Delhi HC Orders Forensic Audit in Daiichi-Fortis Case

Overview: The Delhi High Court has directed a six-month forensic audit into transactions linked to former Fortis promoters Malvinder Mohan Singh and Shivinder Mohan Singh. The review will trace Fortis Healthcare shares, money transfers and connected transactions from May 24, 2016, and examine how assets that could have been used to meet the Daiichi Sankyo award changed over the years. The order may have wider implications for corporate governance, financial reporting and compliance.

Justice Subramonium Prasad has appointed S Ramanand Aiyar & Co to conduct the forensic review. The auditors will reconstruct the transaction history and identify the people and companies connected with the alleged movement of Fortis shares and assets.

The case relates to a Singapore arbitration award, Dated April 29, 2016, in favour of Japanese pharmaceutical company Daiichi Sankyo. The Rs 2,562 crore award, according to an Economic Times report, also carried an order for an interest of 4.44% before the award and 5.33% after it.

Daiichi says the outstanding amount has now reached around Rs 5,300 crore. The award has already passed challenges before the Delhi High Court and the Supreme Court.

Key Share and Asset Trail Under Review

The review will also cover the sale or transfer of pledged Fortis shares, involving 17 banks and financial institutions. The auditor will examine the relevant lending, pledge and share-transfer records to establish how these transactions took place and whether they complied with the applicable requirements.

• FHHPL held about 71.7% of FHL when the award was passed.
• By September 2016, its holding had fallen to around 52%, including 5.29 crore unencumbered shares.
•  FHHPL’s holding subsequently fell to less than 1%. 
•  Daiichi has alleged that 3.25 crore unencumbered shares were disposed of after assurances were given to the court.
•  The Singh brothers have maintained that some transactions resulted from lenders invoking pledges or contractual top-up requirements. Banks and financial institutions have also stated that the shares were already encumbered.

Other Transactions Under Forensic Review

The audit will also examine the transaction through which IHH Healthcare Berhad acquired control of Fortis through Northern TK Venture Pte Ltd. In November 2018, NTK acquired 31.1% of Fortis through fresh share subscription involving about Rs 4,000 crore.

The auditor will review its structure, approvals, regulatory filings, share movement and use of funds. It will also examine the later transaction under which FHL paid about Rs 4,666 crore to acquire interests in assets held by RHT Health Trust, Singapore.

Transactions involving Religare Capital Markets, Religare Capital Markets International, Religare Enterprises, Religare Finvest and Religare Comtrade will also be reviewed.

Lapses Identified and Compliance Risks

The order does not itself establish a legal violation. However, it raises important areas for review:

•  Share and asset movement: Whether assets available for enforcement were transferred or reduced improperly.
• SEBI compliance: Whether share transfers, pledges and disclosures were correctly reported.
• Related-party transactions: Whether connected transactions had proper approvals and disclosures.
• Companies Act compliance: Whether material transactions were properly recorded and reported.
•  FEMA compliance: Whether transactions involving overseas entities complied with applicable foreign exchange rules.
•  Corporate structure risk: The court noted that reverse corporate veil piercing may become relevant if corporate entities were used to dissipate assets or hide their movement. This would require strong, transaction-specific evidence.

Possible Further Legal Impact

Depending on the results of the forensic audit, the Delhi High Court’s ruling might have broader legal consequences. Fortis Healthcare is considering appealing the ruling to the Supreme Court. The audit includes transactions from the time the Singh brothers owned Fortis until IHH Healthcare took over, including IHH’s purchase of the controlling stake.

The court has indicated that appropriate action may be taken against any person found to have violated court orders or frustrated the execution of the Daiichi award. It has also stated that where banks or financial institutions knowingly participated in or facilitated transactions that violated or circumvented existing court orders, their role and legal consequences may be examined.

These are potential consequences based on the audit findings and do not, by themselves, establish liability against Fortis, IHH, banks or any other party.

Compliance Significance for Audit

The case is important for statutory, internal and forensic audits. Auditors should review share records, demat statements, pledge documents, bank records, fund trails, board minutes, shareholder resolutions, statutory registers, emails, legal opinions, valuation reports and regulatory filings.

They should also examine litigation disclosures, related-party transactions and cross-border payments. Depending on the transaction, applicable filings such as AOC-4, MGT-7, FC-GPR, FC-TRS and FLA should be verified.

The first requisition list is to be issued within four weeks, records must be provided within two weeks of requisition, and the audit must be completed within six months. Non-compliance may invite contempt proceedings. Daiichi will bear the initial audit cost, and the matter is listed for April 1, 2027.

Fortis Healthcare’s Position

Fortis has stated that the order imposes no monetary liability on the company, which was neither a party to the original dispute nor a judgment debtor. It is reviewing the judgment with legal counsel and has reiterated its commitment to corporate governance, transparency and regulatory compliance.

Conclusion

The forensic audit will mark a major step in tracing the Fortis share and asset trail and testing competing explanations for their movement. Its findings could have important implications for corporate governance, financial reporting and regulatory compliance, although the audit order itself does not impose liability on Fortis.

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