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Dec 02, 2009, 09.20 PM IST | Source: CNBC-TV18/Mint

Kirloskar brothers restructure group, dilute cross-holdings

The three Kirloskar brothers--Sanjay, Atul, Rahul--and their cousin Vikram are restructuring their ownership of the companies they independently manage in the USD 2.4 billion (around Rs 11,110 crore) Kirloskar group by diluting cross-holdings.

Kirloskar brothers restructure group, dilute cross-holdings
Source: Mint

The three Kirloskar brothers—Sanjay, Atul, Rahul—and their cousin Vikram are restructuring their ownership of the companies they independently manage in the USD 2.4 billion (around Rs 11,110 crore) Kirloskar group by diluting cross-holdings.

Last week, Atul Kirloskar’s Kirloskar Oil Engines Ltd (KOEL) sold its stake in six unlisted firms that were controlled by his cousin Vikram Kirloskar for Rs 250 crore. KOEL owned 11% of Toyota Kirloskar Motor Pvt Ltd (TKM), 10% of Toyota Kirloskar Auto Parts Pvt Ltd (TKAP), 3.82% of Kirloskar Toyoda Textile Machinery Pvt Ltd, 44.6% of Toyota Tsusho India Pvt. Ltd, 26% of TG Kirloskar Automatic Pvt. Ltd and 10.99% of Denso Kirloskar Industries Pvt Ltd.

“These investments did not reflect the return on equity on Kirloskar Oil Engines, nor were related business and hence, we decided to sell them,” said a member of the family, who did not want to be identified.

The Kirloskar group was founded by Laxmanrao Kirloskar in 1880. His son Shantanurao Laxmanrao Kirloskar spearheaded the group and established established KOEL and Kirloskar Electric Co Ltd in 1946, owns four major listed companies that are managed by the three brothers.

Sanjay Kirloskar runs Kirloskar Brothers Ltd (KBL), Atul Kirloskar runs KOEL and Kirloskar Ferrous Industries Ltd, and their younger brother Rahul Kirloskar manages Kirloskar Pneumatic Co Ltd. Cousin Vikram manages the auto component joint ventures such as TKM and TKAP in Bangalore. All are fourth-generation Kirloskars.

The restructuring of the group—only the second such in its history since the last one in 2000 when Vijay Kirloskar, uncle of the three brothers and their cousin, parted ways from the group; the settlement saw him taking control of Kirloskar Electric and 15 companies—began earlier this year with KBL and KOEL transferring their investments, largely holdings in other group firms, into separate companies.

The transfers are meant to give shareholders the choice of owning shares in both manufacturing and investment firms, a second member of the Kirloskar family said. He, too, didn’t want to be identified.

The restructuring will mean that the three brothers and their cousin will now directly own shares in the firms they manage, rather than through holding companies. Critically, it will empower the four to take independent decisions on fund-raising, joint ventures and diversification . It will also allow them to better focus on their businesses, bring clarity to shareholders and create fewer succession issues.

“Such restructuring is necessary to sort out issues such as long-term succession, better focus...and long-term performance of the companies,” said the first family member mentioned in the story.

“This happens all the time and fragmentation is natural,” said Sankaran Manikutty, professor of business policy and strategy at the Indian Institute of Management, Ahmedabad.

Manikutty added that few family business groups stay as one unit past the third generation of the family. He is the co-author of a 2003 paper on family business that won an award from the Boston-based Family Firm Institute, a body of family-run firms.

Ideally, there should not be any cross-holdings between the companies, said the second family member mentioned. “This is an inter se transfer of shares and there is no change in the ownership of the group in the company and Better Value Holdings (will) cease to be holding company for the group,” he added.

KBL was earlier held through Better Value Holdings Pvt Ltd (BVHPL), an unlisted family-owned holding firm.

The inter se transfer of shares, which involves stocks changing hands among co-promoters, is a precursor to the restructuring. KBL will now be the holding company for four unlisted companies that make components for pumps.

BVHPL “has been our holding company for nearly a decade and it is only an inter se transfer of shares to individual names. There is no split between the brothers. We are working very closely between the brothers and management, and ownership has always been insulated,” said the first family member.

Mint had reported in September that Sanjay Kirloskar and his wife Pratima Kirloskar would become the largest shareholders of KBL, which makes water pumps and executes water supply and irrigation contracts.

The couple will jointly own 36.45% of KBL, while the remaining promoters’ stake will be held by family members, including Atul, his wife Arti, and Rahul Kirloskar. Each of them will have less than 3%.

The 6.28% stake held by BVHPL in KOEL has been transferred mainly to Atul and Rahul Kirloskar. The firm, which makes engine valves and diesel generator sets, is run by Atul Kirloskar. The promoters’ stake is 62.37%.

For the fiscal year ended March 2008, KBL—India’s largest manufacturer and exporter of pumps and the largest infrastructure pumping project contractor in Asia—reported investments of Rs 1,278 crore in its listed and unlisted firms. These include Rs 293 crore of investments in unlisted subsidiary companies such as Kirloskar Silk Industries Ltd and Kirloskar Constructions and Engineers Ltd.

Holding companies, by law, are optional and were created for a number of reasons, Anil Harish, legal counsel and managing partner at DM Harish and Co., a law firm that advises clients on corporate law and tax, had said in a September interaction. They allow family members to exercise better control and save on wealth and estate tax, he added.

Until 1993, individuals who owned shares had to pay 8% wealth tax on the value of the stock on the last day of a fiscal. Inheritors of wealth also had to pay 65% estate duty till 16 March 1985 on the value of promoters’ assets. Promoters were exempt from this tax because they held shares through a holding firm rather than individually, Harish said.

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