Mindtree founders may have to vacate board seats for L&T nominees

IT firm can expand the size of its board subject to the upper cap of 15 to give L&T representation

With L&T seeking induction of its nominees on Mindtree board, the founders of the IT services firm are likely to be in a spot as at least one of them might have to vacate the board seat.
 
Sources in the know said given the mandatory one-third representation of independent directors, the IT firm would have to expand the size of the board to reflect fair representation of its new shareholder L&T or it would have to let go of some of its founding members to accommodate L&T nominees.
 
At present, Mindtree has eight board members of which four are independent directors. The remaining members, both in executive and non-executive roles, are the founders of the company. Krishnakumar Natarajan (executive chairman), Parthasarathy NS (executive vice-chairman and chief operating officer), Subroto Bagchi (non-executive director), and Rostow Ravanan (chief executive and managing director) represent the founding team on the board. "The board should be representative of the shareholding pattern of the company. At the same time, the mandated level for independent directors has to be maintained. Against this backdrop, Mindtree has to expand its board, subject to the upper cap of 15 members (according to the Companies Act) or has to drop some of its founding members," said Dipti Lavya Swain, partner at HSA Advocates.
 
The upper limit of Mindtree’s board size according to its Articles of Association (AoA) could not be ascertained. However, experts said in case the company wants to expand the board than what is stipulate in its AoA, it has to pass a special resolution that would require approval of 75 per cent its shareholders.
 

Under current regulations, L&T can only appoint independent directors on the board of the Bengaluru-headquartered IT services firm since it has not been categorised as promoter under the shareholding pattern of the firm. "L&T has to write to the Securities and Exchange Board of India to be categorised as promoter, which will enable them to induct executive directors on the Mindtree board," Swain of HSA Advocates said. "Given that the open offer ends on last week of this month, L&T is likely to take its demand for board seat in the upcoming annual general meeting (scheduled on July 16)."
 
At present, L&T holds around 30 per cent stake in Mindtree, while its open offer for acquiring an additional 31 per cent has been opened since Monday. According to extant rules, an acquirer can't induct a director on the target company's board during the offer period. Therefore, L&T has to wait till the end of the AGM for putting its people on board.
 
"The next AGM is definitely going to be stormy. While both L&T and Mindtree have blocking powers (for special resolution), no party can spearhead the agenda on its own. Even if L&T ends up with more than 40 per cent stake post the open offer, Mindtree founders (with 13 per cent stake) along with Nalanda Capital (11 per cent stake) can very well block any special resolutions proposed by L&T for approval," said a Bengaluru-headquartered corporate governance official.    
 
According to section 114 of the Companies Act 2013, special resolutions require 75 per cent approval from shareholders and include corporate actions such as alteration of the Memorandum of Association, issuance of depository receipts/sweat equity shares/convertible debentures, reduction in share capital, buybacks, appointment of a managing director/whole-time director, and reappointment of independent directors.
 
People in the know also said the decision of giving final and special dividends of Rs 27 per share taken in Mindtree's last board meet in April, may now require L&T’s nod.