Five years on, Sec 151 on small-shareholder directors makes little headway

Efforts have been few and far between since 2014, when the section was introduced; combo of entrenched promoters and onerous curbs may have stifled a provision meant to empower such shareholders

Minority shareholders gained a provision to band together for a board seat five years ago. But its success has been limited.

A combination of entrenched promoters and onerous restrictions may have dulled the use of a provision intended to empower such shareholders, according to experts.  

“A listed company, may upon notice of not less than one thousand small shareholders or one-tenth of the total number of such shareholders, whichever is lower, have a small shareholders’ director elected by the small shareholders,” according to the terms of section 151 of the Companies Act, 2013.

The provision was notified, effective from April 1, 2014.

One of the most publicised cases came in mid-2017 when Chennai-based asset manager Unifi Capital invoked section 151 to try and get a board seat on Gujarat-based Alembic, a holding company for the pharmaceutical firm by the same name. The board rejected the nomination.

Similar attempts at getting board representation through various means, including other forums such as National Company Law Tribunal, haven’t met with too much success.

Minority shareholders including Florintree Advisors attempted to get a foothold in PTC India, and India Horizon Fund made an attempt at Religare Enterprises. One exception was when changes were seen at Fortis Healthcare where investors attempted to replace certain board members.

However, minority shareholder’s use of section 151 in particular has not been a common occurrence, despite the advantages that comes with the position. This includes the ability to better create value for themselves and prevent issues related to the way assets are managed; which puts them in a more advantageous position than being only financial investors without a board seat.  

A board seat provides leverage to minority shareholders, said Shriram Subramanian, founder and managing director of corporate governance advisory firm InGovern. They can better influence outcomes when they are part of board-level discussions.

“Obviously you can try to bring about change,” he said.

InGovern’s Shriram feels that provisions requiring 1000 shareholders to come together may be slightly onerous when it comes to execution. But there is a fine balancing act in creating an enabling provision versus making it too easy for such potentially disruptive steps to be initiated, according to him.  

At the time of the Alembic tussle, corporate governance firm Institutional Investor Advisory Services India (IiAS) noted that the Companies Act gives the board discretionary powers to quash any application for appointing such a shareholder director. The resolutions need not even be put to shareholder vote if the board rejects it, according to an IiAS note from the firm at the time.

Meanwhile, activism in countries like the United States of America have benefited from the absence of entrenched promoters who control a large chunk of company shares. Minority shareholders are better able to garner support in specific situations and assert their interests. But multiple jurisdictions are still struggling with making minority shareholders a more constant force to reckon with, according to Amit Tandon, founder and managing director at IiAS.

 “Different countries have tried different things, but nothing works,” he said.  

What is perhaps interesting is that some companies have appointed such directors themselves. For example, pharmaceutical firm Divi’s Laboratories proposed to appoint S. Sridevi as a small shareholder representative in June 2014. Tamil Nadu Steel Tubes mentioned a similar move with Gopal Singh in their 2013-14 annual report. 

The Companies Act does allow for firms to appoint their own small shareholder directors.

“Provided that nothing in this sub-rule shall prevent a listed company to opt to have a director representing small shareholders suo motu and in such a case the provisions of sub-rule (2) shall not apply for appointment of such director,” it said.

Emails sent to the companies mentioned above did not immediately receive a response.

Little-used provision

• Section 151 allows small shareholders a board seat

• Five years have passed since it became effective

• Limited success in using the provision

• Entrenched promoters make activism difficult

• Some firms themselves appoint small shareholder directors