Corporate Governance Violation in a Large Pharmaceutical Company - The Severe Violation From the Company Secretary, Director and The Independent Directors - Need of Good Governance Practice.

 Corporate Governance Practice Audit  

* Birendra K Jha                                                                                                                                                                       Independent Director, IICA ( Ministry of Corporate Affairs ); Corporate Governance  Practice Audit; CSR Social Impact - CSR Planning & Implementation;  Expert Company Law -SEBI Law - Social & Environmental Law   EMail: birendrajha03@yahoo.com

Pharmaceutical manufacturing facility should be 5S oriented. This is reasonable fear that the  Indian manufacturing practices are very poor in 5S. The employees are not trained. The Directors do not take interest in 5S. Ultimately this damages the business. The FDA issued warning notice to the three manufacturing sites of a big pharmaceutical company in India on the cleaning and contamination issues.  The FDA touched down the all aspect of the 5S.  This is material issue, needed to be disclosed to the Stock Exchange and reported in the Annual Report. This is not to be forgotten that the SEBI is moving towards "Good Practices" where company with poor disclosures are punished. SEBI, collected from the listed entity in question here a whooping sum of  Rs ₹2.9 crore  from the company including directors and the company secretary. Clearly the Independent Directors sitting here failed to control the risk associated with the Corporate Governance. The Corporate Governance issue day by day is going very challenging. This needs good and competent Independent Directors at the board.

 

Corporate Governance Issue: 

SEBI watched this listed company on disclosure compliance. When notice was served, this company admitted the notice and the violation content. A settlement order was given by the SEBI, where it collected Rs ₹2.9 crore  from the listed company, its directors and Company Secretary. Clearly the Independent Directors sitting here failed to control the risk associated with the Corporate Governance. The Corporate Governance issue day by day is going very challenging. This needs good and competent Independent Directors at the board. 

This pin points directly the skill and the poor performance  of the Independent Directors sitting at the Board of Directors here. They are mostly admitted on the board as "supporter" of the promoter or the Managing Director. This damages the "Independent" element in the Corporate Governance. The case listed here is just repeat of that exercise, where the Independent Directors are sitting blindly. With poor skill and knowledge, they have no choice then  to support all the wrong action of the company. This is not good situation. This should must be changed. 

Need of Good Governance Practice: 

Before publication of the Annual Report this is advisable to get the Annual Report examined   by a Third Party Independent expert voluntarily. This shall be a Good Governance Practice. The expert  shall examine the "Draft of the Annual Report"  as observed by an Independent Director, before submission to the stock exchange.   This shall avoid any potential compliance violation as listed down here. These violations are embarrassing. How these violations failed at the Secretarial Compliance Audit. This is an alarming issue. 

Disclosure Violations and the Background Company:

 

This is  large pharmaceutical company in India with its headquarter at Mumbai. This is listed in NSE and BSE. This company operates in more than 100 countries, with a significant presence in the US and Europe. The Annual Report disclosures of 2024-2025 has been observed minutely. Severe compliance disclosures violations are seen in this company. Some are listed here: 

a) Related Party Transaction Violation. 

b) FDS Potential Disclosure Violation 

c) Whistleblower Compliance Violation. 

The detail observations  are given below: 

1. Related Party Transaction - Violation of Regulation 24 of the SEBI LODR – Material Subsidiaries Requirement

The Independent Directors failed here to control an RPT Transaction. This RPT Transaction needed proper approval before execution. This is potential violation of the SEBI LODR Regulation  23(2). The Audit Committee approval was taken on 31 March 2025. But the actual execution date is 26 March 2025. This is potential violation. Company can not cure it by way of Post- Ratification. The transaction involved the creation of a wholly owned subsidiary company with 99.99% subsidiary of this listed company. This is connected with the internal restructuring/merger within the group. Therefore, it qualified as a Related Party Transaction under the SEBI LODR. 

In this case the Independent Directors did two mistakes. The first one, without the approval of the Audit Committee the transaction was executed. The second mistake is that the Independent Directors allowed the Post-Ratification Approval.  This is legally not permissible. This is seen clearly in the case law of  the SEBI Adjudication Order on the Karma Energy Limited ( Adjudication Order: 2025-2026/ 31530 ), where the company took Post Facto Approval of the Related Party Transaction. This approval was struck down by the SEBI, vide the  provisions of the Regulation 23(4) of the LODR Regulations 2015, where Prior-Approval is mandated.  Hence, there is potential violation of the SEBI LODR Regulation 23(2) and 23(3), which  specifically deal with the Audit Committee approval requirements.

2. Potential Disclosure Absence of FDA: 

The U.S. Food and Drug Administration (FDA) is the government regulatory authority in the United States responsible for ensuring the safety, quality, and effectiveness of pharmaceutical products. A WARNING LETTER was issued by the FDA in 2024 to this Indian company. The warning moves around the  5S Problem. The FDA found lack of "cleaning", "sanitization issue" leading to potential product damage found with "bacterial  contamination".  The FDA identified clearly "Microbial Contamination", "Equipment Failures" and "Quality System Breakdown" largely. 

In exchange filing warning disclosure  from the FDA is given but the Material Detail of violations are not disclosed. The Legal Position is that the SEBI LODR Regulation 30 requires: Adequate information to assess the  impact. This was not provided to the exchanges as well as reported in the Annual Report.  This is major violation. The weakness of this information  is that  there is no disclosure:   on the  Revenue impact; Production impact;  Product impact; Product banned and  Financial risk. 

This disclosure absence clearly violates the SEBI LODR Regulation 30. The Independent Directors failed here to take on time adequate remedial measures. SEBI consider FDA Warning Letter as potential Material Event. Compulsory disclosure is necessary in the Annual Report and disclosure at the Exchange level.  This is potential compliance disclosure, which is missing.  

3. Whistleblower Compliance Non-Disclosure: 

a) Key Compliance Issue:  The Annual Report does not mention the SEBI 2021 Settlement Order. This violation directly arose from whistleblower allegations. The total settlement amount that SEBI collected is Rs ₹2.9 crore  from the listed company, its directors and Company Secretary. The SEBI 2021 Settlement Order is missing from the Annual Report 2024-2025. This is Incomplete Compliance History disclosure. SEBI itself has recorded: the Annual Reports 2015–16 and 2016–17 had disclosure failures. Therefore - This is directly relevant compliance history issue.

The Annual Report 2024-2025 does not disclose further: a) Number of whistleblower complaints b) Number investigated c) Number pending d) Nature of complaints

 and f) History of Whistleblower Compliance.  

This is a case of potential Schedule V violation.   The disclosure status on the number of Whistleblower complaints is not disclosed. The Annual Report only states that a whistleblower mechanism exists.  Further, there is no disclosure on the Number of Complain Investigated. 

Conclusion:

There is no short cut. The listed entity should choose voluntary practice of Third Party Independent Audit of their Annual Report, before this is published. There is no harm if two or three different independent opinions are taken. This shall save the company from paying whooping amount running in crores then what the company pay to the auditor for independent opinion.