting the business for which they are duly authorized. None of the assets of the Company should be misused or diverted for personal purpose.

  11. Cost consciousness
  12. All the directors and senior management employees of the Company should strive for optimum utilization of available resources. They shall exercise care to ensure that costs are reasonable and there is no wastage. It shall be their duty to avoid ostentation in Company expenditure.

  13. Confidential information
  14. All directors and senior management employees shall ensure that any confidential information gained in their official capacity is not utilized for personal profit or for the advantage of any other person. They shall not provide any information either formally or informally to the press or to any other publicity media unless specifically authorized to do so. They shall adhere to the provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992.

  15. Relationships with Suppliers and Customers
  16. The Directors and senior management employees of the Company during the course of interaction with suppliers and customers, shall neither receive nor offer or make, directly and indirectly, any illegal payments, remuneration, gifts, donations or comparable benefits which are intended or perceived to obtain business or uncompetitive favours for the conduct of its business. However this is not intended to include gifts of customary nature.

  17. Interaction with Media
  18. The Directors and senior management employees other than the designated spokespersons shall not engage with any member of press and media in matters concerning the Company. In such cases, they should direct the request to the designated spokespersons.

  19. Safety and Environment
  20. The Directors and senior management employee shall follow all prescribed safety and environment-related norms.


  • 1935: Dr K A Hamied sets up "The Chemical, Industrial and Pharmaceutical Laboratories Ltd." in a rented bungalow, at Bombay Central.
  • 1941: As the Second World War cuts off drug supplies, the company starts producing fine chemicals, dedicating all its facilities for the war effort.
  • 1952: Sets up first research division for attaining self-sufficiency in technological development.
  • 1960: Starts operations at second plant at Vikhroli, Mumbai, producing fine chemicals with special emphasis on natural products.
  • 1968: Cipla manufactures ampicillin for the first time in the country.
  • 1972: Starts Agricultural Research Division at Bangalore, for scientific cultivation of medicinal plants.
  • 1976: Cipla launches medicinal aerosols for asthma.
  • 1980: Wins Chemexcil Award for Excellence for exports.
  • 1982: Fourth factory begins operations at Patalganga, Maharashtra.
  • 1984: Develops anti-cancer drugs, vinblastine and vincristine in collaboration with the National Chemical Laboratory, Pune. Wins Sir P C Ray Award for developing inhouse technology for indigenous manufacture of a number of basic drugs.
  • 1985: US FDA approves Cipla's bulk drug manufacturing facilities.
  • 1988: Cipla wins National Award for Successful Commercialisation of Publicly Funded R&D.
  • 1991: Lauches etoposide, a breakthrough in cancer chemotherapy, in association with Indian Institute of Chemical Technology. The company pioneers the manufacture of the antiretroviral drug, zidovudine, in technological collaboration with Indian Institute of Chemical Technology, Hyderabad.
  • 1994: Cipla's fifth factory begins commercial production at Kurkumbh, Maharashtra.
  • 1997: Launches transparent Rotahaler, the world's first such dry powder inhaler device now patented by Cipla in India and abroad. The palliative cancer care centre set up by the Cipla Foundation, begins offering free services at Warje, near Pune.
  • 1998: Launches lamivudine, becoming one of the few companies in the world to offer all three component drugs of retroviral combination therapy (zidovudine and stavudine already launched).
  • 1999: Launches Nevirapine, antiretroviral drug, used to prevent the transmission of AIDS from mother to child.
  • 2000: Cipla became the first company, outside the USA and Europe to launch CFC-free inhalers - ten years before the deadline to phase out use of CFC in medicinal products.
  • 2002: Four state-of-the-art manufacturing facilities set up in Goa in a record time of less than twelve months.
  • 2003: Launches TIOVA (Tiotropium bromide), a novel inhaled, long-acting anticholinergic bronchodilator that is employed as a once-daily maintenance treatment for patients with chronic obstructive pulmonary disease (COPD). Commissioned second phase of manufacturing operations at Goa.
  • 2005: Set-up state-of-the-art facility for manufacture of formulations at Baddi, Himachal Pradesh.
  • 2007: Set-up state-of-the-art facility for manufacture of formulations at Sikkim.


