Bottomline | The worrisome case of Aurobindo Pharma

A day earlier, it had issued a detailed notification to exchanges aimed at addressing any concerns. This is reproduced below.

1. Whether such fraud/default/arrest has been reported to appropriate authorities: The arrest of Mr P. Sarath Chandra Reddy, Whole Time Director of the Company, is not in any way connected with the operations of Aurobindo Pharma Limited or its subsidiaries, hence not required to report to any authority.

2. Nature of fraud/default/arrest: The company learnt that Mr P Sarath Chandra Reddy had been arrested by Enforcement Directorate (ED) relating to the transactions done in his personal entities, and it is not related to the operations of Aurobindo Pharma Limited.

3. Estimated impact on the listed entity: He is overseeing operations of procurement of engineering items, logistics and IT, and these departments are headed by senior professionals and also, the same is now allocated to other whole-time directors hence, impact on the operations in those areas is very minimal.

4. Time of occurrence: He was arrested on 10th November 2022.

5. Person(s) involved: No other person other than Mr P Sarath Chandra Reddy is involved from Aurobindo Pharma Limited

It is tough to distance the fortunes of businesses from their promoters and relatives. Here, it must be noted that Sarath is the son of founder-promoter PV Ramprasad Reddy, as stated in the annual report.

Media reports suggest that in addition, he is the son-in-law of the company’s Managing Director, K Nithyananda Reddy. That makes him as close to the promoters as one can be, even though he isn’t designated as such.

What’s more? Sarath, as the annual report reveals, has been a Director with the company since 2007 and involved with important functions like projects, procurement and IT. Interestingly, he is also on the Risk Management Committee and the CSR Committee.

The former is particularly ironic in light of Sarath’s recent arrest. As stated by the company, "The Risk Management policy of the Company outlines a framework for identification of internal and external risks specifically faced by the Company, in particular including financial, operational, sectoral, sustainability (particularly, ESG-related risks), information, cyber security risks, or any other risk as may be determined by the Committee; measures for risk mitigation including systems and processes for internal control of identified risks; and Business continuity plan. Risk is an integral part of the Company’s business, and sound risk management is critical to the success of the organisation. The Company has adequate internal financial control systems and procedures to combat the risk."

So, Sarath, it seems, plays an important role in the management of the company—he is designated as an Executive Director—and draws remuneration in line with such responsibilities. In FY22, he took home a total of Rs 1.46 crore in remuneration.

To believe that given his position, if his personal dealings outside of the company are at all unethical (remember nothing has been proven yet in the money laundering matter), that everything within the company is kosher requires a leap of faith.

This isn’t Sarath’s first brush with the law. A story by Indian Express points to a matter in 2012 where he had a run-in with the Central Bureau of Investigation (CBI).

The report says: “In March 2012, the CBI had filed a case against Sarath Chandra Reddy among others for allegedly receiving favours from the then Dr YS Rajasekhara Reddy government in the form of land allotment at low prices, in return for investing in his son Y S Jagan Mohan Reddy’s Jagati Publications Private Ltd.”

It goes on to claim that the CBI alleged a quid pro quo. “The CBI chargesheet states that in return for the the land transfer by APIIC, which benefitted Trident Life Sciences by Rs 4.3 crores, Sarath Chandra Reddy invested Rs 7 crores as quid pro quo, in YS Jagan Mohan Reddy’s Jagati Publications Private Ltd (JPPL) at an exaggerated premium of Rs 350 per share. They also wrote to the APICC to waive off Rs 61.38 lakh towards 10 percent process free for transfer of the land.”

This, though, seems like a trifle. Either the sums reported are smaller than the actual, or there could be other matters not known to us. After all, for an executive drawing Rs 1.43 crore a year and belonging to a family that controls Aurobindo Pharma, a company presently valued at Rs 29,000 crore in equity terms, it does seem like a matter being blown out of proportion. What’s more? The quid pro quo in the Indian business and political world is a known that one would be naïve to raise eyebrows at.

The present matter, though, is more concerning. It reportedly concerns his involvement in money laundering under the now-scrapped Delhi liquor policy. It is alleged that Sarath and Pernod Ricard's Benoy Babu, also arrested, were involved in the cartelisation of the liquor licenses and in arranging kickbacks. These seem like serious charges, but there are no details available on the matter, so the real implications are tough to gauge. A worrying point is that the prime accused in the case is Delhi Deputy Chief Minister Manish Sisodia. This gives the matter a political colour, further muddying the plot.

It is well known that businessmen close to certain political parties tend to gain or lose, depending on how the tide turns. Therefore, the involvement of Sarath in the matter that can acquire political dimensions is one of concern. It is prudent on the part of Aurobindo Pharma to distance itself from the issue, but as an investor, you can’t take your eye off the ball.

When it comes to matters of governance for investors, safe is better than sorry.