Sun Pharma to bring in changes to boost investor confidence, stock falls

Sun Pharmaceutical Industries on Monday said it was open to engaging new audit firms for subsidiaries and discontinuing domestic sales through a related party, in a bid to assuage investor concerns. The firm said it was open to making changes wherever matters were not in shareholders’ interest. 

India’s largest drug maker by sales came under fire over the weekend on charges of inadequate corporate disclosures and insider trading during the acquisition of rival drug maker Ranbaxy. 

Sun Pharma’s Managing Director Dilip Shanghvi said the company had received no intimation from the Securities and Exchange Board of India on the matter and announced steps to soothe investor concerns in a conference call Monday evening.

Concerns over the probe were reflected in the markets on Monday, with its stock falling 7.5 per cent. It closed at Rs 455.30 on the BSE. The stock was down over 10 per cent in the morning, recovering later. 

This is the biggest single-day fall in the past 18 months. Year-to-date (YTD) the company’s stock has tanked 20 per cent, with reduced profitability, anti-trust litigation settlement, and other issues contributing to it. 

Since November 26, Sun Pharma lost Rs 133 billion in market capitalisation. This is almost half the total market cap loss (Rs 277 billion), YTD. 

Speaking to investors Shanghvi said the company or its promoters did not violate any insider-trading norm during the Ranbaxy deal. “It was a minor technical issue related to trading-window closure pertaining to some holidays. Sebi had settled the matter in accordance with provisions of applicable law and it was closed,” he said. 

Sun Pharma, Shanghvi, and nine others had settled the insider-trading probe in 2017 by paying Rs 1.8 billion as settlement charges.  Sebi has reopened the insider trading case after a whistleblower submitted a 150-page document with the market regulator in September. Recently, a note from a foreign securities firm, too, was doing the rounds in social media, alleging irregularities and corporate governance issues at the firm.  Shanghvi said he had learnt about the whistleblower allegations from media reports and was yet to be approached by the market regulator for any investigation into the matter. 

He, however, acknowledged the note by the securities firm and said most of the information the note contained had been sourced from the public domain. 

“Some of it is factually incorrect, some others are not related to Sun Pharma, while others are at least 10-15 years old,” he said, adding that Sun Pharma maintained the high level of corporate governance expected of a company of its stature. 

While Shanghvi tried to reason with investors about decisions taken by the company in matters of auditing its subsidiaries, he, however, gave in to investor pressure and said that Sun Pharma was open to appointing additional auditors for subsidiaries. 

The note circulated by the securities firm had raised issues surrounding audit firm Valia and Timbadia (related to Sudhir Vaila, an executive director at the firm and also the brother-in-law of Shanghvi). 

“The matter is 20 years old. The audit firm audits some of our small subsidiaries, which account for 0.6 per cent of our consolidated revenue in FY18. At times, it is not practical to hire global audit firms for small subsidiaries. We are, however, open to introducing new audit firms,” he said. 

Questions have been raised around Sun Pharma appointing a small London-based firm, Jermyn Capital, as manager for its foreign currency convertible bond (FCCB) issue in 2004. 

“JP Morgan Chase was the lead book manager for the issue and Jermyn was the co-manager,” Shanghvi said, adding this was 14 years back. Sun Pharma was a Rs 11-bn company at the time. 

He felt that it was “unfair” to apply the current regulations to judge events that were so old. 

Speaking on investor concerns about 100 per cent of Sun Pharma’s sales through Aditya Medisales, Shanghvi said until FY18 the company was not categorised as a related party. It was re-categorised in FY18 because of consolidation of share holding.

“This was done with shareholder nod,” he said, adding Aditya Medisales had revenue of Rs 80 billion and Ebidta and net margin of 1.7 per cent and 0.4 per cent, respectively indicating that the company was not profiting at Sun Pharma’s expense. 

“We will consider options and open to Sun Pharma taking over distribution and purchasing AML at cost,” he added. 

Shanghvi, however, faced some tough questions from investors during the call pertaining to the nature of Sudhir Valia's (an executive director in the company) and his remuneration. Shanghvi said that he and Valia were amongst the 'lowest paid' senior executives in the Indian pharma industry. 

Investors also raised questions around loans given to 'employees and others' by the company. The quantum of such loans had swelled from Rs 698.1 mn in FY17 to Rs 22.42 bn in FY18. While Shanghvi did not disclose the details of these loans, he nonetheless, added that these are business loans given to non related parties and if this is not considered to be in shareholder interest, the company would see if something can be done to reverse these. 

While Sun Pharma seems to be trying hard to allay investor concerns, more trouble seems to be brewing for the leader in the Indian pharmaceutical industry. 

Institutional investors also seem to be losing interest, reducing stake significantly over the years. “Institutional investors held about 30 per cent in the firm five to six years back. It has now come down to 15-16 per cent,” said Shriram Subramanian, managing director, InGovern, a proxy advisory firm. He added that investors would continue to remain concerned till a more transparent picture emerges. 

According to the available data, at their peak, foreign institutional investors (FIIs) held 27.56 per cent in the company. This was in the second quarter of 2015-16. FIIs are still among the largest shareholders in the company. As of Q2 of 2018-19, they account for over a 16.7 per cent stake. As of the September quarter, MFs held 8.47 per cent in Sun Pharma.

Analysts like Subramanian warned if the insider-trading charges were proved against the company and its promoters, it might need to repay the entire amount (made as gains through insider trading) to Sebi.

With inputs from Jash Kriplani