The Alembic Board on Friday said it has rejected the request by a section of small shareholders led by Unifi Capital to have their representative on the board citing conflict of interests and misuse of provision under Section 151 of the Companies Act.
“The request was deliberated upon and considered not acceded to having regard to various factors,” Alembic Board said in a statement to stock exchanges.
The board said it has noted a very close nexus between Unifi Capital, Unifi Financial, UWM Investment and its group companies which are large shareholders holding 375,102 shares in the Alembic; also, 914 shareholders who proposed the appointment of an independent shareholder director on the company board were portfolio clients of Unifi. Murali Rajagopalachari, who was the minority shareholders' pick for the board seat, is an employee and director on various group companies of Unifi.
“This is a clear case of direct conflict of interest in his role as a representative of small shareholders,” the board said.
The board also stated that a large number of small shareholders -- 320 out of 914 -- who are party to the application under Section 151 of the Act, have become shareholders only during last five days prior to making the application, primarily for supporting this application and are all clients of Unifi.
“It appears that Unifi has used these persons for ensuring that Unifi nominee is put on board by clearly misusing the provisions of Section 151 which is meant exclusively for genuine small shareholders,” the Board contended.
The Board also said that Unifi in the past has repeatedly made attempts to require Alembic to go for “extensive restructuring and when their proposal was not accepted, it seems the small shareholders were artificially put together by UNIFI for putting undue pressure on the Board.”
“In view of the above observations and noting that the existing independent directors of the company being persons of very good repute, relevant expertise and experience are taking adequate steps and measures to protect the interest of all the shareholders including small shareholders and there is no justification to appoint a separate small shareholders’ independent director,” Alembic board added.
In an unprecedented move of minority shareholder activism on July 12 Alembic Board received a notice from Unifi Capital, which was representing portfolio management clients, and certain other shareholders, proposing the candidature of Murali Rajagopalachari, for being appointed as a small shareholders director under Section 151 of the Companies Act, 2013.
The shareholders said the move was necessitated to secure better investor returns.
According to Companies Act, 2013, a small shareholder is a shareholder holding shares of value of not more than twenty thousand.
The regulations under the Companies Act, 2013 allow a small shareholder director on the board with the specific intent of having the interest of small shareholders represented in the decisions made by the board.
However, regulations demand that at least 1,000 shareholders, or 1/10th of the total number of small shareholders can nominate a small shareholder director. Regulations have also attempted to ensure that there is a serious agenda that backs the request for a small shareholder director.
The regulations provide discretionary powers to the company’s Board to quash any shareholder application for the appointment of small shareholder director.
Market infrastructure companies, like the stock exchanges and depositories, have shareholder directors on their board. Public sector banks, too, under RBI regulations, are required to have shareholder director representations on their boards.
Vadodara-based Alembic promoted by Chirayu Amin and his family members as on June 30 hold 29.18 percent stake in Alembic Pharmaceuticals which has sales of around Rs 3131 crore in FY17. Alembic Pharmaceuticals has a market capitalization of over Rs 10,000 crore. A section of small shareholders were unhappy as the existing holding structure doesn’t reward small shareholders.
“The Board has been extremely short-sighted in their rejection of the request,” said Amit Tandon, Managing Director of IiAS, a Mumbai-based institution investor advisory services firm.
“While the clause is there, and the power is given to the board, it needs to exercised judiciously, they can’t just use the language what is a genuine request from a set of investors,” Tandon said.
Tandon differed on the conflict of interest angle cited by the board.
“Where is the conflict of interest, if they are investors in five, ten or fifteen companies it doesn’t mean that they run the strategy of the company,” Tandon added.
Alembic Board convened the meeting of its board to approve first quarter results.
The Alembic announcement came after market hours. The shares of the company declined 1.30 percent to close at Rs 46.60 on BSE, the benchmark Sensex dropped 0.23 percent to end at 32,309.88 points.
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