Reports on Sudhir Valia and corporate governance leaves shares of Sun Pharma bleeding, here's what happened

Last Updated: Tue, Dec 04, 2018 17:26 hrs
A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai

Sun Pharma, a leading Indian pharmaceutical company saw it's shares tumble to an 8 month low.

On Tuesday, shares of Sun Pharmaceutical were quoting a price of Rs 442.80 per share on the Bombay Stock Exchange. The 52 week low of the stock of Rs 434.80 was recorded on 22nd May, while the highest was Rs 678 recorded on 6th September.

The stock has taken a beating since 9th November, with the stock crashing consistently from levels of Rs 595 per share. A list of allegations, clarifications and speculations have lead to the slippage of the stock.

The list of speculations have commenced since 29th November. A PTI report dated 29th Nov claimed that it "was likely" that SEBI could reopen an insider trading case against Sun Pharma. A whistleblower is said to have approached SEBI to open up a case that was already settled. This allegation pertained to a insider trading case which was settled by Sun Pharma after paying Rs 18 lakhs as settlement charges. SEBI has legal powers to open up such cases for re-investigation. The Whistleblower, the report explains, alleged severe lapses on the part of promoters and other entities.

The PTI report does not cite any sources for the allegations, but claims that the irregularity pertained to raising funds via Foreign Currency Convertible Bonds (FCCBs). Sun Pharma did not comment directly to the report, but explained via a regulatory filing to stock exchanges, a day later. In it's report, Sun Pharma said that they were not contacted by SEBI. The company also said that the events were dated 10-15 years ago.

The PTI report does not cite it's sources, but reported that a Whistleblower approached SEBI with a document alleging irregularities. The report also says that Sun's promoter Dilip Shanghvi and nine other entities settled an insider trading probe on payment of Rs 18 lakhs as settlement charges.

On 29th November, an ET story reported of Governance issues citing a Macquarie sales note. This note, according to the report claims inadequate disclosures made by Sun Pharma on the role of Sudhir Valia. Sudhir Valia is Dilip Shanghvi's brother in law. The report said groups on Whatsapp had widely forwarded the Macquarie sales note. The Macquarie report also talks of transactions with banned traders such as Ketan Parekh, Dharmesh Joshi, and guarantees to real estate firm Suraksha Realty. Questions were also raised on UK based firm Jermyn Capital that managed $275 million foreign currency convertible bond. A Mint story reported that Dilip Shanghvi and Sudhir Valia were alleged to have engaged in financial irregularities with Dharmesh Joshi, accused of rigging stock markets and linked with Ketan Parekh. This story says that an email was sent to SEBI by a whistleblower. The mail says there were links between Jermyn Capital and Dharmesh Joshi. The same mail talks about Dilip Shanghvi's investments in his personal capacity in companies such as Natco Pharma and Orange Mauritius.

Moneylife, meanwhile said that a 150 page complaint had been filed by SEBI about Sudhir Valia, Dilip Shanghvi and Sun Pharma. The document marked sensitive had been addressed to key SEBI officials such as Ajay Tyagi, Chairman of SEBI; Madhabi Buch, Whole Time Director; G Mahalingam, Wholetime director; and Ananta Barua. Although Moneylife does not reveal the contents of the document filed in mid-September, the seriousness is severe considering names, phone numbers, bank account statements and complex organisation charts of hundreds of companies, foreign investors and individuals have been reported in the document.

The MoneyLife report also claims that Sanjay Valia had been barred from securities market in 2002 for involvement in price manipulation case involving the stock of Maa Leafin and Capital.

Speculations are rife that insider trading helped Sudhir Valia bag crores. This amount is speculated as Rs 275 crores. Speculative reports also concur that Dharmesh Joshi netted Rs 500 crores via insider trading during the acquisition of Ranbaxy. These are reported values and hence may not be exact values.

Ever since reports of corporate irregularities have surfaced, stock exchanges have sought for responses from Sun Pharma. Here are the Questions and Answers, responded by Sun Pharma's spokespersons:

Question From Exchange: It has been indicated that one of the partners of an audit firm of Sun Pharma (Valia & Timbadia) was investigated in a stock price rigging case. What is the truth?

Sun Pharma: None of the partners of this audit firm or the firm itself was a party to this investigation. This audit firm audits some of our subsidiaries and they have been with us for a long time. The subsidiaries that this firm audits put together account for approximately 0.6% of our consolidated revenues - FY18. (SEBI orders in which neither the partners, nor the firm is party to the said investigations)

Question from Exchange: There are questions that Sun employed a small time securities firm, Jermyn Capital to manage the landmark FCCB transaction in 2004?

