Sun Pharma managing director Dilip Shangvhi went into crisis mode Tuesday after shares slid on worries about a potential government investigation, reports of insider dealing, and an analyst's allegations of mismanagement.
But some key questions remain unanswered. Indeed, Shangvhi's comments seemed to suggest that concerned shareholders could have legitimate grievances. “If there is a sense that this is not in the best interest of shareholders, then we will see what we can do, reverse the transaction if that becomes necessary,” he said of the firm's skyrocketing loans to employees and others.
The controversy began after local media reported India’s financial regulators will likely reopen an insider trading probe against the drugmaker related to its 2014 acquisition of Ranbaxy from Japan’s Daiichi Sankyo. Other allegations touched upon dubious practices of raising money overseas, India’s news agency PTI reported, as published by the Economic Times.
Shares of India’s largest pharma company have plummeted about 10% (and counting) at the news. And the situation was soon compounded by a note Macquarie analyst Andrew Peretti sent to investors, laying out further concerns over Sun’s practices. Though managing director Shanghvi immediately rallied investors for a clarification call trying to allay their concerns, its stock price has yet to recover as a couple of key questions remain unanswered.
Among the issues raised: A huge increase in the amount of money Sun lent to employees and what it calls "nonrelated parties," to about $318 million reported in fiscal 2018. Shingvi won't identify the debtors, and those loans are one of the shareholder concerns he has promised to review.
Here’s what we know about the allegations so far and what Sun had to say about them during its investor call on Monday.
Allegation 1: Last year, Sun Pharma, together with former Ranbaxy CEO Arun Sawhney and several Daiichi leaders, agreed to settle an insider trading probe with the Securities and Exchange Board of India (SEBI) by paying Rs. 18 lakh ($25,500). Now, that case might be reopened at a whistleblower complaint.
Response: Sun is not aware of any complaint, the company says, and hasn’t received any query from SEBI about potentially reopening the case. (As Sun couldn’t offer more clarity, the possibility of a regulatory investigation still appears to worry investors.)
Allegation 2: Insider trading regarding Ranbaxy deal.
Response: There was no insider trading. It was just a minor timing issue where the board approved the acquisition on a Sunday, when the market is closed. Its lawyers advised there’s no need to put out closure on trading holiday. The case was already settled with SEBI with no admission of wrongdoing because otherwise it would incur huge legal fees.
Allegation 3: Valia & Timbadia, auditors to some Sun Pharma subsidiaries, were involved in a stock market rigging investigation.
Response: The matter is 20 years old, and neither the audit firm nor its partners were involved in SEBI’s investigation. Sun has 66 subsidiaries, and the firm audits only some of them, accounting for only 0.6% of Sun’s revenues in the previous fiscal year.
Allegation 4: Little-known Jermyn Capital managed Sun’s issuance of $275 million foreign currency convertible bonds (FCCBs) between 2004 and 2007. The firm is linked to Ketan Parekh and associate Dharmesh Doshi, who were barred from trading for involvement in a high-profile Indian stock market manipulation scam in 2001.
Response: J.P.Morgan was the lead manager and sole book runner, with Jermyn Capital as co-manager. At that time, Sun was a relatively small company and it did what was best for it. (On the Monday call, Shanghvi said he doesn’t have the information whether Jermyn Capital had links with the stock con men.)
Allegation 5: Why is Lakshdeep Investment & Finance not classified as a Sun Pharma promoter entity? The company is owned by Sun director and Shanghvi brother-in-law Sudhir Valia. Valia and his wife together own 2% of Sun.
Response: Legal opinion suggested that Sun classify the firm as nonpromoter. The company is now seeking legal advice again. But even if it were to be classified as a promoter, it wouldn’t bring any substantial change to the promoter shareholding.
Allegation 6: Sun’s domestic formulations business was routed via Aditya Medisales (AML), a related party.
Response: AML became a related party in fiscal year 2018, though the business has been in existence for many years. The company only became a related party due to consolidated shareholding structure. The business structure was designed for tax reasons, but because investors are concerned, the company is evaluating various options, including Sun taking over the distribution business or Sun buying the firm.
Allegation 7: Sun loans to employees and other so-called nonrelated parties increased significantly over the past few years. Per Sun’s annual report, those transactions totaled Rs. 2,242 crore ($318 million) in fiscal 2018, up from about Rs. 70 crore a year ago.
Response: Loans were given to nonrelated parties engaged in the pharma business. Because of confidentiality agreements, the company can’t name the beneficiaries, Shangvi said, but stressed that the money was given at arm’s length at market rates. Though the loans are still ongoing, if investors are concerned, he will look at ways to unwind the loans.
Allegation 8: Lending money to four individuals without security.
Response: The amount of funds lent was small, only a few lakh rupees, and has been fully recovered.
Allegation 9: Sun’s low single-digit tax rate.
Response: That was the number many years ago, and the effective tax rate now is in the mid-teens. The company said it has clarified several times that they have operations and factories in tax-free zones, but the rate will gradually grow in the coming years.
Allegation 10: Guarantees given to Suraksha Realty, the firm promoted by Valia.
Response: That’s factually incorrect. No loan or guarantee has ever been given to Suraksha Realty.