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By Preetika Rana 

NEW DELHI -- American retailer Target Corp. said it was severing ties with one of India's largest textile suppliers, Welspun India Ltd., after concluding the company sold it phony Egyptian-cotton sheets.

Shares of Welspun, widely touted as an Indian-manufacturing success story, fell 20%, the daily limit, on Monday morning before trading of the stock was temporarily suspended. It was expected to resume Tuesday.

Target, one of Welspun's largest customers, on Friday alleged the Mumbai-based company had violated supply contracts by using non-Egyptian cotton. Cotton sourced in Egypt is more expensive and considered softer and more absorbent than other varieties.

"This is an issue of highest priority for us and we will take all necessary steps to address it," Welspun said.

The case underscores the challenges of monitoring a global supply chain. Large retailers often rely on a vast network of suppliers in developing countries to manufacture the goods they sell.

Welspun began as a small silk mill in India in 1985 and quickly blossomed into one of Asia's largest textile makers, supplying bed spreads, rugs and pillow covers to some of the biggest names in retail, including Wal-Mart Stores Inc., Bed Bath & Beyond Inc., J.C. Penney Co. and Macy's Inc.

Welspun's management held a conference call with investors to try to allay fears before markets in India opened Monday, according to one analyst who participated.

American retailers accounted for two-thirds of Welspun's $878 million in sales in the year ended March 31, according to Mumbai-based brokerage Edelweiss Securities. Edelweiss said Target accounted for about 10% of Welspun's sales.

"It's too early to say what went wrong and where. But, yes, a concern now is that other big clients may begin to look into Welspun's practices. That is a big concern," said Sumant Kumar, an analyst at Elara Capital.

Welspun said it has commissioned "one of the Big Four" accounting firms -- a term used to refer to Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG -- to investigate "our supply systems and processes."

Target said it has pulled the Welspun products from its stores and had begun to offer refunds to people who had purchased them.

Welspun's conduct "was contrary to the high ethical standards to which we hold ourselves," Target said.

Write to Preetika Rana at preetika.rana@wsj.com

(END) Dow Jones Newswires

August 22, 2016 08:56 ET (12:56 GMT)