Relief for Sun Pharma as regulator's probe unearths no evidence of fraud

Sun Pharma might soon be able to free itself of whistleblower allegations weighing on its shares—at least from the securities watchdog’s point of view.

A preliminary probe by the Securities and Exchange Board of India (SEBI) has found no violation of securities laws at Sun Pharma on two main whistleblower allegations, Business Standard reported, citing two persons familiar with the matter.

The investigation team recommends no further inquiry and has sent its report to a SEBI committee, which will run its assessment before submitting it to the leadership board for final approval, according to the Indian newspaper.

If SEBI finally clears Sun, it would be a major relief for the Indian drugmaker, whose stock price has been under pressure since the allegations first surfaced in late 2018.

The securities watchdog had mainly focused on two alleged problems, Business Standard said. First, Sun was accused of diverting Rs 42,000 crore ($5.86 billion) through a related party and former formulation distributor Aditya Medisales (AML). Secondly, Sun had issued foreign currency convertible bonds worth $275 million, and some of that was managed by Jermyn Capital, which had links to barred traders.

"The regulator had sought hundreds of documents to understand and examine the trade agreement between AML and Sun Pharma," one source told the Business Standard. According to that person, AML’s books showed it had never generated annual profits of more than Rs 30 crore or annual turnover of Rs 10,000 crore in the past five years.

Sun has meanwhile distanced itself from AML, partly because of a separate whistleblower complaint focused on AML's business relationships with a real estate firm controlled by Sun director Sudhir Valia, who’s also the Sun Pharma chief’s brother-in-law. In April, the drugmaker said a wholly owned subsidiary would start distributing its formulation products in India.

Speaking to the Economic Times previously, Valia said AML and his Suraksha Realty "can do any business that has nothing to do with [Sun] shareholders" because both are private firms. "So far as Sun Pharma’s money is concerned, it has not been diverted," he told ET. Valia switched to non-executive director in late May.

As for the foreign fundraising, Sun has said it didn’t have information whether Jermyn Capital had links with the stock con men. In those transactions between 2004 and 2007, JPMorgan was the lead manager, the company has said.

The SEBI team found Jermyn had underwritten only $1,000 of the total $275 million raise, one source said, as quoted by Business Standard.

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