Mumbai: The family feud and the consequent legal battle among the promoters of Kirloskar Brothers Ltd come against the backdrop of an alleged case of insider trading by Atul and Rahul Kirloskar in 2010. Rahul and Atul Kirloskar recently approached the National Company Law Tribunal (NCLT) to oust sibling Sanjay Kirloskar as chairman and managing director of Kirloskar Brothers, claiming that the board he leads has been arbitrarily rejecting their requests to sell or buy Kirloskar Brothers shares.
Eight years ago, on 6 October 2010, some top officials and some members of the promoter group had sold 13.5% of company shares worth about ₹ 275 crore before financial results were reported on 8 October 2010.
In 2012, the Securities and Exchange Board of India (Sebi) sent a letter to the company seeking transaction details.
Following this, Kirloskar Brothers hired law firm AZB and Partners to conduct a forensic audit to verify allegations of insider trading. The audit found that top officials, including the two brothers, mis-stated in a regulatory disclosure that they were not in possession of unpublished price-sensitive financial information while seeking clearance to sell Kirloskar Brothers shares. The code of conduct for promoters and other key management personnel requires them to take the board’s clearance before transacting in the company’s shares.
A copy of the forensic audit has been reviewed by Mint.
A person familiar with the development said “the forensic audit report is being considered for the investigation". Sebi has not concluded its probe yet.
“The financial performance of Kirloskar Brothers was discussed collectively by the promoter group individuals on a regular basis," the AZB report said.
When AZB went through the pre-share sale clearance declaration, it found that the promoters had declared they did not possess any unpublished price-sensitive information at the time of share sale.
“However, while examining records of Kirloskar Group-Management Operating Board (KG-MOB), annual operating plan (AOP) and other relevant financial information circulated or discussed with the promoters or board of directors in meetings, it was found that financial performance of the company was discussed collectively by the promoter group on a regular/periodic basis. Contrary to the disclosure made by the promoter group individuals, the information could be constituted as price sensitive," AZB said in its report.
Sebi norms for insider trading mandate that a share sale cannot be done while in possession of unpublished price-sensitive information or UPSI.
The audit report added that the relevant AOP providing forecasts for fiscal 2010-11 was circulated to the directors by the finance department of Kirloskar Brothers on 31 March 2010.
In response to Mint’s emailed query, a spokesperson for Atul and Rahul Kirloskar said: “As far as we are aware, no investigation is pending in respect of the said transaction undertaken in 2010." The person added that they reserve legal rights on factually incorrect statements.
Sandeep Phadnis, associate vice president and head secretarial at Kirloskar Brothers declined to comment on the forensic audit, but added that they were unable to comment on any query at this stage as the issues are sub judice.