Facts of the Case

Activist asset manager Unifi Capital, which has under 3% stake country’s oldest pharmaceutical company — the 110-year-old Alembic Limited and is among the top three non-promoter shareholder blocks in Alembic Limited. Unifi Capital with backing of more than one thousand such small shareholders has nominated its vice-president Murali Rajagopalchari as small shareholder director on the Board of Alembic Limited pursuant to Section 151 of Companies Act, 2013.

Legal Provision

Section 151 of the Companies Act, 2013 read with rule 7 of Companies (Appointment of Directors) Rules, 2014.

The small shareholder director is to be appointed under Section 151 of the Companies Act 2013, where only shareholders with a nominal value less than Rs 20,000 can elect through a postal ballot.

The section and Rule quoted above inter alia stipulate that the small shareholder director will have a three-year tenure, shall conform with the requirements under Section 149(6) (for Independent Directors), Such Director shall not be liable to retire by rotation, etc.

The Annual General Meeting of the Company was held on 28th July 2017. Subsequently they received special notice from a nomination from Unifi, nominating its Vice president as a Proposed Director. Consequently, the Company issued an addendum to the notice of Annual General Meeting on 18th July.

But, a Small Shareholder’s Director’s shall be appointed pursuant to the provisions of Section 152 of the Companies Act, 2013 and by means of postal ballot.

Hence, the Addendum was withdrawn on 22nd July 2017.

Cause

Unifi had called for steps to mitigate 70% discount in the stock price of Alembic compared to the company’s main underlying asset, Alembic Pharma, which has a Rs 10,000-crore market value.

In 2011, Alembic de-merged Alembic Pharma to pursue growth in generics, domestic formulations and APIs. The holding company Alembic however continued with manufacturing of intermediate drugs such as penicillin and erythromycin thiocyanate, besides tapping development of its unused real estate assets. It has a little over Rs 1,000 crore in market capitalisation, but directly owns about 30% in Alembic Pharma which is valued at around Rs 3,000 crore.

Unifi have communicated with Alembic board for several months, arguing their case for redistribution of their shares in Alembic Pharma, possibly through a scheme of arrangement.

Conclusion

There are several cases of holding companies trading at massive discounts. As per the published by the Stock exchange the promoters increased their stake in the holding company by nearly 2% in the past two years even as small shareholders saw scope for improving the stock price.

Hence the opinion of the shareholders seem prudent. Since the approval of appointment of small shareholder’s directors has to be sought through postal ballot, practically it seems difficult to appoint unless the promoters vote in this favour.

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