Finolex Cables-Eye-Opener

#Moneylife #NCLT #NCLAT #NSE # BSE # Sebi #Feud #Chabrias The tussle between the two factions of the Chhabria family, fighting for the control of Finolex Cables Ltd, is among the many family feuds that are currently on show and promises to be more entertaining than some of the competing ones!

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It is a highly convoluted dispute with many sub-plots, including a criminal case for forgery which may make the succession episodes recorded in the history of many dynasties of the past quite pedestrian!

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The order of the national company law appellate tribunal (NCLAT) issued last week has all the ingredients of an Agatha Christie novel and may further queer the pitch in the tiff for the turf!

The crux of the dispute, which forms the basis of many petitions and appeals in the countless fora around the country, is that the original promoter of the Finolex group of companies, Prahlad P Chhabria desired to apportion the empire between the different factions of the family, more specifically, between his son Prakash and the nephew, Deepak.

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This intent was supposed to have been implemented by an arrangement whereby the articles of association of the holding company of the group, Orbit Electricals Pvt Ltd, were amended to reflect the allocation of the portfolio of the operating companies, especially Finolex Cables and Finolex Industries, between Deepak and Prakash Chhabria, respectively.

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However, in a conspectus of facts much disputed and still pending adjudication, Prakash took full control of Orbit Electricals to the exclusion of Deepak Chhabria and carried out various corporate actions finally resulting in the matter reaching the NCLAT, where the orders were delivered last week.

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Finolex Cables conducted its annual general meeting (AGM) on 29 September 2023 and one of the items on the agenda for voting by the shareholders was for the reappointment of Deepak Chhabria (DIN 01403799) as a whole-time director designated as an ‘executive chairman’ of the company for five years with effect from 1 July 2023 to 30 June 2028.

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As already mentioned, Orbit Electricals, by virtue of the dispute, had passed the control to Prakash Chhabria. As a consequence of this, Deepak Chhabria lost his status as the authorised person to vote on behalf of the said promoter shareholder.

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Since Prakash Chhabria took control of Orbit, though in highly disputed circumstances, the voting on the reappointment of Deepak Chhabria became a foregone conclusion. Therefore, the Supreme Court was moved to stall the voting on the resolution.

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However, no such injunction was granted; but the Court, by its order dated 26 September 2023, held that the voting results would be subject to the final outcome of the ownership (status) dispute in the main petitions before the civil courts and NCLAT.

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Finolex Cables, which still remains operationally under the control of Deepak Chhabria, had withheld the release of the voting data. Orbit had approached the Supreme Court for the release of the voting data and, based on the orders of the Court, the voting result was released last week.

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Predictably, the promoter Orbit (46,956,120 shares) voted against the reappointment of Deepak Chhabria. Public non-institutions, which include the holding of Finolex Industries (22,187,075 shares), voted 78% against the resolution. Interestingly, the public institutions had voted 65% in favour of the reappointment and 35% against.

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There are two parts to the dispute between the two factions. The first part, which was partially decided by the NCLAT order, is the distribution of control through the shareholding of Orbit in the group companies as stated to have been expressed by the original promoter, Prahlad Chhabria.

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The second is the purported agreement between the two listed entities, Finolex Cables and Finolex Industries, on how the voting would be affected on resolutions in regard to the cross-holding each has in the other. This memorandum of understanding (MoU), dated 11 October 2011, is also a subject matter of litigation but did not form part of the dispute decided by the NCLAT’s order.

So, the focus presently moves to the NCLAT order and its implications on the current impasse on the voting on the reappointment of Deepak Chhabria. The aspect of the dispute that NCLAT decided on pertains to the validity of an amendment made to the articles of association (AoA) of Orbit.

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Articles 59 and 60 were inserted by an extraordinary general meeting (EGM) of Orbit held on 8 September 2012 to carry out the intent of the promoter, about who among the family members should manage the different entities in the group and the person authorised to so represent in each case.

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It was under this article that Deepak Chhabria was made the Orbit representative on Finolex Cable and could vote on its behalf.

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Prakash Chhabria claimed that the said articles were deleted in an EGM of Orbit held on 3 May 2019. Deepak Chhabria contended that no such EGM was held and, in any event, those two articles would fall within the nature of ‘entrenched articles’ as now recognised under Section 5(3) of the Companies Act 2013, and can be amended only in a manner specified.

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The concept of ‘entrenched articles’ is new to the regime of corporate administration in India and this dispute is the first such occasion when it has come up for judicial scrutiny.

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Entrenched articles can be amended only by a specific method prescribed in each case and the normal method of a special resolution will not be adequate. In the case of private limited companies, such Articles can be amended only if all the members are present and vote.

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As a fact, NCLAT found that in Orbit’s case the EGM on 3 May 2019 did not follow the procedure as prescribed. Prior to reaching this finding, the Tribunal satisfied itself that these two articles, though introduced in the charter of the company before the introduction of the Act in 2013, had been subsequently, by conduct of the parties, affirmed to be entrenched articles.

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The voting done by Orbit against Deepak Chhabria’s election is now subject to question, as the deletion of the two articles of Orbit stands invalidated. Deepak Chhabria’s status as the authorised person of Orbit gets reinstated in this process.

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While the order of NCLAT is unlikely to rest at this stage and will be taken on further appeal, the pitch in this battle has been queered significantly.

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For those wishing to make arrangements between different factions of a family to avoid disputes and squabbles, the Chhabria contest has many lessons to learn from.?

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The internecine clash of the cousins staying across each other in the same street would likely pack more action than the arch rivals across the border slugging it out today!

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(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.