Though most consumers expect to pay cash or use a credit card when making a purchase, commercial customers typically want to be billed for any of the products and services they buy. You need to decide how much credit you're willing to extend them and under what circumstances. There's no one-size-fits-all credit policy--your policy will be based on your particular business and cash-flow circumstances, industry standards, current economic conditions, and the degree of risk involved.

As you create your policy, consider the link between credit and sales. Easy credit terms can be an excellent way to boost sales, but they can also increase losses if customers default. A typical credit policy will address the following points:

  • Credit limits. You'll establish dollar figures for the amount of credit you're willing to extend and define the parameters or circumstances.
  • Credit terms. If you agree to bill a customer, you need to decide when the payment will be due. Your terms may also include early-payment discounts and late-payment penalties.
  • Deposits. You may require customers to pay a portion of the amount due in advance.
  • Credit cards and personal checks. Your bank is a good resource for credit card merchant status and for setting policies regarding the acceptance of personal checks.
  • Customer information. This section should outline what you want to know about a customer before making a credit decision. Typical points include years in business, length of time at present location, financial data, credit rating with other vendors and credit reporting agencies, information about the individual principals of the company, and how much they expect to purchase from you.
  • Documentation. This includes credit applications, sales agreements, contracts, purchase orders, bills of lading, delivery receipts, invoices, correspondence, and so on.

For assistance, ask your particular industry's trade or professional association for guidelines. Part of your research should include finding out what your competitors' terms are and taking them into consideration when determining your own requirements.

An often-overlooked element in setting a credit policy is design of invoices and statements. The invoice is a document that describes what a customer is being billed for; the statement is the follow-up document that indicates the status of the account. One collection and creditor rights expert says that invoices and statements that are clear, easy to read, and allow the customer to quickly identify what is being billed are likely to be paid faster.

Here are several points to include on the invoice:

  • An invoice number
  • An invoice date
  • A customer number or other identifying code
  • A complete and clear description of the product or service and item numbers, if appropriate. Avoid abbreviations your customer may not understand.
  • The customer's purchase order, job order or other reference information that will make identifying the invoice easier
  • The total dollar amount due, clearly indicated
  • Payment terms and due date (and specify any early-payment incentives or late-payment penalties).

As a guideline one can write policy in the following sections. The contents of each section can be written to best fit the nature of franchise:

  1. The set-up of credit function.
  2. Objectives of the credit function
  3. Terms and conditions of sale
  4. Sales responsibilities with credit issues
  5. Billing procedures
  6. Obtaining Information on new customers
  7. Procedures for opening new accounts
  8. Process of assessing the information to arrive at line of credit and credit terms that will be offered.
  9. Monitoring your investment in your customers
  10. Profiling your customers to do strengths, weakness, opportunity and threat analysis.
  11. The feedback loop for reporting
  12. Allocating resources and responsibilities
  13. Defining past-due and bad debts
  14. Targets, benchmarks and deadlines for the credit function
  15. Procedure of collecting from delinquent customers.
  16. Analyzing the changing needs of your markets/customers.

An Opportunity for the Organization

There are at least four reasons to have a written credit policy, and they each add to the productivity of your entire organization.

Firstly, the responsibility of managing receivables is serious undertaking. It involves limiting the bad debts and also improving cash flow. With outstanding receivables often being a firm's major asset, it is obvious that a reasoned and structured approach to credit management is very necessary.

Secondly, a policy assures a degree of consistency among departments. By writing down what is expected, the arms of a company (whether marketing, production, or finance) will realize that they have a common set of goals. Conversely, a written policy can delineate each department's functions so that duplication of effort and needless friction are avoided.

Third, it provides for a consistent approach among the customers, etc. Decision making also becomes a logical function based on pre-determined parameters. This simplifies the decision processes and yields a sense of fairness that will only be improving customer relations.

Finally, it can provide some recognition of the credit department as a separate entity, one which is worthy of providing input into the overall strategy of the firm. This allows the department to be an important resource to upper management.

One can see that developing a policy is more than a necessity. It is an opportunity to improve the efficiency of your entire organization.

MISSION OF Cipla's Credit Policy

The most important part of a policy is defining a company's mission statement. Some firms choose to call this a vision or a purpose, and it must coincide with the firm's overall direction.

