Vijay Mallya A Reputational Risk For Sanofi, Bayer Crop In India?

Sanofi India and Bayer Cropsciences, the Indian listed units of French-drug maker Sanofi SA and Germany’s Bayer Group respectively, are taking huge reputational risk by retaining Vijay Mallya on their boards as chairman since he has been tagged as a wilful defaulter by a consortium of lenders and several investigations are pending on his alleged involvement in money laundering and other financial offenses, caution investor activists and industry analysts.

Although no penalties or legal actions yet initiated on Mallya by the court or any other regulators on the said offences including the defaulted loans, the negative perception about Mallya as a financial offender following the wilful defaulter tag and the demand for his arrest by the lenders, including the country’s largest public sector bank-- State Bank of India, should be a matter of concern for these companies, they say.

While Bayer Cropsciences said it has no comments on this issue, Sanofi said Mallya has not been disqualified under any Indian law to hold a board position.

“We have been advised that Dr Mallya has not been disqualified under the Indian Companies Act, to hold a Board position in our company or any other company,” said a Sanofi India spokesperson in response to a BW Businessworld query.

Mallya has been serving on the board of Sanofi India since the foreign drug maker merged Aventis Pharma within itself a decade ago following its acquisition of erstwhile European drug major Aventis Pharma AG globally. Mallya was chairman of Aventis Pharma India before the merger as the company continued the legacy from Hoechst India, the former avatar of Aventis India, in which Mallya and his family were stakeholders.

Investor community had earlier raised issues with Mallya’s continuation on Sanofi board after has was declared as a wilful defaulter by Union Bank of India in 2015. Since Mallya challenged this at the Calcutta High Court that time, Sanofi had justified its stand saying its chairman wasn’t yet been proved a wilful defaulter then.

“Better corporate governance is something beyond the legal definitions. Hence the companies should be responsive to concerns raised by stakeholders on the reputation of people on their board quickly,” says J N Gupta, co-founder and managing director of Stakeholders Empowerment Services, a proxy advisory firm for investor protection, which had also raised concerns about the $75 million settlement between Mallya and United Spirits Ltd for his exit from the latter’s board as chairman a few weeks ago.

The investor community views were in response to the indifference shown by Bayer and Sanofi in reviewing their boards in the wake of the serious allegations made by the banks as well as United Spirits against Mallya. While the lenders have already approached the Supreme Court seeking an order to arrest Mallya and to stop him from leaving the country, United Spirits (currently controlled by UK distiller Diageo after its purchase of majority shares in the country’s largest alcoholic beverages maker in 2013), had alleged that that Mallya was involved in inappropriate financial transactions, including related party transactions, within the company and a wilful defaulter tag on him will affect the company’s credit rating.

United Spirits had also approached the Company Law Board as well as Securities Exchange Board of India (SEBI) to action against the culprits including Mallya earlier.

While, a stock analyst says that these negative perceptions on the person who head the board may sooner or later will also reflect in the investor confidence.

"While stocks of these companies haven't started reflecting the Mallya implications yet, it will be a key risk factor in the market perception soon," said a Mumbai based industry analyst, who doesn't want to be identified.

While, Sanofi India says the legal cases pending on Mallya has nothing to do with the company.

“The legal cases (against Mallya) do not relate to Sanofi India Ltd and hence we have no further comments on this subject,” said Sanofi India spokesperson.

But, SES’ Gupta says there are enough grounds to prove Mallya not only a wilful defaulter of loans availed by his grounded airline (Kingfisher Airlines) with the pending liabilities with the banks (around Rs 9000 crore in total due to some 17 banks), but also on charges of not paying the TDS (tax deducted at source) from the salaries of Kingfisher Airline employees and the service tax collected from passengers when the airline was in operation.

“He hasn’t paid the TDS and the service tax that is collected from employees and passengers, which are criminal offenses. And, his failure to pay salaries to hundreds of Kingfisher Airline employees earlier and the loan defaults are civil offences,” said J N Gupta.

“So, the companies (Sanofi and Bayer Cropsciences) must review the benefits it is having with Mallya on the board versus potential risks it has, apart from reputational risks. Or if they feel it is worth to continue with Mallya at the helm, it must share the reasons with the shareholders," says he.

“Perceptions matter a lot and every decision of these companies should be evaluated in a larger perspective. The Reserve Bank of India has placed a lot of restrictions on wilful defaulters. Further, Sebi in its concept paper on wilful defaulters has proposed strict conditions,” he added.