Peering through glass walls: defining SEBI’s regulatory bounds

Mr. