Sun Pharma’s domestic formulation business is entirely routed through a promoter-owned entity called AML, a super stockist that was declared as related party of the company only during FY18.
Sun Pharmaceutical, India’s largest drugmaker is likely contemplating discontinuing the super stockist arrangement with Aditya Medisales (AML), sources told Moneycontrol.
“They are doing away with AML as super stockist,” said a person with knowledge about the matter on condition of anonymity.
“They are internally debating whether to take it (AML) inside the company, or give it to some third party, depending upon where they can save the money,” the source said.
A spokesperson of Sun Pharma told Moneycontrol the company is evaluating all the options.
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.
In an analyst call in December 2018, Sun Pharma said the arrangement with AML was made for an efficient tax structure and it is ready to review if investors aren't comfortable.
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.
Moneycontrol was unable to independently review the whistleblower complaint.
The report alleged Sun Pharma's payment to Aditya Medisales was transferred to the promoter and group companies between 2014 and 2017.
Later, Sun Pharma in a clarification to stock exchanges said it hasn’t received the alleged 172‐page whistleblower complaint and therefore, is not privy to the contents of the document.
The company requested SEBI to examine the matter in its entirety and the role of some media houses and other stakeholders.
Reputation on the line
Analysts and corporate governance experts Moneycontrol spoke to said it’s time for the SEBI to verify the veracity of the allegations made by the whistleblower in the complaint.
The analysts also felt the response from Sun Pharma so far hasn’t been adequate.
“To tell the investors, that if you don’t like the structure we will reverse, it is for my mind is not an optimal solution,” said an executive of proxy advisory firm that advises shareholders.
“You can’t be reacting, you have to kind of decide what fits in business requirement. If it is a tax efficient structure for you, you have to tell the investors that this why it is a tax efficient structure,” the executive said.
"We don't know the veracity of the (whistleblower) allegations, but for sure the company has not addressed it in a forceful and compelling manner," said Shriram Subramanian, Founder & MD, InGovern Research.
"The December investor call by Sun Pharma was an opportunity for the management to put all the allegations to rest. They said we will look at not using AML in future. We will look at the Rs 2000 crore loans that we have given to non-related parties if it is in the interest of the shareholders, but somehow the management commentary wasn't convincing," Subramanian added.
Subramanian also urged SEBI to act fast and the company to be proactive in the interest of shareholders.
JN Gupta, Founder and Managing Director of Stakeholders Empowerment Services and form SEBI executive director also sought SEBI's action in the case.
"The issue is what are the contents of the whistleblower letter, and whether they are true or not, first this has to be established only after SEBI investigation," said"Now if they are true, then the action whether it is corrective, preventive or penal action lies with Sun Pharma, if they are incorrect, then the action must be taken against the whistleblower," Gupta added.