According to company filings, the firm was originally promoted by two brothers Pralhad Chhabria and Kishan Chhabria; both brothers being equal partners in the business. That arrangement continued in Finolex Cables, in which the entire equity of the firms was held on equal basis by the two, their relatives and investment companies.
Over the years, a number of firms including Finolex Industries (formerly known as Finolex Pipes Limited) were formed on an equal ownership basis by the two brothers and the company, and various associate companies
came to be known in as the “Finolex Group”.
The group grew and there were eventually fifteen investment firms created for tax planning purposes and legal provisions.
With laws including restrictions and controls being relaxed and to avoid the unnecessary burden of compliance issues due to having fifteen investment companies, the company decided to amalgamate the fifteen investment companies
into one investment company namely called Orbit Electrical Private Limited which was a closely held private firm.
It was when these investment companies were amalgamated into Orbit, and when the shares were being calculated that founder Pralhad Chhabria informed his younger brother Kishan that due to certain past accounting entries done by him in the books of the 14 amalgamating companies, his shareholding in Orbit would become 88.10% and that his brothers' share would be 7.30% post amalgamation.
Often its been a standard operating procedure for promoters to merge and join companies almost on an ad hoc basis and to increase their shareholding but of late SEBI has guidelines preventing entities to do the same especially for listed companies,"says Mohit Saraf, senior partner of L&L Partners.
His elder brother's proposal shocked Kishan Chhabria and he raised objections as the business had started out being owned on an equal basis between the two families and no dividends were ever declared by any of these fourteen investment companies nor any buy back of shares ever done by them, so he declined to give consent for the amalgamation.
However, in due course it was generally agreed upon by both brothers that even as the elder brother would control the dominant entity, ownership would actually be equal between the two families.
The filing goes on to state that Pralhad Chhabria agreed that he would remedy the situation by putting his entire shareholding of 82.07% held in Orbit into a private trust. In effect that Pralhad Chhabria Trust that would be settled by him for the benefit of both families and in consideration his brother and family should give their consent as shareholders of the fourteen amalgamating investment companies into Orbit.
However, as is the case in industrial families where there are disputes, after Pralhad Chhabria died in 2016, the next generation's bone of contention emerged stronger than ever. Prakash Chhabria, son of Prahlad Chhabria claimed that before his death his father gifted 70.4% shareholding in Orbit out of a 82.07% shareholding to him by a gift deed dated 28th March, 2016. The gift deed is not a registered document as is required under the provisions of law in order to be a legally binding document, according to the filing.
Filings by Finolex say that the transfer under the alleged gift deed has been challenged before the appropriate Courts by members of Kishan Chhabria's family to include Deepak Chhabria, who is executive chairman of Finolex Cables did not return telephone calls made to him.
Prakash Chhabria couldn't be reached as of press time.
A known source familiar with the matter said that the group's founders are "both Kishan Chhabria and Pralhad Chhabria not Pralhad Chhabria alone."
The source says that Deepak and his father Kishan Chhabria have challenged the gift deed in the Pune Civil Court and that the agreement between the two founding brothers, the trust deeds, the articles of association of Orbit, transcript of recordings, reports of forensic experts and Pralhad’s last and final will are all part of the Court proceedings.
The matter is being heard in the Bombay High Court. "The bottom-line is that all promoters need to follow governance amongst themselves at the family level before they can extend the same to their stakeholders and investors "Saraf adds."These sort of legal doubts cast doubt on any company's longevity and throw a cloud over the firms future operations." Its also a risk globally for Indian promoters who hope to receive foreign investments.