Undue benefits to 'distributor': MCA orders pharmaceutical company agreements' scrutiny

The Monopoly Control Authority (MCA) has ordered scrutiny/audit of agreements of a leading pharmaceutical company, allegedly involved in giving undue benefits to its distributor of medicines, resulting in "undue concentration of economic power" in the pharmaceutical sector.
In this connection, the MCA on Friday issued a detailed order, elaborating the violations allegedly committed by the company and its distributor, under the agreements inked between them.
The MCA has also approached the Securities and Exchange Commission of Pakistan (SECP) to investigate whether the provisions of 'inter-corporate financing' under Companies Ordinance 1984 has been violated by the company or not.
Sources told Business Recorder that this is for the first time that the Authority has detected a pharmaceutical company having committed a serious violation of Section 4(b) of the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970.
The pharmaceutical company has inked agreements with its distributor, which is also a holding company of the pharma giant operating in Pakistan. The MCA detected that the agreement of distributorship between the company and its distributor extended extraordinary benefits for the latter.
Sources said that the terms and conditions of the agreements between the company and its distributor are not covered under the normal course of business and trade. The pharmaceutical company has given exceptional benefits to the company, on soft terms basis. In normal cases, the agreements between a pharmaceutical company and its distributor are not of such nature as inked by the company in question, officials said.
Meanwhile, the MCA has announced that, under the chairmanship of Khalid A Mirza, the Authority had issued an important, landmark, Order on September 13, 2007, designed to remove serious anomalies in the contractual relationship between two associated companies, viz Searle Pakistan Ltd (Searle) and International Brands (Pvt) Limited (IBL), regarding distribution of Searle's products by IBL, a privately-owned leading distributor that also has a substantial equity interest in Searle.
Noting that the distribution agreement and related arrangements, in place since July 2000, had the effect of unfairly benefiting the shareholders of IBL to the prejudice of the shareholders of Searle, which is a listed company with shareholders from the general public, the Order remarks that "it is difficult to imagine a more glaring manifestation of undue concentration of economic power at play.
" The authority has stated that it is an "obvious situation" which comes within the mischief of section 4(b) of the MRTPO 1970 and has laid down the principles setting out a fair and equitable basis upon which the parties must not only redefine their relationship for all future dealings but also recalculate and settle all past transactions since July, 2000.
Among other matters, the Authority rescinded the consignment basis that was in vogue till July 2005 (with financial consequences that follow from this), reduced the period of interest-free credit enjoyed by IBL on payments due to Searle from 120 days to 40 days, reversed warehousing rent charged by IBL to Searle, and laid down a strict basis upon which reimbursement of expenses could be claimed by IBL from Searle.
The Authority ordered that the parties engage either the statutory auditors of Searle or a firm of chartered accountants approved by the Authority to examine all transactions between the two undertakings since July 2000, based on the principles laid down by it, and determine the net amount due from IBL to Searle.
They have been required to complete this task within 90 days and to effect settlement of the net amount determined as due and payable to Searle to the satisfaction of the Authority, within 120 days of the date of this order.
Moreover, the Authority noted the possible contravention of sections 195 and 208 of the Companies Ordinance, 1984, and directed its Registrar to make a reference to the SECP to take appropriate measures, as may be deemed appropriate, by the Commission, the MCA said.