Analyzing the issues in the IPO of API Holdings Limited
Author: Harinie Seenivasan
4th year law student at Symbiosis Law School, Hyderabad
In a series of issues raised against tech companies filing for Initial Public Offering (“IPO”), the South Chemists Drug Association (“SCDA”) recently filed a petition in the Delhi High Court against API Holding's, the parent company of Pharmeasy, decision to go public. While the PharmEasy’s IPO has been approved by SEBI, the opposition against this IPO raises several questions regarding the functioning of the securities market. The author wishes to analyse the issues raised by SCDA and other associations against this IPO.
II. Issues cited by SCDA and other organizations against the IPO
A. The legality of e-pharmacies in India
In several instances, the SCDA and other associations have pointed out the issue with e-pharmacies in India. They allege that e-pharmacies carry out illegal business as the Drugs and Cosmetics Act, 1940 does not apply to them.
The Drug and Cosmetics Act of 1940 regulates the sale of drugs in India. According to Section 18 of the Act, no person can manufacture, distribute, sell, exhibit or stock medicines without a license. Till 2015, the debate centred around whether this provision also applies to e-pharmacies. Issues arose in 2015 when the Drug Controller General of India ordered  (“2015 order”) the State governments to take strict action against the e-pharmacies that did not have a license as per section 18. Following this order, several e-pharmacies and chemist associations filed litigations in the Delhi and Madras High Courts.
In Dr. Zaheer Ahmed v Union of India, the Delhi High court prohibited e-pharmacies from selling medicines without a license under Section 18. Initially, while the Madras High Court passed a similar interim order on December 17, 2018, it later reversed this order in Practo Technologies v Tamil Nadu Chemists and Druggists Association  on December 20, 2018. It held that e-pharmacies could operate until the Government notifies relevant rules. These conflicting judgements and the 2015 order became the cause for the confusion.
In both these cases, PharmEasy and similar companies claimed that they do not require a license as they follow a marketplace model where they only act as intermediaries and do not stock medicines. The drug and trade associations contended  and still allege that e-pharmacies require a license to operate, without which they become illegal under the law.
B. Absence of approval from CCI
SCDA alleges that API Holdings did not get CCI’s permission to acquire Thyrocare. It also states that API Holdings has mentioned Thyrocare as one of its subsidiaries without an order from CCI. While it is true that there is no order in the public domain, there is no clarity as to whether API Holdings approached CCI and whether CCI has given the nod. The Delhi High Court has issued notice to CCI to clarify the same.
C. Corporate structure and protecting the interests of investors
SCDA also alleged that the company’s corporate structure is misleading, as one of the subsidiaries of API Holdings owns the brand PharmEasy , whereas the company, as a whole, is owned by another entity. SCDA has also claimed that such misleading statements will affect the interest of the investors. In a letter to SEBI, SCDA urged that SEBI reject the offer documents as the IPO could affect the interests of the investors.
III. Analysis of the issues
Firstly, the common issue pointed out by SCDA, and other associations is the legality of e-pharmacies. Chemists associations brought out this issue even during the merger of Medlife with API Holdings. Despite several oppositions, CCI approved the merger without discussing the legality of e-pharmacies. The problem with determining the legality of e-pharmacies are the two conflicting judgements and lack of regulations.
The argument put forth by API Holdings and other similar companies is that their business is based on the marketplace model and not an inventory model. Though the Drugs and Cosmetics Act does not provide for a differentiation between these models, the Foreign Direct Investment Policy, 2020 (‘FDI Policy’) provides some guidance on the same. The FDI Policy, 2020 defines marketplace model as follows: “Marketplace based model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.”
This definition clearly highlights that the platform merely acts as a facilitator and do not own the goods or services sold. Though the Drugs and Cosmetics Act, 1940 does not define a pharmacy, it is clear from the intention of the Act and Section 18 that the Act was primarily enacted for the purpose of regulating sale of medicines in pharmacies that have a physical presence. The Act does discuss nor mention the models of pharmacies, as we know them today, as this differentiation is not present in pharmacies that have a physical presence. Apart from this reason, it will also not be right to read e-pharmacies into this act because it is not equipped enough to deal with the possible issues that could arise from e-pharmacies. Moreover, it is also important to note that the issue is pending before the court and hence it would not be proper to label e-pharmacies as illegal business. It is pertinent to note that the legislature has constituted a parliamentary committee to frame the new Drugs, Cosmetics and Medical Devices Act that will supposedly address the issues with licensing e-pharmacies.
Secondly, CCI is yet to clarify the issue pertaining to the acquisition. The Delhi High Court has issued notices to CCI regarding this issue. It is pertinent to note that the order approving the acquisition, if any, has not been published yet. Based on the DRHP, it appears that the threshold under Section 5 of the Competition Act, 2002 has been triggered. 
If API Holdings has not given the required notice under the Competition Act and acted without an order from the CCI, it would amount to gun-jumping which is a serious offence under Section 43A of the Competition Act. API Holdings will need to pay hefty fines in such a case. This could be a major hurdle as the disclosure on Thyrocare being a subsidiary becomes false in this case. SEBI could reject this offer document under the General Order on the rejection of offer documents ("General Order") as criteria 1.6 of the same provides for rejection of offer documents on the account of false statements.
