Sun-Baxy Deal Dinged For Insider Trading

Comments Off Written on April 30th, 2014 by
Categories: Stocks

The SunPharma-Ranbaxy deal has hit a little snag. The Andhra Pradesh High Court has temporarily stalled the merger, asking SEBI and stock exchanges not to approve the merger until it decides on whether there was illegal insider trading with respect to the deal.

Business Standard reports that Silverstreet, a Sun Pharma subsidiary had bought 60 lakh shares of Ranbaxy, in the march quarter. But Sun Pharma has said these shares will be annulled on the merger as it cannot be issued Sun Pharma shares, since it’s a subsidiary.  (HT @madmanweb)

In my first post on the merger, I had brought this up: Why did the shares of Ranbaxy go berserk?

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SEBI Must Investigate

This “SilverStreet will not be given SunPharma shares” doesn’t make sense. So Silverstreet will LOSE Rs. 280 crores? Who in his right mind believes that?

There are only two things - that shares will be issued as treasury stock like Reliance did when it merged with RPL (and Reliance owned a significant chunk of RPL shares). So Sun Pharma will own its own shares in some kind of treasury stock which can be sold at a later date.

Or, secondly, that Silverstreet will sell the Ranbaxy shares before the merger.

In both cases, there is a clear case for dinging them for insider trading. That Silverstreet will, in some way, profit from this deal, and Silverstreet is an insider.

Silverstreet should be asked to immediately sell the shares, and disgorge any profits. And on top of that, to pay a fine. This is similar to Reliance Industries’ insider trading case for which SEBI has demanded a 11 cr. fine for a profit made by a promoter entity in trading in IPCL shares before IPCL merged with RIL. The fine is about 3x the profit made.

Will the merger be stalled?

Not for this reason. SEBI will be forced to investigate. It has become a regulator of convenience - with next to no investigations on large companies or deals recently.

If SEBI does investigate, then the High Court has no reason to stall the merger. Insider trading is first handled at SEBI, not at the high courts. First SEBI must pass an order, which can be appealed at the SAT, which can further be appealed at the courts. There is no implication on the merger - as in, the investigation on insider trading is independent of the merger, and both can happen simultaneously.

The stocks of both Ranbaxy and Sun Pharma are down marginally. If the market feared that the merger would not happen, Ranbaxy would fall a lot more and Sun Pharma not so much. So it’s likely the market isn’t really fearful of a breadown in the merger.

DIsclosure: Family owns Ranbaxy shares.

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The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.