Investors in lurch

Sun Pharma's related party transactions expose loopholes in whistle blower norms

Market regulators have the dubious record of plugging loopholes only after trouble breaks out. The  recent episode involving Sun Pharma has brought to the fore many loopholes in whistle blower provisions. There’s an urgent need for the regulators to act in the case of Sun Pharma that has got embroiled  the episode after it took minority shareholders for a ride due to information arbitrage favouring a few.

Reports suggest that a whistle blower filed a case against Sun Pharma in last week of November 2018 it self. The whistle blower claimed that there had been many related party transactions that were incorrect and not disclosed by Sun Pharma.

When the first report came into public domain, Sun Pharma management claimed that they had no access to the whistle blower’s complaint and hence it was unable to respond. But, it made its intention clear to address issues reported in the media that include investors concern on related party transactions.

The company went to extent of saying that if minority investors pressed it was open to restructuring to take care of related party issues. The regulator did not take a position but admitted to having received a complaint.

Given that all the three parties to the episode – Sun Pharma, whistle blower and SEBI – have taken divergent positions, who does retail investor approach seeking clarity? How does he or she know seriousness of the whistle blower complaint?

Why wasn’t it that stock exchanges did nothing but twiddle their thumbs reneging on their responsibility under the listing agreement to question the company? Should the stock exchanges not have displayed the company’s responses on issues raised by the whistle blower?

Even media houses have had access to complaint lodged by the whistle blower. They had apparently asked institutional investors to examine the documents in their custody to understand gravity of the issues. The moment this happened, Sun Pharma lost over one billion dollars in its market capitalization. Institutional investors have perhaps dumped the stock after having verified claims of whistle blower thereby leading to free fall at Sun Pharma counter. Interestingly enough, Sun Pharma management did virtually nothing except for issuing a statement asking the market regulator to look into a possible conspiracy hatched by the whistle blower and selective leaks. Curiously enough, Sun Pharma stonewalled information on issues flagged by the complainants.

Isn’t it strange that the regulator did not publicly state if it was looking into the issue? If yes, what’s the time line for completing a probe and arriving at any conclusion? In the mele, was the retail investor expected to travel across to Mumbai offices of the media house to take a call on his or her investments?

Now, the chain of events only drives home the point that reputation of the company management seems to have helped with none coming to bat for the small investors. Corporate affairs ministry and SEBI cannot ignore their responsibility to ensure Sun Pharma adhered to minimum corporate governance norms.

In such a scenario, who would pursue protecting interest and rights of small investors that have been taken for a ride by the high and mighty. It’s for the regulator to look into reported whistle blower complaint and decide as to whether Sun Pharma is at fault or not.

Turn of events at Sun Pharma clearly show that there is a need for new set of rules to protect interests of minority shareholders especially in light of whistle blowers’ complaints that are extremely price sensitive.

The rules should allow company the access to such complaints while regulators cannot claim ignorance. Our policy makers need to realise that protection of minority shareholders interests is tracked by not portfolio investors alone but companies that look to expand elsewhere globally.