Amid Kirloskar family feud, forensic audit points to insider trading

The ongoing case of family feud and the consequent legal battle among the promoters of Kirloskar Brothers Ltd comes against the backdrop of an alleged case of insider trading by Atul and Rahul Kirloskar in 2010.

To oust sibling Sanjay Kirloskar as chairman and managing director of Kirloskar Brothers, Rahul and Atul Kirloskar recently approached the National Company Law Tribunal (NCLT). They claimed the board that Sanjay leads has been arbitrarily rejecting their requests to sell or buy Kirloskar Brothers shares.

Almost eight years ago, on October 6, 2010, some top officials and some members of the promoter group had sold 13.5% of the company shares worth about rupees 275 crore before financial results were reported on 8 October 2010.

The Securities and Exchange Board of India (Sebi) sent a letter to the company seeking transaction details, in 2012.

Following the letter from SEBI, the Kirloskar Brothers hired law firm AZB and Partners to conduct a forensic audit to verify allegations of insider trading. It is then that the audit found top officials, including the two brothers, mis-stated in a regulatory disclosure that they were not in possession of unpublished price-sensitive financial information while seeking clearance to sell Kirloskar Brothers shares.

It is to be noted that 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 person familiar with the development said “the forensic audit report is being considered for the investigation”. Sebi has not concluded its probe yet.

The AZB report said, “The financial performance of Kirloskar Brothers was discussed collectively by the promoter group individuals on a regular basis.”

As 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through the pre-share sale clearance declaration, it found that the promoters had declared they did not possess any unpublished price-sensitive information at the time of share sale.

The report from AZB further mentioned, “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.”

According to the 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 also 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.

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,” as said to Mint. The person also syated that they reserve legal rights on factually incorrect statements.

Associate vice president and head secretarial at Kirloskar Brothers- Sandeep Phadnis, 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-juiced.

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