The Credit Department is responsible for maintaining a high quality of accounts receivable while selling to all customers that represent prudent credit risks. Thus providing flexible mechanism to protect the substantial receivables investment.

A company, however, that is striving to gain market share may wish to have a far more liberal credit policy.

The Credit Department will attempt to screen out customers that will result in obvious bad debts.

A firm that has a strong market position and is primarily concerned about its own cash flow would take a far more conservative approach toward its mission:

The Credit Department is responsible for collecting our investment in accounts receivable. It is our responsibility to take no unwarranted risk, and to see that payments are made within terms.

The company continued to report good performance in 1 H FY09, with a 25% increase in sales during the quarter ended September 30, 2008 on year-to-year basis. The growth in the sales was mainly due to 48% growth in the formulation business.

CARE Ratings For Cipla Ltd.

CARE has assigned a 'CARE AAA' (Triple A) rating to the long-term Bank Facilities of Cipla Limited (Cipla). This rating is applicable for facilities having tenure of more than one year. Facilities with this rating are considered to be of the best credit quality, offering highest safety for timely servicing of debt obligations. Such facilities carry minimal credit risk. ARE has also assigned 'PR1+' [PR One Plus] rating to the Short-term Bank facilities of Cipla. This rating is applicable for facilities having tenure up to one year. Facilities with this rating would have strong capacity for timely payment of short-term debt obligations and carry lowest credit risk. The above ratings are assigned to Short-term Bank Facilities (Rs.135 crore, including limits interchangeable with long-term facilities), Long-term Bank Facilities (Rs.1,215 crore) and Long/Short-term Bank Facilities (Rs.384.50 crore) aggregating Rs.1,734.5 crore. Further, CARE has also assigned a 'PR 1+' [PR One Plus] rating to the proposed Term Loan/CP/NCD issue of Rs.500 crore of Cipla. Instruments with this rating would have strong capacity for timely payment of short term debt obligations and carry lowest credit risk.


Taking in consideration, the financial results, you can see that the company's creditors turnover period in which cipla meet its credit obligations has been showing a significant improving trend.

  • The creditors' turnover ratio is good. Creditors turnover ratio= (Average Creditors)/(Cost of Sales/365). Creditors are the ones who sell goods and services to a concern on credit basis. This means that they allow a business concern to pay later rather than paying on cash at that very moment only. Obviously, every creditor has to optimize his credit control policies in exactly the same way that a business concern does while assessing debtors turnover ratio.
  • It shows the company is repaying its creditors efficiently and timely. Since the creditors turnover ration of the firm is pretty good, it shows that the company is very efficient.
  • It depicts that the solvency position of the company is good.
  • On the other side of the coin, average collection period is on the higher side, thus showing delay in collection or delay in realization of its revenue. Average Collection Period= (Total amount of days in period X Average amount of receivables) / Credit Sales. Average Collection Period means the period in which a company receives the payments it owed.
  • The average collection period has increased from 87days to 107 days in just a span of 2 years, thus showing that the company is delaying in the collection of its revenues. This is not a good sign for any company.
  • It also shows that the company is not efficient in revenue realization which may lead to NPA and creating a huge gap in meeting its working capital requirements.
  • If we look at the working capital turnover ratio, it depicts the same thing. it is also on a declining trend. It has decreased from 2.68 to 1.97. this means that the company may resort to external borrowings to meet its working capital requirements.
  • Capital Turnover Ratio=Cost of Sales/Net working Capital
  • If we analyze the figures of 2008, we can see that the company is realizing its sales revenue in 107 days and is repaying the creditors in 44 days. It shows that there is a working capital gap thus leading to inefficient working capital management forcing the company to make borrowings from outside thus leading to a huge debt.
  • In the last two years, the long term debt equity ratio of the company has increased from 0.07 to 0.19 which means that the company has taken more long term debts instead of raising its own equity.


Taking into consideration, the working capital ratios, the average collection period, the average creditors days, the long term debt equity ratio and the overall financial leverage of the company, it can be concluded that the company needs to review and reframe its credit policy, specially credit terms and debtors realization terms along with the overall financial structure and the goals of the company so that a cheque can be kept on working capital gap.





  • Mr. Nikhil Gupta, C. A. 09876457599
  • Mrs. Pooja Gupta, C. A., Chandigarh.

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