Shareholder activism at Alembic Pharma: Issue unlikely to die in a hurry

Alembic's board rejected the request by Unifi Capital to appoint Murali Rajagopalachari as director

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. 

Unifi Capital 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.

Sebi 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 of Alembic. "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. 

Unifi Capital 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. 

Alembic 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 said.

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. "Since 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 Pharma.  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).

Shareholders of Alembic received Alembic Pharma shares in the ratio of 1:1.