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Institutional EYE

Commentary on Corporate Governance Issues

Alembic Limited: Will a set of small shareholders be able assert themselves?

A set of small, yet discerning shareholders in Alembic Limited have woken up to the fact that their ownership of shares in a company need not be passive: they are seeking a seat on the board Alembic Limited. Will the voice of these small shareholders be heard, or will it get drowned under the weight of an untested Companies Act? It is for Alembic Limited’s Independent Directors to shoulder this responsibility. This is a seminal case because it is the first time a set of sophisticated domestic investors are taking a firm stance. IiAS believes this case will define the equation between companies and their shareholders, but importantly, assess the protection regulations offer the small investor.

Alembic Limited’s management has confirmed (to IiAS) that the board will consider a notice it received under section 151 (See Annex 1 and Annex 2) to appoint a small shareholder director at its next board meeting, which is scheduled for 28 July 2017. While small shareholders have attempted to get board seats in the past through this route, this is possibly one of the first cases where a set of sophisticated, discerning shareholders are leveraging this regulation. Therefore, how the board, particularly the independent directors, decide will be reflective of the company’s (and perhaps a large set of corporate India) attitude towards small shareholders.

On 12 July 2017, the company had received a notice from Unifi Capital Private Limited (under the signature of Sarath Reddy, its Managing Director), which proposed Murali Rajagopalachari’s candidature for being appointed as a small shareholder director under section 151 of the Companies Act 2013.

Unifi Capital Private Limited (which has proposed Murali Rajagopalachari’s appointment as a small shareholder director) is a 16-year old portfolio management company with over Rs. 25.0 bn of assets under management. Murali Rajagopalachari is Vice-President, and part of Unifi Capital’s research team (Exhibit 2).

Regulations 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. Market infrastructure companies, like the stock exchanges and depositories, have shareholder directors (or public interest directors) on their board. Public sector banks too, under RBI regulations, are required to have shareholder director representations on their boards. The Companies Act 2013, in providing for at least one small shareholder director appointment in non-public-sector companies, attempts to achieve the same goal.

Through its provisions, the Companies Act 2013 tried to balance the agenda of both, the shareholders and the company. For shareholders, regulations demand that at least 1,000 shareholders, or 10% of small shareholders, can together nominate a ‘small shareholder’ director. In asking for these numbers, regulations have attempted to ensure that there is a serious agenda that backs the request for a small shareholder director. Even so, it may happen that small shareholders may nominate an individual that may not be competent (although not disqualified under the Companies Act 2013). To protect companies and boards from having to embrace such individuals, and from the potential threat of greenmail, regulations provide discretionary powers to the board in acquiescing to the demand for a shareholder director, on the understanding that it will be used judiciously.

Independent directors’ decisions under scrutiny

Whether Alembic’s board is serious about the shareholders’ notice under section 151 is unclear. The board has remained quiet on its opinion of Murali Rajagopalachari’s appointment as a small shareholder director. Even upon receiving a notice to appoint Murali Rajagopalachari’s as a small shareholder director on 12 July 2017, the company failed to make the required disclosures to the stock exchanges. Receiving notice under section 151 is not an everyday event. IiAS believes this is a material event which affects a larger set of shareholders – therefore, it should have been disclosed. Not doing so raises red-flags.

Alembic Limited’s Independent Directors’ (Exhibit 3) silence is indeed eloquent. In decisions that were significantly more public and controversial, Tata group’s independent directors were responsible in providing shareholders with their opinion, and it was then left to shareholders to decide if they agreed with that point of view. While one may argue that the independent directors did not have sufficient time to make a decision, their protracted reticence on this matter raises questions about their own independence, about their ability to tide the company through difficult times, and about how seriously they take their responsibilities as representatives of non-promoter shareholders.

The company’s announcement of a board meeting on July 28, 2017 (before its AGM) has a stated agenda of only considering the results of the first quarter ended 30 June 2017. Alembic’s management has separately confirmed to IiAS that the board will consider Murali Rajagopalachari’s appointment as a small shareholder director under section 151 at that meeting.

The board has discretionary powers – and not absolute, as many argue, and may consider quashing Murali Rajagopalachari’s appointment as a small shareholder director. But, these discretionary powers are given to the board to protect the company against frivolous agendas, or incompetence, or both. For the board to use these discretionary powers to turn down a genuine agenda will be a misuse of the regulatory headroom it has been provided. In any case, turning down the demand for a small shareholder director will not be easy: the board has a responsibility towards all public shareholders to provide a thoughtful and considered rationale for its decision. Should the board acquiesce to the shareholders’ demand for an appointment, the company will then have to issue a postal ballot – in which only small shareholders will be eligible to vote. Murali Rajagopalachari can then be appointed through a simple majority.

Watch this space

If Alembic’s shareholders are required to vote on this resolution, they have little to go by. The board’s radio silence is providing neither guidance nor clarity on the context of the resolution. Unifi Capital, on the other hand, must provide clear guidance to all shareholders if it is to undertake actions that create shareholder value, and garner their votes through a more public discourse of their agenda.

Unlike previous attempts, this is the first time that a set of astute shareholders have decided to act, compelling the company and its board to make thoughtful decisions. How this plays out will have far reaching consequences for the development of India’s equity market.

You can access the full report by clicking the following link

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