Introduction
Family-run businesses and conglomerates have long been a feature and cornerstone of India’s economy with names like Tata, Godrej, Reliance and Birla. However, with the growth of these companies over the generations across multiple family lines, comes the succession conflicts. Such conflicts are understandable since family members of different generations may develop differing views in respect of charting the growth path of the business. These complexities can lead to disputes that involve legal, operational and regulatory issues.
One such case is the Kirloskar family dispute, which highlights the intersection of corporate governance, family settlements, and SEBI’s disclosure regulations. The conflict has sparked debates on whether private family agreements affecting listed entities should be disclosed under SEBI’s Listing Obligations and Disclosure Requirements Regulations, 2015 (‘SEBI LODR’). This article examines the key facts of the dispute, SEBI’s intervention, and its broader implications for corporate governance in India.
Factual Background
The Kirloskar family operates multiple businesses, including several listed companies such as Kirloskar Ferrous Industries Limited, Kirloskar Brothers Limited (‘KBL’) and Kirloskar Oil Engines Limited (‘KOEL’). The dispute originated from a deed of family settlement dating back to 2009 (‘DFS’). This DFS was executed between the Kirloskar family members, and it was intended to allocate and divide business responsibilities among the family members. However, it also contained a non-compete clause which has now become the subject matter of legal and regulatory scrutiny.
The dispute began when Sanjay Kirloskar, the managing director of KBL, alleged that Atul and Rahul Kirloskar, promoters of KOEL, violated the non-compete clause of the DFS by virtue of KEOL entering into pump manufacturing business (which is the business of KBL). He filed a civil suit in Pune[1], arguing that KOEL’s actions breached the non-complete clause under the DFS. The dispute remained largely internal until SEBI introduced amendments to the SEBI LODR in 2023[2], requiring disclosure of agreements that impose any form of restriction on listed entities.
Following these amendments, Atul and Rahul Kirloskar voluntarily informed KOEL’s board about the DFS but argued that it did not impact the company’s management or impose restrictions on KOEL. Based on this assessment, KOEL’s board determined that no disclosure was required under SEBI LODR.
However, Sanjay Kirloskar contested this position and wrote to KOEL, urging it to disclose the DFS under Regulation 30A of SEBI LODR. The matter escalated when he approached both the National Stock Exchange and SEBI, arguing that the DFS imposed indirect restrictions on KOEL’s business activities, and is thus required to be disclosed.
SEBI took note of Sanjay Kirloskar’s complaint and directed KOEL to disclose the DFS. KOEL argued before the SEBI that a) it was not a party to the DFS; b) the DFS was signed in an individual capacity by family members and did not bind KOEL as an entity; and c) the agreement did not affect KOEL’s management or decision-making. Despite these arguments, SEBI maintained its position, stating that the non-compete clause indirectly restricted KOEL from entering into a competing business, making its disclosure necessary under the SEBI LODR.
Does the subject matter being sub-judice affect the role of SEBI?
A crucial aspect of this case is whether SEBI should intervene when a matter is sub judice (under judicial consideration). The civil suit filed by Sanjay Kirloskar in Pune is being heard under Sections 11, 34, and 38 of the Specific Relief Act, 1963, which deals with enforcement and specific performance of agreements.
KOEL argued that since the DFS dispute was already being examined by the civil court, SEBI should refrain from regulatory intervention until a legal verdict was reached.
However, SEBI countered that its jurisdiction over disclosure norms is independent of the civil court’s ruling on contractual obligations. SEBI stated that the case pending before the civil court does not directly deal with non-disclosure of the DFS and hence there should be no bar on SEBI in its adjudication.[3] The issue of disclosures as per SEBI LODR lies with SEBI and hence it is under its purview to direct the disclosure of such agreement.
Doctrine of privity of contract
KOEL has consistently maintained that it has neither signed, ratified, nor agreed to be bound by the DFS, nor has the agreement been incorporated into its charter documents. Consequently, KOEL asserted that the DFS does not impose any binding obligations on it, and therefore, it should not be subject to SEBI’s disclosure requirements in this regard.
The doctrine of privity of contract states that only parties to a contract can enforce its terms or be bound by its obligations. This raises an important question in the context of SEBI-mandated disclosures – whether a listed entity can be held accountable for obligations imposed by a family settlement agreement or any private arrangement on its promoters. SEBI’s stance in the Kirloskar dispute appears to compel a listed company to disclose agreements that impose restrictions on it, even if it was not a party to such agreements.
