Shares in Ranbaxy plummeted yesterday on speculation that Daiichi Sankyo, the Japanese group, may scrap its landmark $4.6 billion takeover of India's largest generics drugs maker.

The fall came after papers filed in a US District Court in Maryland showed that Ranbaxy is being investigated by the US Department of Justice (DoJ) for an alleged fraud that allowed "adulterated and misbranded" medicines to be sold in the United States.

The Indian company confirmed that it has been approached by the DoJ, but dismissed the allegations as baseless. "No prosecution has been initiated," a spokesman said.

Ranbaxy shares fell more than 10 per cent in Bombay, to 475.3 rupees. Sonal Guota, the UBS analyst, said: "We believe there could be close to 50 per cent downside to [Ranbaxy's] stock if Daiichi Sankyo were to withdraw its current offer to buy a majority stake in the company ... we are placing our target price and rating under review."

Pinakin Parekh, of JPMorgan, said the decline "highlighted the seriousness of the charges." Daiichi has agreed to pay 737 rupees a share for up to 55 per cent of Ranbaxy, a price that values the company at about $8.5 billion and represents a 55 per cent premium to yesterday's close.

Daiichi fell 5.5 per cent in Tokyo. The group is understood to be conducting due diligence to ascertain the extent of Ranbaxy's legal liabilities.

The DoJ has claimed that there is evidence to suggest that Ranbaxy used active pharmaceutical ingredients from unapproved sources, resulting in the sale of "subpotent, super potent or adulterated medicines". It is alleged that test data was fabricated to show that medicines met US standards.

The allegations could prove a big blow to the reputation of India's drugmakers. The Indian Pharmaceutical Alliance, a lobby group, described the incident as "very unfortunate for the Indian generics industry".

Ranbaxy is no stranger to complex legal proceedings. Over the past 18 months, the group has settled at least five patent lawsuits out of court. The largest was with Pfizer, the US giant, over the rights to produce Lipitor, the blockbuster anti-cholesterol drug that is the world's most lucrative medicine.

India's generics drugs industry has been the focus of US scrutiny for several years. Several Ranbaxy plants have been inspected in recent years by American officials and in February of last year, the DoJ raided a Ranbaxy office in New Jersey.

Ranbaxy said in a statement: "No legal proceedings in the sense of a prosecution have been initiated. [Ranbaxy] continues to cooperate with the DoJ in regards to the investigation and has agreed to produce the specific documents sought."

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