The third issue pointed out by the SCDA is the confusing business structure. The Draft Red Herring Prospectus (“DRHP”)  states that a subsidiary of API Holdings, Threpsi Solutions Private Limited, owns the PharmEasy brand, however, Axelia Solutions Private Limited (owned by Aarman Solutions Private Limited in which API Holdings has a stake of 19.9%) takes care of its operation.
As per Schedule 6 of SEBI (Issue of Capital and Disclosure Requirements), 2018 ("ICDR Regulations"), companies are required to disclose information about their corporate structure, including details on "material acquisitions or divestments of business/undertakings, mergers, amalgamation, any evaluation of assets". The corporate structure highlighted by SCDA resulted from an amalgamation. 91Streets Media Technologies Private Limited, initially owned Pharmeasy’s online marketplace and Thea Technologies Private Limited owned the inventory. These companies were merged into Threpsi Solutions Private Limited for a better valuation. The NCLT approved this amalgamation; the DRHP  discloses this information. Following this amalgamation, parties entered into a brand usage arrangements and the DRHP  makes sufficient disclosures on the same.
SCDA raised issues with respect to the corporate structure being misleading and confusing. SEBI's General Order provides some help. Criteria 1.3 states that SEBI can reject an offer document when the business model is "Exaggerated, complex or misleading", due to which investors cannot assess risks. The General Order does not discuss what the word misleading or exaggerated means. Section 34 of the Companies Act provides the closest reference to misleading by explaining misstatement as follows:
"includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead [.]"
Applying this to PharmEasy's case, there is nothing per se untrue in the DRHP. The DRHP explains information regarding how API Holdings formed the corporate structure along with sufficient reference to the approval of the same. There appears to be no omission regarding the corporate structure and hence is not misleading.
The SCDA and other associations requested SEBI to reject the offer documents based on Section 11A of SEBI Act, 1992. This section provides SEBI with the power to take action or reject offer documents to protect the investors' interests. SEBI usually takes action under this section when there is insufficient disclosure of required points or false disclosure of material facts. Under Schedule VI, the ICDR Regulations require companies to disclose risk factors and information regarding litigations. DRHP  discloses the pending litigation on the legality of e-pharmacies and mentions the risk arising from the same.
SCDA has alleged that SEBI should reject the offer document because the outcome of the pending litigation could affect the company's survival. The General Order cites the issue of survival as one of the reasons for rejecting offer documents, however, the General Order offers very little help in interpreting this reason. Based on the general understanding, it is easy to gauge that the outcome of litigation in PharmEasy's case will not affect the existence of API Holdings. One, PharmEasy is only one of the many brands owned by API Holdings. The parent company and the subsidiary are two separate legal entities. Based on the DRHP, the company that owns PharmEasy is not being listed along with its parent company. When sufficient disclosures have been made, there is no reason as to why minor issues in a subsidiary should stop the parent company from going public.
Two, the SCDA contends that e-pharmacies strikes at the legality of e-pharmacies irrespective of whether they have a license or not. The 2015 order sufficiently clarified this by asking State Governments to take actions only against those e-pharmacies who do not have licenses. Additionally, considering the initiatives taken by the Central Government towards digital health, it is highly unlikely that the government will ban e-pharmacies as a whole or will refuse to issue licenses. The issue that is being discussed in courts is whether e-pharmacies are covered under the Drugs and Cosmetics Act for the purpose of issuing license. Even if the court clarifies that e-pharmacies need licenses to operate, PharmEasy can get a license under the Drugs and Cosmetic Act. It is less likely to affect the existence of the brand.
Being the market regulator, SEBI has to ensure that the interest of investors is protected under Section 11A of the SEBI Act. To do so, SEBI has issued several general orders and guidelines for companies to follow. SEBI also has the power to recommend changes to offer documents and reject offer documents in certain circumstances. These remedial powers are based on the disclosures made by the company, whereby SEBI evaluates offer documents based on disclosures made in DRHP and not on merit. Risks cited by SCDA and other chemists organizations always exist in companies, and disclosing these risks eventually help investors ascertain the benefit of investment. The only risk that has to be evaluated is the acquisition of Thyrocare and a possible case of gun jumping. Otherwise, the issues cited by SCDA are not substantial and hence will not affects the interests of the investors in any way.
Rejecting offer documents will prevent the company from accessing the capital markets for a year. It appears that SEBI considered all these issues while approving Pharmeasy’s IPO.
 Interim Order, Directorate General Office of Drugs Controller General of Health Services, No.7-5/2015/Misc/e-Governance/091 (30/12/2018).
 Practo Technologies Private Ltd. v. Tamil Nadu Chemists and Druggists Association, 2018 SCC OnLine Mad 3577.
 The Tamil Nadu Drugs and Chemists Association v. The Union of India, 2019 (1) CTC 548.
 In an inventory model, businesses own the inventory of products and services sold on their platform.
 The total assets of API Holdings and Thyrocare is approximately 12,460 crores which exceeds the prescribed limits under Section 5 of the Competition Act, 2002.
 Draft Red Herring Prospectus of API Holdings Limited, Bombay Stock Exchange, https://www.bseindia.com/corporates/download/341948/drhp_20211110135349.pdf, last seen on 3/02/20211, at 44.
 ibid, at 218.
 ibid, at 225.
 ibid, at 63.