Dr Reddy's needs to take lead in corporate governance: Analysts

Investors have been demanding greater transparency from the firm

The class action suit filed by a US law firm against New York Stock Exchange-listed Dr Reddy's Laboratories Limited has only underlined the need for strengthening corporate governance practices by the management in the light of a series of regulatory set backs faced by the company in the recent past, according to some analysts.

They believe that the issues that led to the recent changes at the helm of Indian IT giant Infosys will keep returning to the big companies in one way or the other and it was high time for Dr Reddy's to stop thinking about taking mere incremental steps to address the issue.

"People expect Dr Reddy's to set a bench mark in corporate governance as Infosys founders have done in the past. The issues raised in the class action law suit were not entirely new. Even in India, investors had been demanding greater transparency from the company," said Sarabjit Kour Nangra, vice president, research at Angel Broking, who has been tracking Dr Reddy's for a very long time.

Dr Reddy's scrip has been under performing ever since the US drug regulator had issued the warning letter citing deviations from current good manufacturing practice (CGMP) in three of Dr Reddy's manufacturing facilities, thereby, impacting its US revenues owing to fewer product launches. This has created a ground for the US law firms to launch an investigation to link the investor loss to the alleged non-disclosure of compliance related developments in the company. A class action lawsuit is one in which a group of people, sharing a common grievance, can sue the company as a group.

In this case, the US law firm represents a group of investors who own 700 shares of the company and may bring more such investors on board subsequently. The lawsuit was filed against the CEO and the CFO with the company, on its part, alleging that the investors violated the US federal security laws on several counts. The case seeks damages from the company to compensate the investors for a loss arising from the decline in share price.

The US law firm has alleged that the company had made false and misleading statements with regard to its corporate quality system, and specifically about a warning letter from the US Food and Drug Administration(US FDA), which was issued in November 2015, and another letter received from the German regulator earlier this month.

In its filing, Dr Reddy's refused to comment on specific allegations. It, however, maintains that the asserted claims of the investors were without merit.

"Class action law suits are a common phenomenon in the US. As they have a right to file the suit, we have a right to defend ourselves. We have a fair legal ground to defend ourselves against these allegations in the US court. We will not discuss with them( for any settlement)," Dr Reddy's chief operating officer Abhijit Mukherjee told Business Standard.

A number of companies keep facing class action lawsuits on various grounds in the US but outcomes where a penalty is imposed on the firm is rare. Usually, disputing groups opt for an out-of court settlement and the practice is indeed very common.

Recently in March, a New York grocery workers union had filed a class action lawsuit against Sun Pharmaceutical Industries for allegedly conspiring to raise the price of a generic asthma medicine. Companies from other sectors also ended up facing these lawsuits. In September 2016, US law firms had filed two class action suits against Indian home textile products company Welspun and its US subsidiaries for alleged fraud of using inferior and less expensive cotton in its bedsheets and towels and marketing them as premium Egyptian cotton.

In 2015, Sun Pharma's US subsidiary Caraco Pharmaceuticals faced a class action law suit for allegedly laying off the workers without issuing a prior notice.

Amey Chalke, lead analyst at HDFC Securities thinks that the present class action suit against Dr Reddy's was not going to have any significant impact, as it revolves around the alleged delay in disbursing information related to regulatory inspections. He says that it was not easy for a company to evaluate as to how the drug regulatory will subsequently act up a particular Form 483 observation, issued against a manufacturing facility.