Ranbaxy: U.S. Charges Could Create India Woes

The Indian government is concerned that shareholders weren't properly informed about the risks Ranbaxy faced in the U.S.

The US government's legal move against Ranbaxy for allegedly selling adulterated drugs in the US could expose the company to an investigation back home too.

Concerned whether shareholders in the company were kept in the dark about potential risks or were given a rosier picture of the state of affairs, the Indian government is set to examine the charges levelled by US authorities and the company's statutory documents.

If the company's documents show that the drug-maker has not taken its shareholders into confidence about the risks involved, a full-fledged investigation into the affairs of the company would follow. "We are keeping close tabs on the developments and would look into this issue," said a top government official.

The first step of the expected scrutiny would be an examination of the directors' report (which forms part of the company's annual report) in the light of the US Department of Justice's charge that Ranbaxy sold sub-standard drugs in the US and forged documents to get them approved besides refusing to share documents, allegations the company strongly denies.

If the company is found to have not disclosed enough information in the directors' report for the full appreciation of the state of the affairs there, it could pave way for a full-fledged investigation.

Ranbaxy's spokesperson was not available for comment.

A scan of Ranbaxy's annual report for 2007 by ET discovered the following disclosure in the management discussion and analysis section, "In regard to some of our manufacturing facilities, the US FDA has made certain observations most of which have been responded to while a few are in the process of being addressed. Specifically in regard to the facility at Paonta Sahib (Himachal Pradesh, India), we have fulfilled our commitments made to the US FDA and await their final clearance, pending which, we could continue to face delays for new product approvals from this plant."

The annual report had also said that any material non-compliance could potentially have an adverse affect on manufacturing operations at the facility concerned, on approvals of drug products in the market and for grant of approvals of new products.

It remains to be seen whether the government finds this disclosure sufficient. Since the news of US government's investigation against Ranbaxy became public over the weekend, Ranbaxy shares have tanked 21.39%. Market analysts say that a major reason for the steep fall is that investors were caught by surprise at the seriousness and extent of the charges.

"The alleged offences are of serious nature and many may have lost faith in the company. Most of the FIIs must have exited," a Mumbai-based analyst said. Ranbaxy shares declined to Rs 409.25 on Tuesday from Friday's closing price of Rs 532.15 on the Bombay Stock Exchange.

Daiichi Sankyo's shares fell 1.5% (45 yen) to 2,940 yen on Tuesday at the at the Tokyo Stock Exchange from yesterday's closing price of 2985 yen. The broad Nikkei index fell 256 points or 1.96%.

Under the Companies Act administered by the ministry of corporate affairs, the government can also appoint its directors on the board of the company to safeguard the interests of the stake holders, said a government source.

Sources said even small shareholders can approach the government for an investigation if they think the company is being run in a manner prejudicial to either its or the public's interest. The government can waive the 10% holding in the company is required to raise such a demand.

Overseas media reports meanwhile have suggested that there was a possibility that the USFDA probe may extend to even African countries as Ranbaxy has been supplying anti-retroviral drugs in these countries through the President's Emergency Plans for AIDS Relief (PEPFAR).

Before it's here, it's on the Bloomberg Terminal.