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    How the Rs 3, 500 crore damages against Singh Brothers was arrived at

    Synopsis

    Malvinder Mohan Singh , Shivinder Mohan Singh & entities controlled by them had contested both the amount of damages and method used to arrive at these.

    singh
    The Arbitral Tribunal rejected Singhs’ plea that the petitioner suffered no loss as a result of the transaction.
    The Delhi High Court last Wednesday upheld the arbitral award for damages against the erstwhile promoters of Ranbaxy Laboratories for allegedly hiding certain material information to Japanese major Daiichi Sankyo during their 2008 deal. The judgment analysed how the arbitrators had arrived at the damages figure of Rs 3,500 crore and found nothing wrong with it. Brothers Malvinder Mohan Singh and Shivinder Mohan Singh and entities controlled by them who were respondents in the case had contested both the amount of damages and method used to arrive at these. However, the court did not agree with these arguments.

    Also, in the months before Daiichi inked the deal in June 2008, there was hectic activity in the Ranbaxy scrip. But, let us first see how arbitral tribunal in Singapore arrived at this figure.

    Two deals and some dividend
    Daiichi had bought the shares of Ranbaxy for Rs.19,804 crore in 2008. Out of this, about Rs. 9,576 crore was paid to the Singhs and entities controlled by them and the balance went to the general public in the open offer. About seven years later, in March 2015, Daiichi sold the business to Sun Pharma for Rs. 22,679 crore.

    In addition, a dividend of Rs.53.74 crore was also received. Hence, the Japanese firm received a sum of Rs. 22,732/- crore. Citing these figures the brothers had contended that “The petitioner did not suffer a loss.” They cited these figures to say the computation of damages was wrong and was inconsistent with Indian laws.

    While the respondents had worked forward, the tribunal had worked backwards from the valuations at the time of the Sun Pharma deal.

    Time value of money & WACC
    The Arbitral Tribunal rejected Singhs’ plea that the petitioner suffered no loss as a result of the transaction. It noted that this proposition does not take into account the element of time, cost and the rehabilitative work carried out by the petitioners in order to assist Ranbaxy. The tribunal accepted the plea that Daiichi intended to receive a return equal to average return it received on all its investments as represented by weighted cost of capital (WACC). Accepting WACC at a rate of 4.44%, the proceeds of Sun Pharma transaction of Rs 22,679 crore was accordingly sought to be discounted to obtain the present value (as on November 2008). The 2008 present value of Sun Pharma Transaction worked out to Rs.17,241.23 crore . This was Rs.2562.78 crore short of the sum of Rs 19, 804 crore shelled out by Daiichi in 2008 .

    In addition to this, the tribunal also awarded interest at the same rate of 4.44 percent from November 7, 2008 to the date of the award. This worked out to Rs 851 crore. The third component of the award was the reimbursement of attorney fees and expenses incurred by the petitioners which came to $14.54 million. At current exchange rates, this works out to around Rs 93 crore. These three components take the damages to a total of Rs 3,506 crore.

    Interest accruing from date of award
    The arbitral award was given on April 29, 2016. Over 21 months have passed. This is significant as the award also talks about a simple interest of 5.33 per cent from the date of award till the time the damages are eventually paid. This means the eventual payout could touch Rs 4,000 crore. The court has held the award of interest was as per the terms in the original share purchase agreement and does not amount to multiple damages.

    RHC Holding, the Singh family entity said in a statement this week that it was disappointed by the judgment and that it would explore legal options. In an appeal which is likely it is likely to reiterate its arguments against the damages and the methodology. “The value in 2015 discounted by WACC cannot reflect the true value of 2008 in the facts and circumstances of the case where the petitioner has been in management and enjoying voting rights on shares for seven years,” it had argued before the high court.

    Timeline
    Ranbaxy_Timeline_Final_Version

    Run up in Ranbaxy shares
    One aspect which was not brought before the arbitral tribunal or the court was the run-up in Ranbaxy shares before the deal in 2008. At a time, when the global financial crisis was picking pace and the Sensex itself had crashed from its January 2008 peaks, Ranbaxy had rallied. From around Rs 350 levels in February that year, the pharma firm’s scrip gained around 60 percent in value to close at Rs 560 on June 11, 2008. The price of Rs 737 per share offered by Daiichi represented a 53.5% premium over the average of daily closing prices of preceding three months.


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    ( Originally published on Feb 03, 2018 )
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