Sebi inquiry clears Sun Pharma, finds no merit in allegations of fraud

A preliminary enquiry by the Securities and Exchange Board of India (Sebi) has found no merit in allegation of violation of securities laws, levelled by a whistleblower, against pharmaceutical major Sun Pharmaceutical Industries, said two persons aware of the matter.

The market regulator had sought detailed answers on two queries — 1. Alleged fund diversion of Rs 42,000 crore, through the company’s key distributor and subsidiary, Aditya Medisales (AML); 2. On the company’s 2004 fund raising through foreign currency convertible bonds (FCCB). 

The investigation team is of the view that the matter does not require further probe, said sources. 

The team sent its report to the Sebi committee for vetting. It will make observations, provide remarks, and submit it to the board of the regulator.  

Sources said according to the report, the alleged diversion never generated huge profits. “The regulator had sought hundreds of documents to understand and examine the trade agreement between AML and Sun Pharma,” said one source, adding: “AML’s books showed it had never generated profits more than Rs 30 crore. The company’s turnover never reached Rs 10,000 crore in past five years (2013-2018).” 

AML is a distribution company, classified as a promoter shareholder by Sun Pharma. It owned a 1.6 per cent stake as of December 31, 2018. 

However, it could not be ascertained whether Sebi was convinced with the pharma major’s argument of declaring AML a related party only in the financial year 2017-18. 

To explain the trade agreement with its distributor, Sun Pharma submitted the copy of the agreement between AML and carrying and forwarding agents (CFAs), who have a proper drug licence to reach out to various locations. AML is said to have arrangements with separate CFAs who have a demarcated warehouse and drug licence. 

A Sun Pharma spokesperson said “We have not received any intimation from Sebi regarding the investigation.”

On fund raising, the Sebi team is of view that Sun Pharma had a limited role. “Jeremy Capital was taken by Sun to market their issue in Europe and had underwritten only $1,000 out of an issue of $275 million,” said a source.

Back in 2004, for the FCCB fund raising transactions, the pharma major had hired Jeremy Capital as its second lead manager. 

A Macquaire analyst had alleged that Jeremy Capital had links with some banned traders. 

Sebi’s enquiry followed allegations made by a whistleblower in a 150-page complaint to Sebi accusing Sun Pharma of committing corporate governance and tax-related offences and securities market-related violations. 

Specifically, the whistleblower complained of a fund diversion of Rs 42,000 crore and of personal profits being made to the tune of Rs 10,000 crore.

The letter is also believed to allege that AML had thousands of crores of rupees worth of transactions with a real estate firm that is controlled by a director on the Sun Pharma board.