Minority investors seek seat on Alembic board, analysts say move unprecedented

In what be the seminal case of shareholder activism, minority shareholders of 110-year old drug maker Alembic moved a resolution to appoint their representative on the board at company’s upcoming AGM on July 28 as they seek better investor returns.

Alembic management said its board will consider a notice it received under Section 151 of Companies Act, 2013 to appoint a small shareholder director at its next board meeting, which is scheduled for July 28, 2017.

According to Companies  Act, 2013, a small shareholder is a shareholder holding shares of value of not more than twenty thousand.

The procedure for appointing a small shareholder director needs to be done through a postal ballot. If appointed, the small shareholder director will have a three-year tenure.

On July 12 Alembic received a notice from Unifi Capital under the signature of Sarath Reddy, its Managing Director, proposing Murali Rajagopalachari’s candidature for being appointed as a small shareholder director under section 151 of the Companies Act 2013 at the company’s upcoming annual general meeting (AGM) scheduled on July 28.

Unifi Capital is a 16-year old portfolio management company with over Rs 25 billion of assets under management. Unifi Capital holds around 3 percent stake in Alembic.

Vadodara-based Alembic promoted by Chirayu Amin and his family members as on June 30 holds 29.18 percent stake in Alembic Pharmaceuticals which has sales of around Rs 3131 crore in FY17. Alembic Pharmaceuticals has a market capitalization of Rs 10,289.20 crore on Monday.

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.

Shares of Alembic gained 8.22 percent to close at Rs 43.45 on BSE, while Alembic Pharma rose 1.04 percent to end at Rs 545.80. The benchmark Sensex increased 0.68 percent to 32,245.87 points.

Experts on corporate governance feel that move is unprecedented.

“As this is untested, company secretaries and lawyers are yet grappling with the implications of such a move. However, it empowers the minority shareholder and provides a way for small shareholders to get their nominee onto the board,” said Shriram Subramanian, MD, InGovern Research Services— a firm advising institutional investors on corporate governance standards.

“This is a seminal case because it is the first time a set of sophisticated domestic investors are taking a firm stance,” said IiAS, a Mumbai-based institution investor advisory services firm.

IiAS believes this case will define the equation between companies and their shareholders, but importantly, assess the protection regulations offer the small investor.