The enforceability of agreements like the DFS which concern the listed entity – though not in relation to the parties who signed the agreement – may continue to be subject to legal scrutiny under the doctrine of privity. Courts may need to determine whether such agreements create legally binding obligations on a listed entity or if they merely serve as a disclosure requirement without enforceability. This remains a crucial area for future litigation and regulatory interpretation.
Impact of disclosures and regulator’s role
The pertinent question that arises is whether family disputes also come under the ambit of disclosure and are required to be disclosed to SEBI. SEBI in its circular[4] specifically states that a family settlement agreement to the extent that it impacts management and control of a listed entity needs to be disclosed.[5] It also provides that an agreement, which subsists as on the date of the notification, entered by promoters which either directly or indirectly imposes any restrictions on the listed entity needs to be disclosed to the stock exchanges.[6]
While SEBI’s mandate is to protect investors’ interests and uphold the integrity of the securities market, the disclosure of such agreements can have far-reaching implications. It may lead to increased scrutiny and potentially influence the share prices of listed entities indirectly impacted by such agreements. Making agreements public could also frustrate counterparties who expect confidentiality clauses in their agreements to be upheld.
From a regulatory perspective, SEBI’s role in mandating disclosures of material events is to ensure that investors have access to all relevant information necessary for informed decision-making. This role becomes even more crucial in cases like the Kirloskar family dispute, where agreements such as the DFS could indirectly affect the governance and operations of listed entities. By requiring disclosures of agreements like the DFS, SEBI seeks to eliminate ambiguities, promote corporate governance, and create a fair playing field in the securities market. In the Kirloskar case, for instance, SEBI identified that the non-compete clause in the DFS, even though it was a private family agreement, had implications for the listed entities promoted by the family members. By mandating its disclosure, SEBI addressed potential investor concerns about undisclosed agreements that might influence strategic decisions or restrict the company’s ability to enter certain business segments. This kind of transparency allows investors to assess risks more accurately, trust the governance framework, and make informed investment decisions.
KOEL had stated that KBL had already disclosed the DFS in the public domain and therefore the sole intention of the complaint filed either by KBL or Mr. Saniay Kirloskar is to make SEBI a tool to settle scores in a private family dispute. KOEL’s position suggests that once a disclosure has been made, there is no further regulatory obligation for SEBI to intervene. SEBI countered this argument by highlighting that while KBL had disclosed the DFS, however, each entity must independently fulfil its disclosure obligations under the SEBI LODR. SEBI rejected the notion that parties should interpret the necessity of disclosure based on their own understanding of the agreement’s relevance, as this would lead to regulatory uncertainty and inconsistent disclosures. SEBI’s response underscores the principle that disclosure requirements are not contingent on whether an entity perceives an agreement as relevant but are instead dictated by clear regulatory mandates to ensure market transparency.
Retrospective applicability
A key takeaway from the decision is the reaffirmation that SEBI LODR do not have retrospective applicability, meaning that agreements executed before the amendment cannot be subjected to new disclosure requirements unless they continue to have a binding effect on the listed entity. This principle is critical in the present case, as the DFS was executed prior to the amendment that introduced mandatory disclosures for agreements imposing restrictions on listed entities. KOEL’s position, therefore, gains some strength in arguing that SEBI cannot retroactively enforce disclosure obligations that did not exist at the time the DFS was executed. However, SEBI’s counter to this is that while the agreement itself predates the amendment, its impact on KOEL remains ongoing, thereby making it subject to disclosure under the current regulatory framework. This highlights an important regulatory challenge – balancing the principle of non-retrospectivity with the need to ensure transparency in cases where past agreements continue to influence corporate governance.
The dispute underscores the potential for regulatory mechanisms to become entangled in private family conflicts, raising concerns about the line between necessary disclosures and undue regulatory intervention. As SEBI continues to refine its approach, companies going through similar issues will need to carefully assess not just the letter of the law but also its broader implications on governance, investor confidence, and long-term business strategy.
Written By Nidhi Arora (Partner) and Amiya Krishna Upadhyay (Associate)
[1] Sanjay Chandrakant Kirloskar v. Atul Chandrakant Kirloskar, Spl.C.S./4286/2018
[2] Disclosure of material events / information by listed entities under Regulations 30 and 30A of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
[3] Para 6.26 of SEBI’s Letter in Intimation dated 31st December by KOEL under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015. (Link)
[4] Disclosure of material events / information by listed entities under Regulations 30 and 30A of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. (Link)
[5] Clause 5, Disclosure of material events / information by listed entities under Regulations 30 and 30A of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015
[6] Clause 5A, Disclosure of material events / information by listed entities under Regulations 30 and 30A of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015
