Sebi asks Sun Pharma to explain alleged fund diversion of Rs 42,000 crore

Pharma major calls fund-diversion charges baseless

The Securities and Exchange Board of India (Sebi) has sought an explanation from Sun Pharmaceutical on the alleged fund diversion of Rs 42,000 crore through its key distributor and subsidiary Aditya Mediasales (AML).  

In two letters dated January 28 and February 18, the regulator asked Sun Pharma to furnish a detailed methodology of AML’s operations, along with the agreement between the drugmaker and AML. Sebi also asked Sun Pharma to explain the rationale, terms, and conditions of the advances given to AML. It is a pharma distribution company and is classified as a promoter shareholder by Sun Pharma. It owned a 1.6 per cent stake in Sun Pharma as of December 31. Sun Pharma’s domestic formulation business is entirely routed through it. AML, a super stockist, was declared a related party of the firm only during the financial year 2018.

Sebi’s demand for an explanation follows serious allegations made by a whistle-blower in a 150-page complaint to Sebi accusing Sun Pharma of committing corporate governance and tax-related offences and securities market-related violations. Specifically, the whistle-blower complained of a fund diversion of Rs 42,000 crore and of personal profits being made to the tune of Rs 10,000 crore. 

The letter is also believed to allege that AML had thousands of crores of rupees worth of transactions with a real estate firm that is controlled by a director on the Sun Pharma board.

In an email response to Business Standard, a Sun Pharma spokesperson said: “While we do not have access to the whistle blower documents, we have received an information request from SEBI related to our transactions with Aditya Medisales. We have responded to SEBI on the query.” 

Sun Pharma has denied all allegations of wrongdoing, called them baseless and false, and provided specific details for each query raised by the regulator, said a source familiar with the case. On the fund diversion allegation, Sun Pharma said that AML has been generating profits after tax ranging between Rs 10 crore and Rs 30 crore in last five years. It said that AML’s book of accounts has already been filed with the Registrar of Companies and other appropriate authorities whenever required.  

Further, Sun Pharma enclosed the AML turnover figures for five years from 2013 to 2018. According to the disclosure, the turnover for FY18 was a little over Rs 8,000 crore; in FY17, it was Rs 7,800 crore; in FY16, Rs 6,000 crore; in FY15, Rs 4,300 crore; and in FY14, the turnover was about Rs 2,000 crore.

One of Sebi’s queries related to the trade arrangement between AML and Sun Pharma. Typically, the distributor is a third-party which buys drugs from the manufacturer and sells them to customers for a margin. However, in this relationship, Sun Pharma was dealing with a distributor which was also its subsidiary, an arrangement that raised suspicions.

On this matter, Sun Pharma explained that AML operates through Carrying and Forwarding Agents (CFAs) who have a proper drug licence to reach out to various locations. In addition, AML also has an arrangement with separate CFAs who have a demarcated warehouse and drug licence. In its submission to the regulator, Sun Pharma has given a copy of the agreement between AML and CFAs and its separate arrangement with agents.