Is Kir Loss Kar Battle Finally Settled?
The fight within the Kirloskar business family resembles the battle field in Kurukshetra, where independent battles between different key warriors on either side was simultaneously on show! 
 
Among the many battles being fought in different forum, the one that figures for discussion here is between the brothers, Sanjay Chandrakant Kirloskar of Kirloskar Brothers Ltd (KBL) with a 35% public holding on the one side, and Atul Chandrakanth Kirloskar of Kirloskar Industries Ltd (KIL) with 28% public shareholding on the other side.
 
This dispute is anchored around the control of KBL in which KIL has a 23.91% holding.
 
The genesis of the dispute is the Deed of Family Settlement (DFS) dated 11th September 2009, entered into among the different constituents of the Kirloskar clan involving the distribution of the shares in various Kirloskar entities to achieve an economic parity in the distribution of the wealth among all of them.
 
 
It is clarified that these members alone do not represent the entire Kirloskar family owing its lineage to the founder, as some of the other branches had separated earlier.
 
In this process of the distribution under the DFS, the shares in KBL reached the two warring siblings, Atul and Sanjay. Due to various restructuring moves the holdings of Atul Kirloskar in KBL ended in KIL. which is a listed entity with public shareholding.
 
Even prior to entering into the DFS, the various entities in the group got aligned with different members of the family. It is somewhere recorded that such pairing of the management happened sometime in the early part of 1980s. Sanjay Kirloskar' control of KBL seems to be arising from this time.
 
After the distribution of the shares in KBL as above noted, there has been some simmering dispute between the brothers, and KIL has been accused by KBL of competing in its domain, contrary to the tenets of the DFS which has been the subject matter of a different litigation.
 
Atul Kirloskar /KIL at some point in time approached KBL, as required under the regulations for the promoters to buy or sell shares, for the necessary pre-approval to acquire additional shares or to sell the existing holding to some outsiders.
 
The pre-approval was denied by the compliance officer of KBL. The rationale being that any additional shares purchased by KIL would increase its holding beyond 25%, thereby threatening the position of Saniay Kirloskar as its controlling shareholder.
 
The permission to sell was also denied on the ground that the sale would reduce the overal promoters' holding in the company, which would be contrary to the object of the DFS to not let the family dilute the stake thereby affecting the control exercised by one of the branches.
 
It is recorded as a fact that Sanjay Kirloskar opted to buy the shares which KIL wished to sell, on the grounds that he should have the first right over such shares.
 
Thus KIL, despite having investments in KBL currently valued about Rs3,000cr or so, found itself in a golden handcuff and denied the ability to enjoy its value. It also did not enjoy any role in the management, despite being the highest single holder. KBL and its board acted in an obstructive way.
 
Given the logjam as explained above, KIL and Atul Kirloskar, moved the national company law tribunal (NCLT) against KBL and Sanjay Kirloskar, charging them with oppression and mismanagement.
 
The petition for oppression and mismanagement was resisted on technical and substantive grounds by the defendants. Leaving out the technical and jurisdictional issues that may at best interest a lawver. it is useful to look at the substantive issues.
 
The important aspect was the role of the DFS. The contention of KIL was that Sanjay Kirloskar had no rights created under the DFS to manage KBL to the exclusion of the other family members. His rights were similar to the rights of the other shareholders like KIL. The role of the board that aided Sanjay Kirloskar to deny KIL the approval to deal in the shares of KBL, amounted to mismanagement and oppression.
 
DFS was only among the family members and cannot be taken cognisance of by the companies.
 
On the other hand, KBL and Sanjay Kirloskar anchored their defense in the DFS and contended that the DFS not only distributed the shares equitably in the companies but also affirmed the management rights of Sanjay Kirloskar over KBL based on the way the companies were allotted to the different family members sometime in the past.
 
One of findings recorded by the NCLT is that the compliance officer and the board of KBL acted unreasonably in relying on the DFS. It was an extraneous document that cannot in anyway restrict the transferability of the shares held by KIL.
 
 
 
KBL, should have distanced itself in a fight between the promoters, but ended up supporting one of them, who was in control of its management. 
 
The board which was to deal with such issues in an independent fashion seemed to have played a second fiddle to Sanjay Kirloskar in the fight.
 
The denial of the right to sell actually frustrated the idea of the DFS to bring about an economic equality among the families in the ownership of the group entities.
 
The denial ended up in making the shares held by KIL in KBL a mere piece of paper!
 
NCLT had also noticed the sequence of events that caused KBL to take on record the DFS sometime in 2016 when KIL approached for the pre-approval to buy additional shares or be permitted to sell to whoever it wished to sell the shares to.
 
