Sun Pharma answers complaints with revamp that cuts ties with director's firm

After a first round of whistleblower allegations prompted Sun Pharma to rally investors for a clarification call, a second complaint has driven immediate changes at the Indian drugmaker.

Sun Pharma said on Tuesday that it will transition its formulation distribution business to a wholly owned subsidiary, replacing Aditya Medisales, a company with alleged ties to Sun Director Sudhir Valia. Aditya Medisales has been the target of a whistleblower complaint that was reportedly sent to market regulator Securities and Exchange Board of India (SEBI). The accusations weakened Sun shares, leading to investor concerns.

The whistleblower alleged that Aditya Medisales had transactions worth Rs 5,800 crore ($816 million) with Suraksha Realty, a firm controlled by Sun Pharma Director Sudhir Valia, according to a report by financial news site Moneylife a few days ago. Valia is the brother-in-law of Sun Pharma helmsman Dilip Shanghvi.

The Indian drugmaker has yet to announce which unit will take over the business but said the change will happen by the first quarter of its 2020 fiscal year, or by June 2019.

Before the Moneylife report, Sun’s relationship with the distributor—categorized as a related party—had already come under scrutiny in late 2018. Sun said at the time that it could take the distribution business in house or simply acquire Aditya Medisales out of respect for investor concerns.

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During an interview with local newspaper The Economic Times, Valia defended his dealings, saying that Aditya Medisales and his Suraksha Realty “can do any business that has nothing to do with [Sun] shareholders” because both are private firms.

“So far as Sun Pharma’s money is concerned, it has not been diverted, that is the statement I am making to you,” Valia said, as quoted by ET.

Controversy over Sun’s corporate governance arose last November when reports emerged that SEBI, upon receipt of the whistleblower’s first complaint, could reopen an insider trading probe against the drugmaker related to its 2014 acquisition of Ranbaxy. Other related-party transactions also raised eyebrows.

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One allegation stated that Sun once gave loans or provided guarantees to Suraksha Realty, an accusation Sun rebuffed as “factually incorrect.” In its Tuesday statement, it once again “states unequivocally that it does not have any financial transactions with Suraksha Realty.”

However, ET noted that Suraksha Realty has raised money using Sun’s shares as collateral on at least three occasions in the past two years. Shanghvi Finance—which at the end of 2018 owned 40% of Sun’s shares—contributed a small piece of Sun’s stake to help Suraksha raise Rs 100 crore, according to ET.

In his interview with ET, Valia stressed that Shanghvi Finance has not given any shares and that the arrangement was made for “flexibility.”

Concerns have also been raised over the alleged role of Valia & Timbadia in a stock market-rigging probe. The company audits some Sun subsidiaries that accounted for only 0.6% of Sun’s revenues in the previous fiscal year, according to Sun. Even though Sun has clarified that neither the audit firm nor its partners were involved in SEBI’s investigation, the drugmaker said on Tuesday it has initiated steps to replace it.

Investors welcomed Sun’s changes, pushing up Sun’s stock by more than 4% in Tuesday trading.