Sun Pharma: The fact is that JP Morgan Chase was the lead manager and sole book runner and Jermyn Capital was only a co-manager.

Question from Exchange: Why is Lakshdeep Investments & Finance not considered a promoter entity?

Sun Pharma:Lakshdeep is an investment company of Mr. Sudhir Valia. As per the then legal advice we received, we classified the same as a non-promoter entity and disclosures were made accordingly. However, even if it were to be classified as a promoter entity, it does not materially change the current promoter shareholding. Further, as a concern has been raised on this, we are in the process of seeking a revised legal opinion on this matter.

Question from Exchange: There are questions raised regarding the relationship between Orbit Investment Services and Investment Trust of India.

Sun Pharma: The investments made by these entities may be private investments made by independent parties, which the company is not privy to.

Question from Exchange: There is an issue that pertains to Sun Pharma lending some money to four individuals without security?

Sun Pharma: This is a 20+ year old event which happened and the money involved was a few lakh rupees, which was fully recovered. The company conducts business as per its policy guidelines and in accordance with applicable laws. If at any point in time, any loan was extended to any individuals as per the then prevailing guideline of the company, those loan accounts have been closed after receiving all the receivables from such borrowers. It is also pertinent to note that while these four individuals were investigated by SEBI, the appeals tribunal in 2002, has actually given a ruling in favour of these four individuals.  (the order is related to the four individuals mentioned above who won the appeal)

Question from Exchange: A question is being raised about an insider trading case which was settled with SEBI regarding the Ranbaxy acquisition?

Sun Pharma: We clarify that Sun Pharma has not been involved in any insider trading norm violations relating to the Ranbaxy deal. However, there was some minor technical issue relating to a procedural aspect of trading window closure due to intervening holidays. The board meeting for approving the Ranbaxy acquisition was held on a Sunday and hence our lawyers advised that there is no need to announce a trading window closure since stock markets are anyways closed on Saturday and Sunday. SEBI later on ruled that we should have announced a window closure. This case was settled with SEBI with no admission of guilt in accordance with the provisions of applicable laws and matter was closed. It is also important to note that none of the insiders traded in the Sun Pharma stock even if the window closure was not announced.

Question from Exchange: A point is being raised about Mr. Dilip Shanghvi buying the shares of Natco Pharma in his personal capacity from a company known as Orange Mauritius?

Sun Pharma: We clarify that this transaction has been already disclosed to the stock exchanges. These are long term investments which Mr. Shanghvi has made in his personal capacity and he continues to hold these shares.

Question from Exchange: There was an issue raised on Sun Pharma’s domestic formulations business being routed through a related party?

Sun Pharma: Our domestic formulations sales are undertaken through Aditya Medisales Ltd. (AML) which became a related party in FY18. However, the domestic formulation business transactions with AML have been in existence for the past many years. The transactions with AML are reported as related party transactions in FY18 but not in previous years since AML was not required to be classified as a related party prior to FY18. AML became a related party in FY18 due to consolidation of its shareholding amongst fewer entities as compared to the past. We had also taken shareholder approval on this in our 2017 AGM. These transactions cover the sales made to AML in FY18 and consequent receivables. Sun Pharma’s relationship with AML is on an arms-length basis. As investors have expressed concerns regarding this arrangement, we are in the process of evaluating various options for undertaking domestic formulation business.

Question from Exchange: Has Sun given any Bank guarantees to Suraksha Realty?

Sun Pharma: Sun Pharma has not given any Bank guarantees to Suraksha Realty.

Question from Exchange: There are concerns being raised about Sun Pharma’s low single digit tax rate? Sun Pharma: This was the case many years back and now our effective tax rate is in mid-teens. We have guided many times in the past quarters that our tax rate will gradually inch up in the coming years.

Question from Exchange: There have been news reports about SEBI likely to re-open the old Insider Trading Case?

Sun Pharma: We have not received any information from SEBI in this regard.

Question from Exchange: There have been some queries on loans and advances given to non-related parties which have increased significantly in FY18?

These are loans and advances given in the normal course of business at arms-length basis at market interest rates and at market terms and conditions.

Question from Exchange: There have been news reports of a whistleblower complaint filed against Sun Pharma with SEBI?

Sun Pharma: As of now, we have not received any query related to this from SEBI.

Meanwhile, retail investors are a confused lot on whether to buy the stock or not to. Some believe this is an opportune time to buy at the dips, while others say that a boardroom indiction such as the current one could leave a hole in investor's wallets. We hope investors place decision to either buy or sell shares on a conscious and a well-thought decision.

Here are some responses from Twitter: