Mockery Of Corporate Governance: The Sun Pharma Way

Being transparent to investors is the most important and one of the basic elements of good corporate governance and any violation in complying with this ethical practice is a punishable offence. When companies do not disclose critical information to investors, it should be treated as a serious violation under corporate governance law and such companies should be barred from participation in public trade of shares and from raising money from the markets or any other public sources. And, the disclosure is applicable not only to developments that have already taken place but also to developments that will take place sooner or later as part of the companies’ already conceived strategy.

The case in reference here is Sun Pharmaceutical Industry Ltd’s decision to cut employment and divest manufacturing units in a series after its acquisition of local rival Ranbaxy Ltd. These decisions were very well conceived at Sun Pharma’s management level at the time of the deal closure in 2014 itself. The company, although announced a synergy of $250 million to be derived from the deal when the integration of the acquired entity is completed, it did not disclose the ways and means of this synergy.

But, as a matter of fact, the industry analysts and consultants and the media could well in advance anticipate that the synergy would be nothing but job cuts and asset divestment. However, media reports, including a series of reports by this author, on this expected developments in Sun Pharma were vehemently denied by the company then.

As anticipated, soon after the Ranbaxy integration process started in Sun Pharma in 2015, there were a series of job cuts and asset sales. The company laid off some 150 senior executives in its India and US businesses in June 2015. Immediately after this, it again laid off a large team of research and development staff in July. As a matter of fact, many more such rounds of divestment and lay offs are still expected in the company, mainly in the production units and field force.

In December 2015, Sun Pharma announced its first round of asset divestment as part of a manufacturing consolidation. The company sold its manufacturing unit at in US to Nostrum Laboratories Inc for an undisclosed sum as part of the company's consolidation of manufacturing business in the US. And, the second round came in June 2016, when it announced sale of two production units in the US. The company said on June 4 that as a part of its manufacturing consolidation in the US, one of its wholly owned subsidiaries has entered into an agreement with Frontida BioPharm Inc for divestment of its two oral solid dosage manufacturing facilities located at Philadelphia and Aurora along with 15 related pharmaceutical products.

In this case, Sun Pharma has not only violated the good corporate governance in terms of transparency but also consciously tried to make the investors believe that there is no plan to either divest assets or to cut jobs by strongly denying the then true media reports. Hope the regulators and investor protection groups are listening. The company deserves due punishment as it is not only the question of being non-transparent but also a matter of cheating the investors and other stakeholders with untrue denials.