Nothing Is Fine At Finolex Cables: Promoters Fight It Out As Shareholders Suffer

Prahlad Chhabria and Kishandas Chhabria emigrated from Karachi to Pune in 1945 and set up an electrical cables shop.

As the business grew rapidly, the brothers decided to step into cable manufacturing in 1958 as Indian Cable Industries Limited. The company soon diversified into manufacturing light duty cables and also acquired Alpha Rubber Company.

At this point, it renamed itself Finolex Cables Limited. It rode the waves of industrialisation and the adoption of telephones, through the power cables and Jelly-Filled Telephone cables businesses.

In parallel, the promoters also established Finolex Industries, a company that focuses on manufacturing PVC and CPVC pipes and fitting, for both plumbing and agriculture segments.

Family Dispute

After Kishandas Chhabria and Prahlad Chhabria hung their boots, their sons — Deepak Chhabria and Prakash Chhabria — took on the leadership positions, as chairmen, in these companies.

Deepak heads Finolex Cables, while Prakash heads Finolex Industries.

But while Finolex Industries stock has doubled over the previous five years, Finolex Cables has given its shareholders a meagre 10 per cent return over the same period.

The low return partly is the result of Finolex Cables' slow sales growth, which compounded at 3 per cent over the last five years. But the company suffers from a much larger issue.

The decline in the cable manufacturer’s stock price began in 2018 when the fight between Deepak and Prakash Chhabria became public. The cross-holdings in the two companies, and a majority ownership in the holding company Orbit Electricals, allowed Prakash Chhabria to oppose several special resolutions in the 2018 AGM.

These resolutions dealt with reappointment of the then chief financial officer, Mahesh Viswanathan, and that of Deepak Chhabria as Executive Chairman.

Nevertheless, despite the resolutions being defeated at AGMs, the current management continues to run the day-to-day operations of the company.

Ownership Issues

The root of the issue boils down to a management control issue between the two brothers. While the Finolex Group was growing, the promoters controlled the entire group through 15 investment companies.

But as the group got larger and regulations became relaxed, the promoters decided to forgo the complicated group structure for a simpler one and amalgamated all 15 companies into a single holding company — Orbit Electricals.

The elder brother, Prahlad Chhabria, had an 88 per cent share in Orbit whereas his brother, Kishandas Chhabria, received a 7 per cent stake. Kishandas’ side of the family wasn’t happy with the distribution as the business had begun as an equal partnership.

But, it was decided that Prahlad Chhabria held the shares as trustee for Kishandas’ family and that both families would have an equal say on all business matters.

But in 2016, after the death of Prahlad Chhabria, his son Prakash claimed that his father had given him 72 per cent of the shares in Orbit through an unregistered gift deed.

A gift deed is not registered, and Deepak has claimed that the deed was forged and hence, is not valid.

“Two major corporate shareholders namely: Orbit Electricals Private Limited holding 30.7 per cent and Finolex Industries Limited holding 14.5 per cent aggregating to 45.2 per cent of the paid up share capital of the company voted against each of the resolutions for their respective reappointments. Both the aforesaid major corporate shareholders are under the management control of Mr. Prakash Chhabria, one of the promoters of the company who is currently in dispute with Mr D K Chhabria, another promoter who is in management control of the company which explains the reasons for such negative votes being cast by those companies. A contention has been raised that these votes were cast contrary to the mandate under their constitutional documents/contractual commitments, and these are the subject matter of challenge before the court(s) and the matter is thus sub-judice,” the company said in its fiscal 2020 annual report.

Yet, Prakash Chhabria retains management control of Orbit Electricals. He owns 45 per cent of Finolex Cables’ shares through Finolex Industries’ Direct Stake (30.7 per cent) and through Orbit Electrical (14.5 per cent).

Shareholders Suffer

Shareholder advisory services have put out reports with concerns about the company’s corporate governance. The management has continued running the company in spite of the defeat of special resolutions, which is unlawful.

Stakeholder Empowerment Services, a shareholder advisory based out of Mumbai, has also highlighted the contradictory nature of the resolutions for election of independent directors.

Finolex Cables’ secretarial auditors had also highlighted the company’s non-compliance in the 2020 Annual Report.

The two brothers are fighting it out in court, while minority shareholders are paying the price for the crisis. Several other companies operating in the same spaces have raced past these companies in terms of revenues, profits and valuations.

For instance, Astral Limited, a Pipes manufacturer, has grown its revenues at a compounded annual growth rate of 14 per cent, while Finolex Industries grew at 7 per cent.

Similarly, Polycab Cables and KEI have outperformed Finolex Cables in revenue growth. In terms of valuations, Finolex Cables trades at 14 times earnings while Polycab trades at 42 times earnings.

Companies with track records of poor corporate governance usually command lower valuations in the markets.