Mumbai-based proxy advisor Stakeholders Empowerment Services (SES) has asked shareholders of pharmaceutical company Sanofi India to vote against the company’s proposed related-party transaction (RPT) with Sanofi-Aventis Singapore Pte Ltd.

The resolution will be presented at the company’s annual general meeting on May 5 and the e-voting period is between May 2 and 4.

Both Sanofi India and Sanofi-Aventis are indirect subsidiaries of Sanofi SA, France.

According to Sanofi’s reasoning for the related-party transaction, the former, in the ordinary course of its business, imports various products and active pharmaceutical ingredients from and also exports its products to Sanofi-Aventis Singapore. The two companies have, in the past, carried out RPTs of values of up to ₹1,100 crore a year. The current resolution, “based on the future business projections of the company, proposes to increase this limit to an amount not exceeding in aggregate ₹2,000 crore in each financial year.”

The SES report has said that although Sanofi India has “provided adequate justification and disclosures regarding the transaction in a detailed manner, and stated that the transactions are in the ordinary course of business and at arm’s length,” the company is seeking approval of the shareholders for perpetuity, that is, for RPTs up to ₹2,000 crore for every financial year without any further approval of the shareholders.

“SES believes that as owners of the company, shareholders have the full right to approve or disapprove any material-related party transaction of the company. Such resolutions with perpetual approval provide unfettered power to the Board of Directors, even if the company’s business scenario changes... Therefore, SES believes that, as a good governance practice, the company must take such approval of the shareholders on a yearly or periodical basis, keeping in mind the dynamics of business.”

SES concluded that almost 25 per cent of sales and more than 25 per cent of purchases by Sanofi India are through related party. “The company must explain the advantage that it is accruing due to these RPTs in monetary and strategic terms.”

Meanwhile, a company spokesperson responded: “As per the Companies Act, 2013, and SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, ...RPTs do not require annual approvals from shareholders. Therefore, with regard to routine business transactions of import and export of pharmaceutical products with the parent company, Sanofi India Ltd exercises diligence to be compliant with all the applicable regulations and has the support of all its investors.”

Decision on directors

SES has also reiterated its objections to Sanofi India’s decision to retain AK Nedungadi and Subhash Gupte as directors on its board, who were also directors at Kingfisher Airlines, which has since been declared a wilful defaulter. According to the Reserve Bank of India, this makes both Nedungadi and Gupte liable for penal provisions and criminal action. SES has questioned why Sanofi has chosen to retain the two directors, especially when Usha Thorat, a former Deputy Governor at the RBI, is also a member of Sanofi’s board.

The spokesperson said Gupte and Nedungadi were “elected as Independent Directors by the shareholders in accordance with the provisions of the Companies Act, 2013, and the Listing Regulations prescribed by SEBI. The fact that neither of the two have been declared wilful defaulters by any court and, further, that the company has received declarations by them to the effect that they are not disqualified to act as Directors, clearly negate the questions that the SES report raises regarding their position in the Board of Sanofi India.”

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