Sun Pharma shares face turbulent times: Here is how its troubles began

Since November 26, Sun Pharma has lost Rs 133 billion in market capitalisation

Sun Pharmaceutical Industries, India’s largest drugmaker by sales, on Monday had the biggest single-day fall in the past 18 months and seems to be trying hard to allay investor concerns, but more trouble seems to be brewing for the leader in the Indian pharmaceutical industry. How did it all begin?

On December 1, the Securities and Exchange Board of India (Sebi) initiated an inquiry into the affairs of Sun Pharma and reopened insider trading case on the basis of a whistle-blower complaint submitted in September. The 150-page letter accused the company of committing corporate governance and tax-related lapses, besides other securities market-related violations.

Sun Pharma, its Managing Director Dilip Shanghvi, and nine others had settled the insider trading probe, paying Rs 1.8 million against the settlement charges in 2017.

In a conference call on Monday evening, Shanghvi said that the company had received no intimation from Sebi on the matter and announced steps to soothe investor concerns.

Speaking to investors, he 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 added.

A note from a foreign securities firm

Shanghvi, however, acknowledged a note from a foreign securities firm, alleging irregularities and corporate governance issues at the firm. He 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 highest level of corporate governance expected of a company of its stature.

The note 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.

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 firm said it was open to making changes wherever matters were not in shareholders’ interest.

According to the available data, at the company's 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 while mutual funds held 8.47 per cent in Sun Pharma.

Shares take a beating

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

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.

The company’s stock has tanked 20 per cent YTD, with reduced profitability, anti-trust litigation settlement, and other issues contributing to it.

On November 27, shares hit an over five-month low of Rs 475 per share, slipping 7 per cent, and falling 9 per cent from its early morning high on the back of heavy volumes. The stock was trading at its lowest level since June 6, 2018, declining 11 per cent in past three days.

Sun Pharma was up 2 per cent to Rs 521 in intra-day trade after the drug maker said that it has settled Modafinil antitrust litigation with certain US plaintiffs.

The settlements extend to all claims brought by the direct purchaser plaintiffs. The terms of the settlements are confidential, it added, the company said in a regulatory filing.

It had reported a loss of Rs 2.2 billion during July-September quarter (Q2FY19) due to a one-time provision of Rs 12.1 billion for the estimated settlement amount payable to all the remaining plaintiffs related to the Modafinil antitrust litigation in the US.

What now?

Though Sun Pharma has denied the allegations made in the letter, brokerages, however, say that until the company re-evaluates some of its structures and transactions which weaken investor confidence, these issues will overshadow company's overall performance.

On Tuesday, the stock has remained stable in morning trade after falling 7.5 per cent on Monday.r trading case against Sun Pharma.