Shadow over Sun Pharma

A series of allegations against India’s largest drug manufacturer, Sun Pharmaceutical Industries, has led to its stock price slipping over 10 per cent in the past two trading sessions. The allegations are wide-ranging and from multiple sources. It has been reported, for example, that the Securities and Exchange Board of India (Sebi) is likely to re-examine insider trading allegations and related accusations pertaining to fundraising abroad by the company and its promoters. This apparently follows the submission of relevant documents to the market regulator by a whistleblower. An analyst note had also flagged issues about the company’s corporate governance, which played into the market’s concerns. For one, some of the auditors appointed for Sun Pharma’s group companies seem to be under a cloud. Money has been lent, according to the note, to various organisations without clear explanations to shareholders — for quite substantial amounts, totalling Rs 22 billion. The question of whether another company, Aditya Medisales, should be the channel through which domestic formulations are routed was also raised, as the company counts as a related party. Some personal transactions of Sun Pharma’s promoter, Dilip Shanghvi, have also been questioned.

A strong response from the company and from Mr Shanghvi on Monday evening sought to allay some of the concerns, though it did not seem to have cut much ice with investors as evident from the fall in the stock price on Tuesday. In many cases, Mr Shangvi has pointed out that the cases are old or the information has been made public in the past. Yet that is not exactly the best of arguments against accusations that there have been systemic lapses in corporate governance at Sun Pharma. The question is: What institutional response was taken to these cases and whether those were effective enough to prevent their recurrence at some point. Old ghosts can haunt companies — and investors will not be pleased with the possibility that they can be brought back to add volatility to any company’s stock price in this manner. The only way to address such uncertainty is to make clear that the ghosts are unconnected to current practices.

It is worth noting also that, in spite of Sun’s quick and well-argued responses, some issues do in fact remain outstanding. Mr Shangvi admitted, for example, that the company knows nothing at this point about any re-opened investigation by the market regulator. While this uncertainty remains, it will be a significant drag on the company’s price and reputation. The company has also failed to clarify who received loans worth Rs 22 billion, arguing that confidentiality must be maintained. It is true that pharmaceuticals is a sector in which confidentiality is a must. However, this lack of clarity will need to somehow be addressed. Meanwhile, the sooner Aditya Medisales’ relationship to Sun Pharma is transparently restructured to be in keeping with current law, the better. Many Indian champions in the pharmaceutical sector have suffered reputational damage in the past, which has led to investor worries. Only a robust and activist series of actions by managements and boards that improve transparency and accountability can help.