Alembic’s board on Friday rejected the request by Unifi Capital
to appoint Murali Rajagopalachari as a director for small shareholders
but experts said it might write to the Securities and Exchange Board of India (Sebi) on the issue.
Some experts said the group of small shareholders
might move the National Company Law Tribunal (NCLT) as a last resort.
said it was studying its options in response to Alembic's decision to reject its proposal.
Sarath Reddy, managing director, Unifi Capital, said, "We spent nearly a year in discussions with the company and offered specific suggestions with supporting rationale. They did not respond positively. We had no option but to use the regulatory provisions available to us. The measures we took to propose Murali Rajagopalachari as a director for small shareholders
are entirely in keeping with the provisions of law and are also bereft of any 'conflict of interest' as suggested by Alembic’s directors."
Such shareholder activism by a portfolio fund manager is unprecedented in India and might trigger similar developments in other listed companies.
The law provides for 1,000 small shareholders
to come together and agree on one individual to represent their concerns on a company’s board. "The fact that this provision has never been tested shows how daunting it is for 1,000 people to agree on something," Reddy added.
Shriram Subramanian, managing director of proxy advisory and corporate governance firm InGovern Research Services, said there was no valid reason given by Alembic's board for turning down the proposal of the small shareholders.
"While they have said things like conflict of interest and close nexus, there is actually no legal reason to stall the process of voting. The small shareholders
may approach Sebi, which is supposed to uphold corporate governance guidelines," he said.
might ask Alembic
to put the matter to vote through postal ballot, he added.
Another proxy advisory firm, Institutional Investor Advisory Services (IIAS) said the Alembic
board had not provided meaningful grounds for rejecting the request of the small shareholders.
"But in doing so they, and particularly the independent directors, have taken on the onus of balancing the demands of small shareholders
with those of the controlling shareholder. Their role and the decisions they take will now be subject to greater scrutiny," it said.
Legal experts in Vadodara who track Alembic
said the possibility of vested interests could not be ruled out because Unifi Capital
and its group companies
were linked to larger shareholders
"Nowhere does the Companies
Act, 2013, mention where these 1,000 shareholders
have to come from, what kind of association they will have, or under which banner they will mobilise. What these shareholders
have asked for under Section 151 of the Act is perfectly legal," said a person close to the development. He said the shareholders
could approach the appropriate judicial forum, which in this case was the NCLT.
Subramanian added that somebody had to mobilise small shareholders
and in this case, Unifi Capital
had done it. There was nothing illegal about it, he pointed out.
admitted that such conflicts involved much time and resources and as a small company it had to think very hard before embarking on such an exercise. "It is much easier to simply look the other way and move on, but sometimes you feel compelled to fight for what is right; the benefits could accrue to all investors in India over the long term. Alembic’s board seems more intent on trying to discredit Unifi Capital
than in evaluating our suggestions with an open mind. They should have no reason to fear a small shareholders’ director on their board," Reddy said.
In a filing to the stock exchanges, Alembic
said it had rejected the proposal of appointing Rajagopalachari as a director for small shareholders
because Rajagopalachari was a director in various Unifi group entities. Further, the 914 shareholders
who proposed the candidature of Rajagopalachari are also clients of the Unifi group. Alembic
thus felt that this was a clear case of conflict of interest.
has also said of the 914 shareholders, 320 had become shareholders
in five days prior to the making of the request. "It appears that Unifi Capital
has used these persons to ensure its nominee is put on the board by clearly misusing the provisions of Section 151," Alembic
A source close to the development said when Alembic
was demerged in 2011 by spinning off its pharmaceuticals business into a separate entity, Alembic
Pharma, the less profitable real estate business and the loss-making Pen-G business remained with Alembic.
does not have any major projects under way, there is not much scope for its share value to increase. Whenever, Alembic
Pharma pays out dividends, Alembic’s shareholders
receive proportionate benefits. A move to unlock value in Alembic
shares by capitalising on the pharmaceuticals company's shares might prove to be detrimental to the legitimate shareholders
of the latter." he said.
The pharmaceuticals business constituting formulations, generics and API along with manufacturing facilities at Baddi, Panelav and Karakhadi were transferred to Alembic
retains its Vadodara manufacturing facility (Pen-G business) along with power infrastructure (16 MW used for internal consumption) and land in Vadodara (115 acres, including 45 acres used for the Pen-G facility).