Moneycontrol
Last Updated : Jan 24, 2019 07:35 AM IST | Source: Moneycontrol.com

Allegations on Sun Pharma may tighten scrutiny on related party distribution model in sector

Sun Pharma’s domestic formulation business is entirely routed through a promoter-owned entity called AML, a super stockist that was declared as a related party of the company only during FY18.

Viswanath Pilla @viswanath_pilla
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The controversy surrounding Sun Pharmaceutical Industries super stockist arrangement with Aditya Medisales (AML) has brought the spotlight on related party distribution models.

Sun Pharma’s domestic formulation business is entirely routed through a promoter-owned entity called AML, a super stockist that was declared as the company's related party only during FY18.

AML had revenues of Rs 8,000 crore in FY18.

Sun Pharma stock took a hit last week, with shares dropping 12 percent on intraday trading on December 18.

This was on reports of a whistleblower complaint to Securities and Exchange Board of India (SEBI) alleging transactions over Rs 5,800 crore between AML and Suraksha Realty, controlled by Sun Pharma’s co-promoter Sudhir Valia, out of the money generated from the publicly-listed company.

Sun Pharma said the arrangement with AML was made for an efficient tax structure and it is ready to review it if investors aren't comfortable.

But on January 22, the company said it is switching the ownership of the domestic formulations distribution business from Aditya Medisales to a wholly- owned subsidiary of Sun Pharma.

Interestingly, Sun Pharma was among a few companies that continued with the model, that was discontinued by most others years ago.

In the super stockists model, a company sells the products to super stockists under the defined sale agreement. The super stockists then sell the products to distributors in different geographies, who in turn distribute to retailers and finally to the consumers.

The arrangement helps companies to have better control over distribution.

However, the super stockist model was later replaced by the more tax-efficient Clearing & Forwarding Agents (CFA) model. To bypass the state sales tax or CST of 4 percent all the big pharma companies shifted to services of third-party CFAs in each state to transfer goods as an inter-state stock transfer.

“Earlier, you would avoid a cross border sale because of additional Central Sales Tax (CST) and VAT coming in, but if you did stock transfer between your own depots, under your own title across the state border there was no tax implication,” said a pharma analyst at a consulting firm.

The analyst said with GST, the CFA role is becoming irrelevant in the supply chain.

“Now, with the GST, even if you move goods from your own warehouse to another warehouse it will attract tax, which means selling a product or transferring it is the same thing under GST,” the above analyst said.

Related party distribution

Another executive of a pharma company said there is nothing wrong about a pharmaceutical company or its related entity owning a super stockist or CFA, and be tax efficient.

“Being related is not an issue, the real issue is governance around it. It should be used for the purpose, it was supposed to be used for,” the executive said.

In Sun Pharma the contention is that the super stockist has allegedly done unrelated transactions with a real estate firm, he added.

"With the Sun Pharma episode, the transactions of related party companies will face a lot more scrutiny from auditors," the executive said.
First Published on Jan 23, 2019 08:52 pm
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