Corporate governance overhang haunts Sun Pharma despite management rebuttal

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26 Aug, 2025 12:21

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The overhang of corporate governance issues faced by India's largest drug maker Sun Pharma may not go away soon as analysts tracking the company said they still haven’t got full clarity on Rs 2,242 crore loans advanced to employees and others, and the benefit of the arrangement with the promoter- owned Aditya Medisales.

Investors are also concerned about a potential investigation by the stock market regulator the Securities and Exchange Board of India (SEBI) on a complaint by a whistleblower. The company said it hasn’t received any communication from SEBI.

Sun Pharma has been trying to restore investor confidence, after a scathing note by Australian brokerage firm Macquarie and a whistleblower complaint to SEBI last week. The drug maker's stock has since dropped to one-fifth of its value.

Shares of Sun Pharma on December 5 dropped 6.59 percent to close at Rs 413.60 on BSE, the benchmark Sensex declined 0.69 percent to end 35,884.41 points.

The company held an investor call on Monday late evening to assuage concerns over recent reports of governance lapses at the company. Dilip Shanghvi, Sun Pharma’s Managing Director tried to give a point-by-point rebuttal and said his company is ready to simplify structures and do away with certain transactions.

But analysts have found something amiss on at least two things

Third-party loans and advances

In FY18, loans given by Sun Pharma rose to Rs 2,242 crore, compared to Rs 69.8 crore a year ago to employees and others. The company said this was a structured transaction, related to the pharmaceutical business. But it did not share crucial details like the eventual beneficiary of the loan, citing business sensitivity.

But the company said the loan is for pharma business and can take 2-2.5 years to come back, with interest rate ranging from 0 to 15 percent, depending on certain outcomes. The company added it can unwind this transaction earlier than planned if required.

But it raised more questions.

“Given the recent $200 million modafinil settlement and $250 million speciality product-related milestones in 1HFY19, Sun Pharma was forced to ask Taro for $500 million special dividends to strengthen its ex-Taro balance sheet. This further weakens the rationale for furthering such a large loan to a third party. Moreover, does it indicate that Sun Pharma no longer has investment avenues to earn 15 percent IRR on pharma /speciality projects?,” Kotak Securities said in a report.

Modafinil antitrust settlement relates to so-called “pay-for-delay” settlements in which brand-name drug makers pay their generic counterparts to keep drugs off the market.

The analysts were also spooked by lack of disclosures around the number of parties receiving the loan, or the average quantum of loans given.

Related party transactions

Sun Pharma’s domestic formulation business is entirely routed through a promoter-owned entity called Aditya Medisales, a super stockiest that became a related party of the company during FY18 after a consolidation of several other investment companies.

Aditya Medisales does not enjoy any significant profitability, and on revenues of Rs 8,000 crore, it had an EBITDA margin of 1.7 percent and net margin of 0.4 percent in FY18. Shanghvi said the arrangement was made for an efficient tax structure and said he is ready to relook at the deal and might look at changing the structure of the deal.

The Aditya Medisales arrangement for tax-efficiency has become irrelevant with the introduction of Goods and Services Tax (GST) last year.

What are analysts saying
“The company provided limited clarity on the structure of its domestic C&F agent (Aditya Medisales), US$340m of incremental loans advanced to employees/others and the whistle-blower complaint filed against the company. Based on investor feedback, management may look at rewinding/reorganising some transactions that the company believes will not have any material impact on its operations,” said IIFL in its report.

“We believe these issues may remain an overhang on the valuations until more clarity emerges,” ICICI Securities said.