A Board Seat

Can small shareholders, who hold shares worth less than Rs 20,000, earn a board seat and have a say in the running of listed companies? A section of minority shareholders of India's oldest drug company, Alembic Ltd, has raised this question in an unprecedented move in India's corporate sector.

A section of small shareholders under the banner of asset management firm Unifi Capital, which has less than 3 per cent stake in the company, had asked the Alembic management to appoint Murali Rajagopalachari, Vice President of Unifi Capital, as an independent director. The Board of the Vadodara-based company rejected the proposal on July 28; the AGM, held the same day, also did not consider the proposal.

"In response to Alembic's decision to reject our proposal, we are studying our options," says Sarath Reddy, Managing Director, Unifi Capital. According to company law experts, Unifi has the option of approaching Sebi and other regulatory agencies.

A small shareholder director can be appointed under Section 151 of the Companies Act 2013; only shareholders owning shares with a nominal value of less than Rs 20,000 can vote through a postal ballot. "Under Rule 7 related to 'Appointment and Qualification of Directors', it is mentioned that a company may, upon notice of 1,000 small shareholders or 1/10th of the total number of shareholders having less than `20,000 in value, appoint a small shareholder director. However, Rule 7(1) also mentions that the company has discretionary powers to appoint a small shareholder," says a corporate law expert.

"We spent nearly a year in discussion with the company and offered specific suggestions. They did not respond positively. We had no option but to use the regulatory provisions available to us," says Reddy. "The measures we took to propose Murali Rajagopalachari as a small shareholder director are not only in keeping with the provisions of law, but also bereft of any 'conflict of interest' as suggested by Alembic's directors," he adds.

The 110-year-old Alembic Ltd had demerged its pharmaceutical business in 2011. What was left were struggling penicillin and an antibiotic business, real estate development and some small investments in power. While Alembic Ltd's market capitalisation is just Rs 1,082 crore, the market cap of Alembic Pharmaceuticals is nearly Rs 10,200 crore. Alembic Ltd is the largest promoter of Alembic Pharmaceuticals with 29.18 per cent stake out of the 72.68 per cent stake of the promoter group, led by Chirayu Amin and family. The minority shareholders want unlocking of value of their investments in Alembic Pharmaceuticals through redistribution of shares of both companies.

Shriram Subramanian, Managing Director, InGovern Research Services, which offers corporate governance advisory and shareholder activism services, says small shareholder activism is unfamiliar to Indian conditions. "Though there were many incidents of shareholders demanding change of directors or initiating action against board or management decisions, small shareholder activism is not familiar to India as it requires a motivated investor and some effort and time to bring together 1,000 such shareholders to a consensus," he says.

"The fact that this powerful provision has never been tested before shows how daunting a challenge it is for 1,000 people to agree on something and manage the logistics of implementation," says Reddy. Whether Reddy and Unifi Capital succeed or not, the dispute will bring something positive for small shareholders.

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