The case of fraud, forgery, criminal breach of trust and other offences alleged to have been committed by an Indian affiliate of a US pharmaceutical major has sent shockwaves down India’s $25 billion pharmaceutical industry, that ranks third in the world in terms of volume and 14th in terms of value, and which is being opposed by foreign multinational companies using state and judicial power.

It has been claimed by the police in India that former directors and employees at a high level plotted against CD Pharma India, the Indian affiliate of the US giant, in an attempt to steal its patents and business.

At the heart of it is Kanwaldeep Singh Chadha, who is absconding after being denied anticipatory bail by the Hon’ble Sessions Judge due to the gravity of the offences allegedly committed by him in connivance with Claudio De Simone, a scientist in faraway Switzerland.

The case, claim investigators, has highlighted an instance of senior executives in charge of Indian subsidiaries violating global norms with impunity for their own benefit. This was last witnessed in the Reebok fraud case some years ago that saw the exit of top management handling the Indian subsidiary on similar charges.

In a nutshell, Chadha and his men are accused of wanting to steal the trademarks of CD Pharma India by licensing them to his own company and selling the products to the Indian, Asian, Russian and CIS markets. In India, CD Pharma had, among other clients, Sun Pharmaceutical, the country’s largest drug maker.

Papers, accessed from the District and Sessions Court in New Delhi,  establish the fraud.

It transpires from police sources that in June-July 2014, Chadha and Claudio De Simone, who were the directors of CD Pharma India, fabricated trademark licence agreements between CD Pharma and NextGen Pharma (which is their own company), fraudulently granting NextGen Pharma the exclusive right to use trademarks VSL#3 and Florisia. Prior to this, Chadha and Claudio De Simone also wrote various e-mails to Sun Pharma, telling Sun Pharma that on account of certain corporate level changes, all business would henceforth be undertaken with NextGen Pharma.

It has been found by the investigators that after July 2014, CD Pharma’s entire business was diverted to NextGen Pharma. Chadha and Claudio De Simone also got their own company NextGen Pharma substituted in place of CD Pharma in the import licence granted by DCGI sometime in May-June 2014 by resorting to misleading declarations.

The alleged misdeed committed appears to be multi-jurisdictional and colossal in nature, and it is suspected that the accused have fabricated various other documents and collected huge revenues by fraudulently granting trademark licences to third parties in markets such as CIS, Russia, China, etc. The same is sought by agencies to be proved from the discovery of over invoicing of imports and making payments to Claudio Simone’s company Mendes SA, which had no role in supply of the drug API to CD Pharma.

Chadha, it is alleged by those investigating the case, misled CD Pharma India, a company where he worked as the managing director. CD Pharma India operates as a distributor of pharmaceutical products and provides clinical research and product development services in the area of probiotics. CD Pharma India is an affiliate of the US-based VSL Pharmaceuticals, Inc., which provides medical food for the dietary management of patients in the United States and internationally.

Shareholders of VSL Pharmaceuticals—through their lawyers in India—lodged complaints with the police in Delhi and the case was probed meticulously. Strangely, not a word about the case filtered out in the local media.

Papers accessed from the District and Sessions Court in the national capital appear to show that Chadha connived with Claudio De Simone, the Swiss scientist, and entered into a conspiracy to divest the US company of crores of cash—the total value is yet to be estimated by the courts—and transferred valuable intellectual properties to another clone company floated in India, Next Gen Pharma. This clone company was incorporated in December 2004, a mere six months after the incorporation of CD Pharma.

“It is apparent that the accused persons have transferred and diverted business worth crores of rupees to their own company over the years with the intention to siphon off the entire business and then make false representations to the customers that on account of certain changes at the corporate level, all agreements and dealings would now be with their own company (Next Gen Pharma),” said the court papers.

Expectedly, the case has made many sit up and take notice in the domestic and international pharmaceutical sector, because it involved trademark products of a US pharmaceutical major based in Gaithersburg, Maryland. Officials of the Department of Pharmaceuticals, Ministry of Chemicals and Fertilisers, said they were tracking the case “seriously because it could have implications on global pharmaceutical giants tying up with Indian companies”.

Investigations reveal Chadha, and his men formed Next Gen Pharma with Claudio De Simone, who had total control over Mendes SA, a Swiss company, with the intention to take over the Indian market’s business of VSL. Papers sourced by Indian investigators showed Claudio De Simone had 70% share of Next Gen Pharma, while Chadha had 27.27% share, the rest 2.73% shares were with Dasgupta. Next Gen Pharma even opened a subsidiary, CC Research India and Chadha and Claudio De Simone incorporated as directors.

The investigators claim that the principals, in their efforts to fudge accounts, had drawn up fake bills, informed companies doing business with CD Pharma that Next Gen Pharma is the new company that will execute business, backdated consultancy and assurance agreements by writing mails to lawyers to garner more cash from the parent company in the US and when found out, tried hard to draw up fake bills to claim extra cash.

“What we understand is that a company formed by these two was trying to take over the legitimate business of an American company,” said a spokesperson of the Department of Pharmaceuticals, Ministry of Chemicals and Fertilisers.

The lid was blown when Ajaya Chand, a senior person based in Delhi, authorised by the US company to look into the activities of CD Pharma, was appointed a director by the shareholders, but was not permitted access to CD Pharma or its records. Finally, access was granted by an order of the Delhi High Court. Chand was appointed as Claudio De Simone was found engaged in competing business, even while he was entrusted the position of president of the Board of VSL Pharma in the US and shareholders had indications that all may not be right with CD Pharma. Such was the nature of possible fraud that a forensic analyst (based in Gurgaon) had to be contracted to retrieve estimated 100 GB data that highlighted the way Chadha and Claudio De Simone perpetuated the fraud over more than 8-10 years.

The case is also being probed by the Registrar of Companies (ROC) and industry lobby Indian Pharmaceutical Alliance (IPA), because both Chadha and Claudio De Simone did not file annual returns of CD Pharma and blatantly defrauded the shareholders of CD Pharma, towards whom they had a fiduciary duty. The products imported from US were sold at a huge discount to Next Gen and sold back to CD Pharma at an inflated rate to pocket the profit.

The two even acquired some of the top trademarked products of the US pharma major and licensed it to Next Gen Pharma for sale across Asia, including China, Russia and a host of CIS nations.

The case has alarmed global and Indian drug companies. An industry insider confided that “Such cases may be used by business rivals to cast a shadow on Indian companies which have gained expertise making ingredients for multi-national drug makers. Cases like these could be used by global pharma to make others lose faith in Indian companies”.

Economic crimes committed by directors and employees sully the good name of India in the eyes of foreign investors. The police are investigating the full extent of the alleged fraud to recover the proceeds, whether hidden in India or overseas in order to punish the perpetrators in accordance with law to restore the faith of foreign investors in India.

Claudio De Simone is now a fugitive and Chadha is absconding and moving courts for anticipatory bail. With the generic growth tapering off and the industry tweaking its business model, cases like this one would add to the woes of the Indian pharma market. DG Shah, secretary general of IPA, says Indian drug makers currently facing FDA’s warning letters, observations or import alerts, should not be seen indulging in acts of fraudulence that would invite serious charges. “If Indian companies can work on increasing the level of awareness and compliance to meet US FDA standards, it would be a sustainable competitive advantage. Stealing of licences and trademarks would incur the wrath of US majors,” says Shah.

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