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Chemist association drags CCI and SEBI to court over PharmEasy’s IPO

The regulators were criticised for their purported inaction against the online pharmacy company that wants to go public.

A writ petition has been filed against the Competition Commission of India (CCI) and Securities and Exchange Board of India (SEBI) by the South Chemists & Distributors Association (SCDA) in the Delhi High Court against the failure of CCI and SEBI to respond to SCDA’s concerns around PharmEasy’s parent company — API Holdings.

The Delhi HC has now issued notices in the matter and directed CCI and SEBI to be present at the next hearing scheduled for January 13, 2022, according to a press release by SCDA. The Union government, API Holdings, and Docon Technologies have also been made respondents in the case, according to a copy of the petition reviewed by MediaNama.

Why it matters: Litigation can throw a spanner in the works of PharmEasy’s IPO which awaits SEBI’s green light. The petition also highlights serious issues, which if true, can scuttle PharmEasy’s plans to go public altogether.

Prayers of the petition

The traders’ body is requesting Delhi HC to issue the following orders:

  • Direct CCI to initiate an inquiry into API Holdings acquiring a controlling stake in Thyrocare Technologies Ltd. through Docon Technologies Pvt. Ltd. under the Competition Act, 2002.
  • Call on SEBI to reject the Draft Red Herring Prospectus (DRHP) filed by API Holdings under Section 11A of the SEBI Act, 1992.

What are the grounds on which SCDA is making its case?

The traders’ body revealed that it is approaching Delhi HC to protect the wealth of investors. Here is a summary of reasons which compelled SCDA to file this petition:

Remit of CCI: “…the Respondent No. 2 (CCI) cannot abdicate its functions under the Competition Act, 2002. The failure of the Respondent No. 2 to inquire into the combination of Thyrocare Technologies Ltd. with API Holdings Ltd. through Docon Technologies is contrary to law and affects the interests of the Petitioner, consumers and general investors,” the petition alleged.

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Thyrocare’s acquisition was not notified: The petition alleged that the combination of Thyrocare Technologies Ltd. with API Holdings Ltd. was not notified with CCI as required under Section 6(2) of the Competition Act, 2002.

  • CCI did not undertake suo moto inquiry: “Because even if an entity fails to notify the CCI, it has the power to undertake suo moto inquiry as per Section 20 of the Competition Act,” the petition read. SCDA alleged that CCI failed to respond to its representation after it wrote to the commission about the merger of Thyrocare with API Holdings Ltd under the assumption that the body has been notified by API.

The acquisition is beyond the prescribed threshold: “…as per the Competition Act, 2002, any combination of entities which have combined assets of more than Rs. 2000 crore at Enterprise Level or more than Rs. 8000 crore at a Group Level have to be notified to the CCI,” the petition read. SCDA argued that the combination is above the prescribed threshold because the assets of API after Thryocare’s acquisition stood at Rs. 12,460 crore as per the DRHP.

PharmEasy’s DRHP does not meet SEBI’s criteria: The petition said that SEBI needs to decide on API Holdings’ DRHP and it can be rejected based on the following criteria laid down by SEBI:

  • SEBI has reasonable grounds to believe that investors may not be able to assess the risks associated with the issue.
  • The existence of litigation, including regulatory action, is so major that the issuer’s survival is dependent on the outcome of the litigation.

Uncertainty faced by e-pharmacy: SCDA alleged that the primary exposure and business of API Holdings is from PharmEasy—the e-pharmacy arm of their business. It cited an order in a case (Dr. Zaheer Ahmed vs. Union of India & Anr) whereby the court ‘injuncted online sale of medicines without license’ and directed the government to ensure it is prohibited till further orders. “It is clear that e-pharmacy does not have any legal validity in our country,” the petition claimed, adding that investors can lose billions if e-pharmacy rules are made against their business model.

  • Affidavit filed by the health ministry: The petition highlighted an affidavit filed by the Ministry of Health and Family Welfare in a separate case stating:
    • The issue relating to the online sale of drugs is presently under the consideration of the Union government.
    • The Drugs and Cosmetics Act, 1940, and Rules, 1945, have no provision on the online sale of drugs or online pharmacies at present.
    • A provision for registration of e-pharmacies by the Central Licensing Authority was proposed in a notification and is under examination by the Union government.

Misleading corporate structure: “…the corporate structure of the API Holdings and its association with PharmEasy is misleading for prospective investors,” the petition alleged. SCDA argued that the company contradicts its own stand by first claiming that PharmEasy marketplace is operated by Axelia Solutions Private Limited and Threpsi Solutions Private Limited, merely owns the “PharmEasy” brand and they are not involved in the operations of the PharmEasy marketplace in a letter sent to SCDA. “The DRHP paints a very different picture regarding the ownership of PharmEasy by claiming ownership of the brand, and suggesting that their proprietary technology platform powers the PharmEasy marketplace.

  • Multiple corporate structures are an illusion: The petition added that API Holdings’ role in the ownership and operation of PharmEasy appears minimized to the regulatory authorities but they indulge in misleading and luring prospective investors due to their association.
  • Clarify the extent of ownership: The proposed IPO is able to garner so much traction only because of PharmEasy according to the petition. It called it an attempt by API Holdings to hoodwink prospective investors without the company taking any steps to clarify its ownership and involvement.

PharmEasy’s business is illegal: Several small businesses under SCDA have no means and resources to survive against the millions being pumped into through foreign investors into API Holdings, the petition said. API Holdings is raising money from the general public by resorting to cash burning and unfair market policies such as deep discounts, to perpetuate an illegality, the petition added. This conduct infringes the SCDA’s fundamental rights guaranteed under Articles 14, 19 and 21 of the Indian Constitution.

  • It is an undeniable fact that API Holdings is the parent company of the online pharmacy platform — PharmEasy. Its business is illegal and contrary to the existing provisions of the Drugs and Cosmetics Act, the petition concluded.

Summary of objections faced by PharmEasy to date

September 2020: PharmEasy’s merger with MedLife merger was approved despite opposition from the SCDA which had argued that online pharmacies were not allowed under the law, and hence the CCI cannot permit “combination for an illegal purpose”. In a representation to the CCI, the association had said that the proposed merger is essentially “that of two e-pharmacies as well as companies involved in the distribution chain”. It also said that the deep discounting by e-pharmacies can harm competition, given that these “are not based on any efficient business model but solely due to cash burn thanks to investment from foreign-based entities”.

July 2021: PharmEasy’s acquisition of Thyrocare was opposed by SCDA in a letter sent to CCI asking the regulatory body to reject the acquisition because e-pharmacies are not legal under Indian law and therefore the proposed acquisition needs to be rejected. It also claimed that allowing PharmEasy to acquire Thyrocare would result in dominance in the market by API Holdings.

November 2021: SCDA again asked SEBI to reject the initial public offering (IPO) of PharmEasy on the grounds that online pharmacies are not legal under Indian law as per a letter sent by the association. The association lists the same reasons as it does in the petition in pleading its case.

December 2021: The Confederation of All India Traders (CAIT) wrote to SEBI a few weeks ago asking the regulator to reject the initial public offering (IPO) of API Holdings, owner of PharmEasy, arguing that the online pharmacy’s business model is “entirely based on gross illegality.”

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I cover several beats such as Crypto, Telecom, and OTT at MediaNama. I can be found loitering at my local theatre when I am off work consuming movies by the dozen.

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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