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 running on this model. However, with the growth of these companies down the generations with multiple family lines come the succession conflicts. It is understandable since promoters within the group might have differing views in respect of the direction of business to lead. These complexities can lead to disputes that spill over into legal, operational, and regulatory domains. A similar instance can be found in the Kirloskar group dispute, which finds itself intertwined with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. (‘SEBI LODR’)
Factual Background
The Kirloskar family operates multiple businesses including some listed companies such as Kirloskar Ferrous Industries Limited, Kirloskar Brothers Limited (‘KBL’) and Kirloskar Oil Engines Limited (‘KOEL’). The dispute culminates from a deed of family settlement (‘DFS’) dating back to 2009. This DFS was executed between the Kirloskar family members, and it consisted of a non-compete clause.
It was alleged by Sanjay Kirloskar in the civil court of Pune (‘Civil Suit’) that KOEL headed by Atul Kirloskar (promoter & chairperson of KOEL) and Rahul Kirloskar (promoter of KOEL) violated the non-compete clause when it entered into the pump manufacturing business of KBL headed by Sanjay Kirloskar.
After the introduction of amended regulations of SEBI LODR which mandate disclosures of any agreement entered into by promoters which directly or indirectly impose a restriction on the listed entity[1], KOEL received a letter from Mr Atul Kirloskar and Mr Rahul Kirloskar on July 27, 2023, addressed to the board of KOEL informing that a DFS was entered into among certain family members of the Kirloskar family in 2009 in their individual capacity. It was stated that the primary purpose of the DFS was the distribution of the shares held by various family members inter-se amongst themselves and that the DFS does not have any impact on the management and control of KOEL and hence no action is required with regard to regulation 30A of the SEBI LODR in respect of the DFS.
On July 31, 2023, KOEL received a letter from Mr Sanjay Kirloskar calling upon KOEL to disclose the DFS under regulation 30A of the SEBI LODR. Both the letters were placed before the board of KOEL and the board determined that KOEL is not a party to the DFS and it has not been signed on behalf of KOEL, therefore the DFS has no impact on the management or control of KOEL nor does it impose any restriction on KOEL. It further reached a conclusion that KOEL was not required to disclose the DFS under SEBI LODR regulations.
Further, a complaint was made by Mr. Sanjay Kirloskar to NSE relating to non-disclosure of DFS, on which response was sought by NSE from KOEL. In its response, KOEL on 11 September 2023, submitted to the NSE that the DFS is not binding on KOEL. In another communication by NSE on 9 February 2024, NSE requested KOEL to submit the disclosure of DFS, to which KOEL reiterated its earlier reply and insisted that KOEL is not required to disclose the DFS.
Mr Sanjay Kirloskar further wrote to SEBI regarding non-disclosure of DFS under regulation 30A of SEBI LODR. SEBI in a mail to KOEL asked it to disclose the DFS under regulation 30A of SEBI LODR. Regulation 30A of SEBI LODR read with Clause 5A of Para A of Part A of Schedule III of the SEBI LODR provides for disclosure of any agreement entered into by the promoters which directly or indirectly imposes a restriction on the listed entity.[2] KOEL filed an appeal in the SAT against this communication. SEBI submitted that they shall hear the representations filed by the appellants and the appellants agreed to file their representations within four weeks. SAT directed the matter to be heard by SEBI for disposal of the said representations within six weeks.[3] KOEL filed its representations to SEBI arguing that the company is not a party to the DFS and it was signed in an individual capacity. SEBI in a letter dated 30th December after taking note of the representations ruled that the DFS need to be disclosed to the exchanges by KOEL.[4] SEBI further opinionated that non-compete restriction between the parties (promoters and chairman of the listed entity) to DFS would extend to the listed entities promoted by them as the DFS was itself executed for the purpose of ownership and management of different business amongst the Kirloskar family members.
Further, SEBI said that the aforesaid clause imposed restriction on KOEL in a sense that it cannot engage in a business similar to other entities managed by the parties to DFS and the disclosure of DFS is warranted under the SEBI LODR.
Does the subject matter being sub-judice affect the role of SEBI?
The role of the regulator when the matter is sub-judice needs to be understood on a case-to-case basis and it would have to be clarified as to what issues are sub judice in court of law. In this dispute, the Civil Suit is sub judice in the court of Pune under section 11, 34 & 38 of the Specific Relief Act.[5] SEBI stated that these sections do not directly deal with non-disclosure of the DFS and hence there should be no bar on SEBI in its adjudication.[6] 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.
Legality of disclosure of family disputes
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[7] specifically states that a family settlement agreement to the extent that it impacts management and control of a listed entity needs to be disclosed.[8] 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.[9]
The reason behind SEBI’s requirement of listed entities making such disclosures can be traced in the consultation paper on review of disclosure requirements for material events/information required under regulation 30 of SEBI LODR[10], which mentions that SEBI has received many complaints regarding disclosures that are delayed and inadequate by the listed companies. The listed companies have also complained that the regulations lacked a standardisation which makes it hard for the companies to determine the materiality of an event.[11]
Impact of disclosures and regulator’s role
While SEBI’s mandate is to protect investors’ interests and uphold the integrity of the securities market, the disclosure of such disputes can have far-reaching implications. It may lead to increased scrutiny and potentially influence the stock prices of listed entities involved in such disputes. Further, these disclosures might place listed entities in a challenging position where sensitive internal agreements become public knowledge, potentially affecting operational efficiency and business relationships. 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.
Conclusion
The disclosure requirements by SEBI serve as a dual edged sword. On one hand, the confidentiality and discretion that are required by the parties of large commercial transactions of listed entities are pierced by virtue of these disclosures. On the other hand, the investors need relevant information to make an informed decision, and these disclosures serve the same thereby serving the fundamental purpose of investor protection and market transparency. The argument of private party agreements needing confidentiality may fall flat in front of SEBI's mandate for listed entities which bolsters investor protection. In sum, by bringing agreements like the DFS into the public domain, SEBI is not merely enforcing compliance but redefining the boundaries of accountability for listed entities.
Written by: Nidhi Arora (Partner) and Amiya Krishna Upadhyay (Associate)
[1] 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.
[2] ibid
[3] Kirloskar Oil Engines Limited v. SEBI, Appeal No. 601 of 2024, SAT.
[4] Intimation dated 31st December by KOEL under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015. (Link)
[5] Sanjay Chandrakant Kirloskar v. Atul Chandrakant Kirloskar, Spl.C.S./4286/2018
[6] 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.
[7] 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.
[8] 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
[9] 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
[10] Para 2.5, Review of disclosure requirements for material events or information under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
[11] ibid