 
The company had no rights and obligations under the DFS which was only among the family members. The compliance officer and the board had no reason to take cognisance of it, or act as an ally of the promoter who was resisting the moves by his brother to either take a fuller control by additional purchases, or exit at a reasonable price which an outsider may pay for such a significant holding.
 
Despite clearly observing that the DFS did not deal with the aspect of control of the individual companies, nor put any restriction on the way the shares can be dealt with by any of the members of the family who came into possession, NCLT's conclusion did not seem to accord well with this.
 
In its conclusion, NCLT has seemingly leaned towards the stand of Sanjay Kirloskar about his right to manage KBL to the exclusion of his brother, Atul.
 
The DFS did not bind any of the companies whose shares were distributed among the family members who were signatories to it. Even the DFS did not give any room to infer a different intention.
 
The only possible place where the control of the companies was referred to was in the preamble to the following effect.
 
“The Parties hereto have, for some time in the past, been managing various companies in the tradition set by Shri S.L. Kirloskar. Names of the major companies managed by the Parties, both public and private, are listed in Schedule I to this DFS.”
 
The purport of the above para in the preamble appears to be to identify the different companies which the current set of family members were managing to demarcate them from the Kirloskar entities managed by other Kirloskar cousins who had separated earlier. The said Schedule I merely lists the entities the shares of which got allocated to different
members under the DFS.
 
There is no attempt, even by implication, of correlating the companies with the family members, who were signatories, from a management perspective. Thus, little existed as a basis for Sanjay Kirloskar to claim exclusive right to manage KBL under the DFS.
 
 
NCLT must have been influenced by the fact that KIL was making efforts to sell the shares and not contending for the management rights over KBL. Hence, it must have gone on the reasoning that letting them sell was a sufficient relief from the oppression and mismanagement which they had clearly noticed to exist in this case.
 
 
KIL was denied the pre-approval to sell. The final order allows them to sell but with the condition that it shall be first offered to Sanjay Kirloskar, since the company may suffer if the shares are picked up by an outsider who may vie for the control.
 
The contention of KIL that it should get a control premium in the price was negated by NCLT as KIL was not exercising any control over KBL in actual practice.
 
This case raises the issue of the line of distinction between the promoter and the company managed being quite thin. The independent directors, who were a majority in the board had no qualms in going with the promoter in control who had picked and appointed them.
 
 
The other aspect is that the dispute had nothing to do with the interest of KBL or its minority shareholders. In a manner of speaking if the shares held by KIL get sold to outsiders, potentially it may realise a higher price beyond the current market price, which the minority shareholders of KIL would benefit from.
 
For its part, KBL will have more floating stock in the market, rather than a significant control with a single holder, which again would benefit its public shareholders.
 
Very little, in fact, no part of the discussion actually adverted to the impact of the conduct of the parties on the public shareholders, nor an evaluation of the final resolution, again from the point of view of public shareholders.
 
In actual effect, Sanjay Kirloskar succeeded in using the company as a foil for achieving a higher control and the long legal battle costing a huge sum in legal fees seems to have been fought by the company on his behalf.
 
 
What scrutiny the auditors and the audit committee applied to check if the legal fees at least to a proportionate extent was incurred by the promoter and not charged to the company, may never come out.
 
Family settlement recently came into prominence when the Godrej group announced its separation of the companies among its different branches.
 
While, such arrangements would have passed the scrutiny of multiple experts, there is no way of saying that an agreement of such complexity would have tied all the loose ends and could be litigation proof for all times!
 
(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 a 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.)
Comments
rgood8863
1 month ago
The Deed of Family Settlement dated 11th September 2009 is not just about distribution of the shares in various Kirloskar entities but also about "non compete". This article is half information.

Half information = misleading information... Something that the regulator SEBI too does not like!
singhanjalii868
1 month ago
The dispute is NOT anchored around the control of KBL but around the "Deed for Family Settlement" and the non compete clause. Family has already divided the assets, else Toyota share sale and other money transfers would not have taken place. Sadly Mr. Ranganathan has na-ut done the research well :) Check out the deed for family settlement copy... its publicly available at the KBL website. Probably Mr. Ranganathan has checked out website of only one side!
singhanjalii868
1 month ago
The dispute is NOT anchored around the control of KBL but around the "Deed for Family Settlement" and the non compete clause. Family has already divided the assets, else Toyota share sale and other money transfers would not have taken place. Sadly Mr. Ranganathan has na-ut done the research well :) Check out the deed for family settlement copy... its publicly available at the KBL website. Probably Mr. Ranganathan has checked out website of only one side!
pgodbole
2 months ago
A very well written article. On e shocking aspect of the entire drama is the huge legal fee paid by KBL for a private dispute which was essentially between members of promoter family. Neither independent directors nor statutory auditors thought it worthwhile to comment or object to such blatant misuse of a publicly listed entity.
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