Dr Reddy's and a US law firm's 'investigation'

Dr Reddy's Laboratories is at the receiving end these days. Early this month, the company disclosed that the US Food and Drug Administration (FDA) has warned of quality issues at two of its active pharmaceutical ingredients (API) manufacturing facilities and an oncology formulation manufacturing facility at Andhra Pradesh, based on the US drug regulator's three inspections since 2014.

That had caused Dr Reddy's share prices to fall by 15 per cent on November 6 on the Bombay Stock Exchange (BSE), the most in the past decade, as the US contributes 40 per cent of its revenues.

On Thursday, an American law firm Lundin Law PC said it is initiating an investigation against the Indian drug maker related to the FDA action. Share prices tanked 7 per cent during the day's trade on BSE. That is despite the law firm neither specifying any charges against Dr Reddy's nor elaborating what exactly it had found out to initiate the 'investigation'. During the course of the day, the company vehemently denied any misconduct on its part.

Many may wonder how a small law firm in the US can 'initiate a probe' and harm one of India's largest companies. Dr Reddy's is listed on the New York Stock Exchange since 2001 and disclosure norms have to be in accordance with the rules of that land. Interestingly, Dr Reddy's American Depository Receipts prices remained stable and surged by 0.13 per cent on Wednesday on the New York Stock Exchange.

'Class action suits' (where investors join together to get justice against erring firms) initiated by IP and law firms are common in the US. Such 'class action suits' mostly end up in erring firms paying fines to the aggrieved investors. In India, such suits are not common and normally aggrieved investors file cases for winding up petitions to get justice.

Perhaps the Indian investors fear worse to come for the company and over-reacted during the day's trade on Thursday. Some industry experts feel it could be the effect of knee-jerk reaction by investors to negative news, reported aggressively by the Indian media without assessing the real gravity of the development.