The subtle, surgical and surprise moves of the two warring promoters of the Finolex twins, Finolex Industries Ltd, and Finolex Cables Ltd, is a potent competitor to the just concluded Chess Olympiad, swept by the Indian grand masters (GMs)!
The voting results of the recently held annual general meeting (AGM) of Finolex Industries resemble a Queen’s pawn attack to counter the King’s Indian defence!
Four of the independent directors (IDs) of Finolex Industries put up for appointment to serve their respective second five-year terms could not get the requisite votes for the special resolution to succeed.
In corporate history, this must be the maximum wickets to fall in a single AGM. Ashwin R! Beware!
After this debacle, the company has a solitary ID on its board as shown in the table here. It is also short of the minimum of six directors required for a company of its size.
Ritu Chhabria’s election, a confusing move like a knight jumping three squares, will be dealt with later in the essay.
The fight between the Chhabria cousins, Deepak (DC) and Prakash (PC), has been raging for some years and its effect is decisively spilling into the boardrooms of both the companies.
To briefly recapitulate the context of the tug-of-war between the cousins, the current holding structure is a good starting point.
The fight is principally about the control of Orbit Electricals.
Orbit Electricals is the key to controlling the group effectively, though there is a significant cross-holding by the two listed entities.
PC and DC had their territory marked with the management of Finolex Industries and Finolex Cables, respectively, assigned to them under a family arrangement.
The family arrangement had the following with regard to the management of the two companies in question.
This understanding was transported into the AoA of Orbit to render the same enforceable under the law.
However, at some point in time, PC managed to amend the AoA of Orbit Electricals to exclude DC from exercising control over Finolex Cables.
This act was challenged by DC as illegal on the ground that the said article qualified to be an ‘entrenched article’ under the 2013 Act and could not be amended without the presence of all the shareholders in the EGM concerned.
The first decision of the national company law appellate tribunal (NCLAT) rendered in this dispute in October 2023 was in favour of DC. However, the said decision was recalled by the court pursuant to questions raised in the Supreme Court on the integrity of the proceedings before the bench that delivered it.
NCLAT revisited the matter and issued the revised order on 28 August 2024, ruling in favour of PC.
By virtue of this order, PC’s control over Orbit is supreme and allows him to exercise the voting rights that Orbit has in both the entities.
There are other parallel proceedings with regard to the operation of the family arrangement, both civil and criminal, in different forums which are yet to conclude.
Despite the win in NCLAT that approved the amended AoA of Orbit, there seems to be a stalemate at the board level right now which resulted in the reappointments of the four IDs being defeated.
How did this happen?
DC was ousted from the position of a director and chairman of Finolex Cables when the results of voting in the AGM of the company were declared on 16 October 2023, after a drama in NCLAT and the Supreme Court.
Both Orbit Electricals and Finolex Industries voted against the appointment.
Not only was DC ousted in the AGM, but the subsequent appointment of Shane Pedder as a non-executive director was also not passed, resulting in Finolex Cable’s board of directors (BoD) being short of the requisite number of directors as required under the law.
The following disclosure in the corporate governance report of Finolex Cables must be one of its kind for a large listed corporate to carry!
The tension will again surface at the AGM of Finolex Cables due to be held on 28th September as one of the agenda items is the reappointment of Nikhil Naik, since he retires by rotation in that meeting.
Not to be outgunned in this proxy battle, Finolex Cables has now managed to defeat the reappointment of all four IDs in Finolex Industries in the recent AGM as mentioned in the beginning.
Finolex Industries would also suffer from inadequate board strength as the total number falls below six, and the number of IDs is also less than the statutory 50% of the board’s strength.
On 19 September 2024, in a meeting of the directors of Finolex Industries held between 6.45pm and 9.30pm, five new IDs were appointed. They will be put up for the approval of the members through a postal vote.
Unless something changes, either through a regulatory intervention or by happenstance, these resolutions would also fail, necessitating putting up another five names!
Why competent professionals are offering themselves as pawns for this farce to play out is difficult to comprehend.
On the same day, the managing director of Finolex Industries, Ajit Venkataraman, resigned, adding to the crisis in the board’s composition.
Quite surprisingly, Finolex Cables, which voted against the reappointment of the four IDs in Finolex Industries, did not vote against the reappointment of Ritu Chabbria, the wife of PC!
If they had voted against that resolution, though it needed only a 51% majority, the same would have failed. The motivation not to block her reappointment is not clear in this case!
How the stalemate of not having the requisite composition of directors in both the companies will be broken is interesting to watch.
Though PC has won control of Orbit, he is unable to control the board of Finolex Cables. Due to this, his control of Finolex Industries is also under question.
PC’s retirement by rotation may arise next year. Unless something dramatically changes, or a stay is obtained on Finolex Cables exercising its voting rights, he may lose his office.
Will PC approach the national company law tribunal (NCLT) for its intervention to appoint the IDs in Finolex Industries, by agitating that the action of Finolex Cables voting against its appointees is an act of oppression?
At this juncture, Finolex Industries appears to be having a bigger compliance crisis as compared to its counterpart.
Dish TV, though for different reasons, is going through an identical logjam in appointing new directors.
An unstable board that has no continuity in oversight, especially key committees like the audit committee getting new members every three months, may be quite destabilising to the two companies.
How much does this spell an issue even if the operations seem to be chugging along well and the companies are financially healthy?
The IDs are operating as pawns in the game of the two Chhabria scions. If the IDs in the respective companies had put their foot down to not allow the voting to be used as a tool to block the new appointments, then at least the boards of both the companies could independently manage the show and the two promoters could fight it out in the courts.
This case, and the other family disputes currently raging in many business families, have shown the vulnerabilities of even documented family arrangements, the holding company model to hold the family’s shares, trusts set up for the benefit of family members, the wills and testaments.
In effect, the existing notions of lawyers and private wealth managers on how to structure family holdings for effective succession planning suffer from many inadequacies.
Families that have a succession plan in mind should take a fresh look to avoid such stalemates.
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
