Sun Pharma is weighted down by its own corporate governance issues
Sun Pharma has streamlined its operations over the past few years and appears to have addressed the immediate issues that plague investors too. But it remains silent on how it proposes to correct some of its corporate governance practices. The environment today is far more focused on long-term value, and that needs to be the concentration of its management, promoters, and the board.
Sun Pharmaceutical Industries Limited’s (Sun Pharma)’s board has failed to control the narrative. Its filing with the stock exchanges today is reactionary – it came after more paperwork was released by the same whistle blower, who is an insider and whose assertions have been backed up with documentation. While the company has attempted to assuage the immediate concerns raised by the whistle-blower, this has limited palliative value. The company needs to rethink its corporate governance structures.
Sun Pharma has asserted that it will transition the domestic formulations distribution to one of its wholly-owned subsidiaries. While this corrective measure has been welcomed by shareholders, the larger question we ask is why have this structure at all? So far, these transactions were routed through Aditya Medisales. According to the whistle-blower, Aditya Medisales had the same address as that of Sun Pharma for several years – and this casts aspersions on the rationale for having this arrangement in the first place.
Sun has now (belatedly) disclosed that Atlas Global Trading is a recipient of the Rs. 2.2 bn reported as loans and advances on 31 March 2018. The nature and ownership of Altas Global Trading is unclear, as is its rationale for assuming a USD 345 mn liability on behalf of Sun Pharma for damages on account of patent litigation settlement. It is also unclear why the company was reluctant to make this disclosure to investors when the first whistle-blower letter was out.
The response to replacing the auditors is again a very narrow and specific response, limited to the concerns relating to Valia and Timbadia as auditors of subsidiaries: Sun Pharma itself has confirmed that the subsidiaries Valia and Timbadia audit together accounted for just about 0.6% of FY18 consolidated revenues. The larger issue being raised is that there needs to be oversight across the group given the complexity of the business structure and concerns over the quality of audit in subsidiaries.
Though it is not part of the audit industry construct, we encourage investors to have Sun Pharma employ a single audit firm or network for all its subsidiaries – both Indian and foreign.
Sun Pharma’s independent directors continued silence is inexplicable. Unlike Infosys and ICICI Bank, the board has not instituted an independent inquiry into the allegations – rather they appear to have allowed the promoters to defend allegations of their own wrong-doing. That the independent directors haven’t voiced their opinion may perhaps be a function of how the board and board committees are structured. The board comprises four employees of the Sun Pharma group, two of which are promoters. The Chairperson is not considered independent because his company appears to have business dealings with Sun Pharma. Other than the audit committee and the nomination and remuneration committee, all other committees have three members, two of which are Dilip Shanghvi and Sudhir Valia. The audit committee has management presence through the membership of an executive director.
The company’s argument of asymmetry in information dissemination is yet another instance of displaced responsibility. The board cannot hold a media house responsible for some market participants getting hold of the whistle blower letter. Instead of continuously lamenting the fact that they have not received the whistle-blower letter, investors expect the company to get hold of the letter and proactively address the issues. There are few that would accept Sun Pharma’s victim card in light of the nature of the allegations and the market panic that was caused.
Investors are now more vocal than ever before, and governance levels are increasingly becoming part of investment decisions. Today Sun Pharma is scrambling to apply band-aid as issues surface rather than address the substantive issues that underlie the whistle-blowers disclosures. In this, it has misread the investors: Sun Pharma is today weighed down not by its operations or the fallout of its Ranbaxy merger, but corporate governance issues which are of its own making.