Sun Pharma to settle Dubai firm loans, shift distribution arm to subsidiary

A bird flies past the logo of Sun Pharma installed on the facade of its corporate office in Mumbai. Photo: Reuters
Seeking to ease investor concerns, embattled drug major Sun Pharmaceutical Industries on Tuesday announced plans to unwind loans of Rs 2,238 crore given to a Dubai-based company, Atlas Global Trading FZC, and transfer the distribution of the domestic formulation business to a subsidiary from a separate entity.

 

Sun Pharma said the company’s consolidated balance sheet had receivables of Rs 2,238 crore from a non-related party. “This liability was in respect of Atlas assuming the damages on account of Protonix patent litigation settlement entered by Sun Pharma, which was disclosed in Sun Pharma’s annual report for fiscal year 2014,” it said in a statement.

 

Last month, when investors had asked Sun Pharma Managing Director Dilip Shanghvi about the loan in a conference call, he said it was given to a “non-related” party, but did not give details.

 

Responding to Business Standard queries, Sun Pharma clarified Atlas Global or any of its subsidiary was not a related party at any point in time.     

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The Sun Pharma stock has lost about 30 per cent, or Rs 42,700 crore, of its value since September as investors are worried about the company’s corporate governance standards. The Securities and Exchange Board of India (Sebi) has also received two whistle-blower letters in this regard. The company has denied any wrongdoing and written to Sebi to investigate the share fall in the recent days. On Tuesday, the stock closed at Rs 418 a share, up 5 per cent.

 

In Tuesday’s statement, the company gave further details about the Atlas transaction and said its Halol facility in Gujarat had been impacted by US FDA issues since September 2014, which were finally resolved in June 2018.

 

Due to supply constraints arising as a result, Sun Pharma was not able to adhere to the agreed supply schedule with Atlas Global. “Sun Pharma, in FY18, funded Atlas towards non-fulfilment of its supply obligations till the time such obligations are fulfilled in accordance with the agreement. The said funding was included in the loans and advances schedule of Sun Pharma’s FY18 consolidated balance sheet,” the pharma major said.

 

The parties to the supply contract have now agreed, Sun Pharma said, that Atlas would assign its rights and obligations arising from this contract, to a wholly-owned subsidiary of Sun Pharma. This assignment will ensure that the loans and advances given to Atlas will, therefore, be settled. “On conclusion of this transaction, in the consolidated balance sheet, this loan and the obligation will cease to exist as it gets squared up. This transaction is expected to be concluded in FY19,” the statement said.

 

Interestingly, in a note to its clients in October 2014, Credit Suisse had said Sun Pharma signed a deal with a third party where Sun would get $400 million in consideration for agreeing to sell pharmaceutical products at a negotiated discounted price. It made a provision of $438.5 million towards estimated expected liability on account of such discount on future sales. Credit Suisse further said Atlas Global was a group company of SuGandh Group of Dubai. “Another company from SuGandh Group, SuGandh Management Consultancy, was a related party of Sun (an enterprise under significant influence of key management personnel or their relatives) till 28 February 2013,” Credit Suisse had said. On a four-year compounded annual growth rate basis, the $38.5 million cost of discount comes to 2.3 per cent. This is similar to the interest cost for Sun Pharma for a foreign loan, the global brokerage said. “Atlas Global Trading FZC is one of the leading basmati rice processing and marketing companies. It is an integrated player, undertaking activities right from procuring paddy to drying, de-husking, milling and polishing, colour sorting, grading, inspection, packing, branding, distribution and retailing,” Credit Suisse further described Atlas quoting SuGandh Group’s website. An email sent to SuGandh on Tuesday did not elicit any response.

 

The Sun Pharma statement said its domestic formulations distribution would be now transferred from Aditya Medisales, the current distributor and a related party, to a wholly-owned subsidiary of Sun Pharma by the first quarter of the next financial year. Further, the statement said it had not given loans or guarantees to Suraksha Realty, a company owned by Sudhir Valia, brother-in-law of Shangvi, a Sun Pharma director and co-promoter.  Sun Pharma also announced that it would replace Valia & Timbadia with SRBC & Co LLP, an EY audit firm, as statutory auditors of the subsidiaries of Sun Pharma as investors had earlier raised some queries on the previous auditor.