When the business family proliferates across generations, ownership and control of business enterprises is fraught with contentious claims and goes well beyond a mere claim to a share of the property.
The Securities and Exchange Board of India (SEBI) has recently widened the scope of the disclosure requirements (Regulation 30A i.e., “Disclosure requirements for certain types of agreements binding listed entities) necessitating the disclosure of family arrangements that impact the ownership or operation of any listed entity even where the entity itself is not a party to the arrangement.
This was long overdue as many business groups had formal and informal arrangements within the family of the manner of running a listed entity or non-competition agreements that (in)directly impacted the freedom of the listed entity to do business, or succession to key management positions which stood undisclosed to the board and the shareholders of the listed entity.
While written agreements themselves become a bone of contention, oral arrangement is a minefield of disagreement and dispute and, with witnesses passing on over the years, it ends as dirty linen being washed on the streets.
In the case of Hikal Ltd., where the siblings of the Kalyani group are contending, the latest disclosure after the SEBI notification states-
“Mr. Baba Kalyani, brother of Mrs. Sugandha Hiremath and brother in law of Mr. Jai Hiremath, both being promoters of the Company, had entered into a family arrangement in 1994, with his father Dr. NA Kalyani, in the presence of his mother Mrs. Sulochana Kalyani, for transfer of stake held by the companies owned and controlled by the Kalyani Family in the Company (~34%) to Mrs. Sugandha Hiremath.”
In this instance, the sister is seeking the restoration of the 34% stake in Hikal Ltd from the companies owned by her brother and it appears the arrangement was oral as the mother is cited as a witness!
The Kirloskar group has a comprehensive 38-page family settlement signed in 2009 and has made multiple visits to all the available forums to resolve the disputes among a plethora of cousins. Unsurprisingly, one of the allegations by a contending party is that a publicly listed entity, Kirloskar Brothers Ltd, has funded the legal expenses of Rs274 crore over the past seven years for one of the battling families!
Another warring family is that of the Chabbrias and the case exposes the typical structural issues of cross-holding in many Indian groups that seriously affect corporate governance and compromise minority interest.
The complicated cross-holding between Finolex Cables Ltd (FCL) and Finolex Industries Ltd,(FIL) and the family arrangement among the Chhabrias is the subject of multiple court disputes with an obvious impact on the two listed entities and their minority shareholders.
An extract from the family arrangement below would be relevant to appreciate some of the nuances involved:
“FIL hereby notes that Shri Deepak K Chhabria is presently the Managing Director of FCL. Similarly, FCL hereby notes that Shri Prakash P Chhabria is presently the Managing Director of FIL. Each party hereby agrees to ensure that their respective voting rights in the other company are not utilized to inconvenience or displace or remove: (i) Shri Prakash P Chhabria from the post of Managing Director or any other higher post to which he may be elevated to in FIL in future unless he is incapacitated or otherwise disqualified or unwilling to act as such in FIL; or (i) Shri Deepak K Chhabria from the post of Managing Director or any other higher post to which he may be elevated to in FCL in future unless he is incapacitated or otherwise disqualified or unwilling to act as such in FCL.”
While FCL has made the requisite disclosure, FIL appears not to have.
And to await such a direction from SEBI to make these disclosures sets in very poor light the governance streak—at least in some Indian businesses.
Another partly disclosed information is that of the contested family settlement in the Delhi High Court of the Kanwar family owning Bharat Gears Ltd.
These disputes have a direct effect on the operations of the companies concerned and impact the public shareholders. Even where there is no apparent dispute, the existence of an agreement that has relevance to the governance of a listed company should necessarily be brought to light. SEBI has intervened quite appropriately in this regard though, going by its detailed notes on the public discussion, this move was much objected to by the business community.
The rationalisation of the succession laws, which enable women their rightful share in the family property, is a cornerstone reform in personal laws and families that historically did not acknowledge women their due place in this regard have an added issue in business ownership and succession.
The pending dispute between a woman member of one of the branches of the Murugappa family in Chennai and her cousins and uncles is reflective of this aspect in family arrangements. A family arrangement that excludes women from equality with male members would be a cause for dispute as in the case of Dr Valli Arunachalam.
The SEBI notification requires all present arrangements to be brought to public light. If a particular family arrangement excludes certain family members from ownership or control of the listed companies or assigns a particular listed entity to a specific branch of the family then it would appear that such arrangements impact the manner of governing the listed entity and should be brought to public notice.
The compliance with such a major change in the regulatory sphere of a subject, that was hitherto treated as highly proprietary to a family and held close to the chest, will not be spontaneous and SEBI may need to proactively push all companies to make a one-time disclosure.
About a year ago, the Chennai-based TVS conglomerate separated its various businesses among the different branches of the family. The listed entities did disclose that a family arrangement was arrived at but confirmed that no implications arose for the listed entities since the arrangement was only with regard to the reordering of the shareholding pattern.
However, the TVS brand is commonly used across the group entities and it is difficult to conceive that it is unsupported by a family agreement of brand usage. Also, there may be non-compete arrangements to avoid encroaching on allied domains since most companies are in the auto ancillary segment. An issue may arise if such an agreement should be disclosed, if in existence.
For example, Hero MotoCorp has disclosed the existence of a family agreement under which Sunil Munjal quit the post of the managing director (MD) in 2016. In other words, it may appear that even if no change is envisaged in the management control presently, the mere existence of an agreement already acted upon may need disclosure.
Life can only get more adventurous for the corporate boards and the auditors! While none of the above-mentioned information is classified as secret, at least it did not feature as official information. To ignore this hereafter, and not to caveat the audit reports is not a risk many will have an appetite for!
Trusting that India@100 would have seen the end of at least some of these feuds and fewer new ones!
(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)
Two things can possibly avoid this future landmine:
(1) Within one or two generations, family arrangement must be clearly, legally and transparently made and complied upon. Matters often complicate beyong one or two generations.
(2) In my opinion, a legally validated and witnessed WILL will go a long way in dealing with family disputes and other problems.