The Sun that was Eclipsed by Law

Sun Pharma, India’s largest drug manufacturer has recently hit grabbed the limelight in the news for its record on corporate governance. Though on the negative side, where there are investor allegations for its corporate mismanagement. As a result of which its shares dropped by 31 percent.

The take away for commerce students is that, a few provisions of the company act can be studied by analyzing the recent news surrounding Sun Pharma.

Sun Pharma is promoted by Dilip Shanghvi through his financial inter mediation company, Shanghvi Finance Private Limited (SFPL), which holds 40 percent of Sun Pharma. Sudhir Valia, owner of Suraksha Realty, a real estate firm, is a key director of Sun Pharma. Valia is also the brother-in-law of Dilip Shanghvi, which makes him a related party for Sun Pharma. Around early January, SFPL pledged a portion of its stake in Sun Pharma to help Suraksha Realty raise Rs. 100cr. Shares of Sun Pharma being used collateral to raise money for Suraksha has already happened for at least 3 occasions in the last 2 years.

Such related party transactions need board resolution before execution, which is clearly absent here. This is covered under section 188 of Companies Act 2013, which speaks about ‘Related party transactions’. But Valia claims that no guarantee or security is given to Suraksha by SFPL and that their shares are only for flexibility purpose. He also states that Lakshadweep Investments and Finance ltd (LIFL) is the firm that has pledged its shares. Since Valia, a director at Sun Pharma, is also the promoter of a real estate company, he has to comply with section 184 of the Companies Act 2013, which says about disclosure of interest by directors.

This concern also extends to Aditya Medisales Limited (AML) a subsidiary of Sun Pharma, where a lot of related party transaction issues were raised. But these claims were disregarded by Dilip Sanghvi, who said that AML was not a related party and that the transactions were at arm’s length price. A lot of financial misappropriation and money laundering cases is felt against AML by the investors of Sun Pharma. Recently, a loan of Rs. 425 cr was given by Sun Pharma to AML. These related party transactions raise a lot of questions in the mind of investors, who want answers to the functioning of the management of Sun Pharma.