India’s leading proxy advisory firms Institutional Investor Advisory Services India Limited (IiAS) and Stakeholders Empowerment Services (SES) have advised shareholders against voting for a forensic audit of Kirloskar Brothers (KBL), citing a lack of compelling reasons and a possible attempt by requisitioners to settle private or family issues.
The promoter family has been embroiled in a dispute related to a deed of family settlement (DFS) for the assets of the Kirloskar Group. Sanjay Kirloskar and KBL allege that a faction of the promoter family (Atul Kirloskar, Rahul Kirloskar and their group companies) have breached the DFS by entering into a directly competitive business through their entity – Kirloskar Oil Engines Limited by acquisition of controlling stake in La-Gajjar Machineries Private Ltd.
This has resulted in litigation involving Kirloskar Brothers Ltd, its promoters and other Kirloskar group companies along with their promoters.
On 21st Oct 2022, Atul Kirloskar led Kirloskar Industries Limited (KIL) wrote to the exchanges that it’s board has approved to request convening an Extraordinary General Meeting (“EGM”) of the shareholders of Sanjay Kirloskar led KBL. Kirloskar Industries Limited is one of the largest share holders of KBL with about 23% equity.
Their key demands were to seek a forensic audit on the legal expenses and also raised questions around DFS and the Board of Directors.
On 16th November 2022, Kirloskar Brothers called for the EGM on the 8th of December as requested by KIL but refuted all the allegations made by Atul Kirloskar led KIL along with necessary documents while updating the exchange.
Institutional Investor Advisory Services India Limited (IiAS) an advisory firm, providing participants in the Indian market with independent opinions has issued an advisory against the suggestions made by Atul Kirloskar led KIL.
Justifying their recommendation, the IIAS report said “KBL’s legal expenses, at about 2% of revenues, is comparable to several of the S&P BSE 100 companies”. It added that “We believe the questions raised by the requisitionists do not necessarily warrant a forensic audit at this stage, given KBL’s disclosures.”.
SES, It is the first Company to register as Proxy Advisor under SEBI (Research Analysts) Regulations founded by Former Executive Director of Indian securities market regulator SEBI said the proposed resolution was not in the interest of the investor and requisitioners appear to approach shareholders with a mala fide intent.
SES said the proposal for a forensic audit lacks proper rationale and given the history of the disputes between the parties, it may be a tool to settle individual scores.
The proxy firm said it were against the appointment of an independent and reputed external entity as an independent forensic auditor to conduct a forensic audit to investigate expenses incurred by Kirloskar Brothers on legal, professional and consultancy charges over the past six years.
SES’s view was that the request has not come from the regulator or minority shareholder but from one set of promoter shareholders, who appears to be at loggerheads with another.
Kirloskar Industries’ Atul Kirloskar and Rahul Kirloskar, who requisitioned this EGM, have a combined shareholding of around 25%. The requisitioners have not provided compelling reasons for demanding a forensic audit of the company, SES said. While the legality of such a resolution is not in question, the rationality of this requisition has to be assessed, it said.
There are various suits and claims initiated by KBL in the past seven years, given the alleged violation by Rahul Kirloskar and Atul Kirloskar of the deed of family settlement (DFS) so it is undoubtedly a case of dispute between two sets of promoters and there is an apparent attempt to pressurise one party against the other using their financial muscle to achieve their individual objective, SES said.
KBL had given a detailed page disclosure to the exchanges which was the basis of recommendations by the proxy advisory firms. Certain key observations are:
- Atul Kirloskar, Rahul Kirloskar and Kirloskar Industries Limited (Requisitionists) have entered into competing businesses by acquiring controlling stake in La-Gajjar Machineries Private Limited (through Kirloskar Oil Engines Limited), in breach of the Deed of Family Settlement (DFS). Accordingly, the company has had to incur legal expenses to protect its business and interests.
- There is ongoing litigation pertaining to the DFS for the benefit of the company and its shareholders. Further, the company has also been forced to defend itself in proceedings adopted by Kirloskar Industries Limited, Rahul Kirloskar and Atul Kirloskar.
- Proceedings also include show cause notices issued by SEBI alleging Insider Trading of the company’s shares by Atul Kirloskar, Rahul Kirloskar and their respective family members.
- KBL disputes the allegations levelled by Atul Kirloskar and Rahul Kirloskar that Rs. 2.74 bn has been paid towards professional and legal expenses since 2016 and that a large portion of this expense was for facilitating disputes of the company’s Managing Directors. Over the last seven years: legal, professional and consultancy charges have aggregated to Rs. 2.74 bn. The majority of expenses have been paid to consultants such as KPMG, Ronald Berger and Boston Consulting Group for growth and business. The actual legal expense for the last seven years is Rs. 700 mn, of which only Rs. 280 mn has been spent towards the ongoing Kirloskar group litigation.
- Legal expenses amounting to Rs. 700 mn over the last seven years has been expended against a consolidated turnover of Rs. 25.0 bn per annum. Such expenses include legal expenses towards the company’s tax matters, labour related matters, arbitrations pertaining to protection of company’s project business, cases related to domestic and international projects of the company, patents, property documents and overseas business. Further, the company is the only MultiNational Corporation in the Kirloskar Group with manufacturing subsidiaries in four different continents.
- As far as litigation presently ongoing with the requisitionists: it not only includes proceedings initiated by the company but also includes the proceedings initiated by the requisitionists towards the company, which it is defending. Litigation costs for these proceedings works out to an average of Rs. 4 crs per year over the last seven years.
- KIL, Rahul Kirloskar and Atul Kirloskar have not expressed any concerns towards the accounts (which includes legal and consultancy charges) in the company’s annual report. They have also not voted against any of the adoption of accounts resolutions.
