In the last week of November, it came to light that Australian brokerage firm Macquarie has issued a note raising questions over the corporate governance norms of Indian drug major Sun Pharmaceutical Industries Ltd. Later, it was reported that a “potential whistleblower” too had raised such questions. Between November 30 and December 6, Sun’s stock price at the National Stock Exchange fell 14.7%.
Issues raised & addressed
>Among the issues raised, one was that one of the partners of an audit firm of Sun Pharma — Hiten Chandulal Timbadia of audit firm Valia and Timbadia — had been probed in a stock price rigging case. Sun responded with a press release on December 3, stating: “None of the partners of this audit firm or the firm itself was a party to this investigation.”
>Another question was why Sun Pharma employed a small securities firm, Jermyn Capital, to manage a major foreign currency convertible bond transaction in 2004. Sun’s response: “The fact is that JP Morgan Chase was the lead manager and sole book runner and Jermyn Capital was only a co-manager.”
>It was asked why Lakshdeep Investments & Finance is not considered a “promoter entity”, when its ownership lies with Sudhir Valia, brother-in-law of Sun Pharma’s main promoter Dilip Shanghvi. Valia owned around 1.4 crore shares in Sun Pharma as of September 2018, according to Bombay Stock Exchange. Sun stated: “Lakshdeep is an investment company of Mr Sudhir Valia. As per the then legal advice we received, we classified the same as a non-promoter entity and disclosures were made accordingly. However, even if it were to be classified as a promoter entity, it does not materially change the current promoter shareholding.”
>One question was about Sun lending to four individuals without security. Sun stated: “This is a 20+ year old event which happened and the money involved was a few lakh rupees, which was fully recovered. The company conducts business as per its policy guidelines and in accordance with applicable laws.”
>Yet another question was about an insider trading case (settled with SEBI) regarding the Ranbaxy acquisition, which happened in 2014. Sun stated it has not been involved in any insider trading but “there was some minor technical issue relating to a procedural aspect of trading window closure due to intervening holidays”. It added: “SEBI later on ruled that we should have announced a window closure. This case was settled with SEBI with no admission of guilt… and matter was closed.”
>Then a question was raised on Sun’s domestic formulations business being routed through a related party, Aditya Medisales Ltd. Sun’s response: “Our domestic formulations sales are undertaken through Aditya Medisales Ltd. (AML) which became a related party in FY18. However, the domestic formulation business transactions with AML have been in existence for the past many years.”
Other questions included one on non-related party transactions — which included loans to employees — of around Rs 2,200 crore.
On December 3, Shanghvi held a conference call with market analysts to allay concerns over these issues. Many analysts appeared unsatisfied with the explanations given. A day after the conference, financial services firm Edelweiss stated in a note: “A few questions still remain unanswered, particularly regarding Aditya Medisales (AML) and the 350 million dollars unsecured loan extended by Sun Pharma. Most other issues were dated, but enough to question the track record of India’s largest Indian pharma (company).”
ICICI Securities stated in a note on December 4: “Concerns regarding issues related to transactions with AML (related party distributor) and loans and advances to others (which witnessed a sharp spurt in FY18) are unlikely to settle down easily.” It added that question marks remain over the whistle-blower’s complaint for want of management action plan as the management awaits SEBI correspondence.
Also on December 4, Kotak Securities issued a note. About Sun Pharma’s response on the Rs 2200 crore loan, the note said: “The management is unwilling to share information on the eventual beneficiary of the loan as they believe that this information is material and sensitive to the business, with the only clarification being that the loan is for pharma business.”