Dilip Shanghvi, chairman of Sun Pharmaceutical Industries Ltd., poses during an interview at the company’s headquarters in Mumbai. (Photographer: Kuni Takahashi/Bloomberg)

Dilip Shanghvi On Allegations Against Him And Sun Pharma

Sun Pharmaceutical Industries Ltd.’s promoter Dilip Shanghvi denied allegations of insider trading and poor corporate governance after a report that the market regulator may reopen its probe against India’s largest drugmaker and some of its promoters for various lapses.

Shanghvi tried to allay investor concerns after shares of Sun Pharma tumbled as much as 13.21 percent, the most in a year and a half, yesterday. It was the first day of trading after newswire PTI reported over the weekend that the Securities and Exchange Board of India is likely to reopen its probe into an insider trading case against Sun Pharma and alleged lapses by some of its promoters and other entities in raising funds overseas. A whistleblower, according to the report, approached SEBI with a document alleging irregularities at the company.

Fresh allegations follow a sales note by Macquarie’s Andrew Peretti to his clients highlighting what he called concerns about Sun Pharma’s auditors, its subsidiaries, foreign entities, and alleged market manipulation cases. A LinkedIn profile of Peretti says he is an equity sales trader at Macquarie Group based out of Mumbai.

Shanghvi, in a conference call with analysts and investors, said the points raised in the sales note pertained to information which was already public. Some of the issues were not related to Sun Pharma, he said, while some were factually incorrect and others were 10-15 years old.

“The underlying theme of the note is to project serious corporate governance issues at Sun Pharma,” he said. “We follow a high level of corporate governance which is expected from a global company of our size.”

Here’s what Shanghvi said about specific allegations:

Allegation: BloombergQuint’s research found that Valia & Timbadia were auditors to 16 of Sun Pharma’s 66 subsidiaries. Hiten Chandulal Timbadia, partner of auditing firm Valia & Timbadia, has been involved in a stock rigging case and his account was frozen.

Response: The matter being referred to is 20 years old and none of the partners of the firm or the firm itself were party to the investigation. The firm audits some of the smaller subsidiaries (which accounts for 0.6 percent of the group’s consolidated revenue in 2017-18). The company didn’t engage large global audit firms due to the small size of subsidiaries. Sun Pharma may look to hire new audit firms to improve investor confidence.

Allegation: Lakshdeep Investments & Finance, a company owned by Sudhir Valia, not classified as a promoter of Sun Pharma. Sudhir Valia owns 1.4 crore shares of Sun Pharma in his personal account, according to BSE. Raksha S Valia, another board member of Lakshdeep Investments, owns 3.3 crore shares of Sun Pharma in personal account.

Response: Classified Lakshdeep Investments as a non-promoter entity on legal advice received years ago. Even if Lakshdeep Investments is classified as a promoter, there will be no change in promoter shareholding. Sun Pharma is looking to seek revised legal opinion on the matter.

Allegation: Jermyn Capital was the banker to some of Sun Pharma’s fundraising plans between 2004 and 2007. A SEBI order in 2006 showed that there were links between Jermyn Capital and Ketan Parekh and his associate Dharmesh Doshi. Parekh, a stockbroker from Mumbai, was convicted in 2008 for his involvement stock price manipulation from 1998 to 2001.

Response: JPMorgan was the lead manager and sole book runner while Jermyn Capital was the co-manager to overseas borrowings. Sun Pharma’s management didn’t say anything about Jermyn Capital’s links with Parekh and Doshi.

Allegation: Macquarie trader pointed out that Sun Pharma lent money to four individuals without any security or collateral.

Response: The lending happened in 1995-96 and the amount of funds lent was small and has been fully recovered. The appeals tribunal in 2002 ruled in favour of the four individuals after being investigated by SEBI.

Allegation: Insider trading case was settled with SEBI regarding the Ranbaxy acquisition.

Response: Sun Pharma was not involved in any insider trading issue on the Ranbaxy deal. There was a minor technical issue relating to trading window closure norms. The case was settled with SEBI without admission of guilt and the matter was closed.

Allegation: A point is being raised about Dilip Shanghvi buying the shares of Natco Pharma in his personal capacity from a company known as Orange Mauritius, which had ties to Jerymyn Capital.

Response: Natco Pharma transaction has been disclosed on the exchanges when transaction happened and still continues to own shares. On Orange Mauritius Investments, Shanghvi said he is not aware from whom he purchased the shares.

Allegation: Sun Pharma’s domestic business is routed via a related party—Aditya Medisales.

Response: Domestic formulations are routed via Aditya Medisales which became a related party in FY18 due to shareholding consolidation; it wasn’t a related party prior to that. The company is in the process of discussing various options and is open to changing the distribution arrangement with Aditya Medisales. The options include Sun Pharma taking over the distribution business or acquiring Aditya Medisales at a cost.

Allegation: There are concerns being raised about Sun Pharma’s low single digit tax rate.

Response: The effective tax rate is now in mid-teens. A lower tax rate is a result of operations in tax-free zones. The drugmaker had guided many times in the past quarters that its tax rate will gradually inch up in the coming years.

Allegation: Sun Pharma gave guarantee to Suraksha Realty—an unrelated company.

Response: Sun Pharma has never given any loan or guarantee to Suraksha Realty.

Allegation: A whistleblower has filed a complaint against the company with SEBI.

Response: Sun Pharma has not received any query or communication from SEBI and is not aware of any such complaint.

Allegation: Loans and advances given to non-related parties have increased over the past few years.

Response: Loans are given in the normal course of business, at arm’s length and at market rates. The company did not disclose the nature and beneficiaries of loan, but said they related to the pharma business.

Also read: Brokerages Say Three Concerns Remain On Sun Pharma Despite Shanghvi’s Clarification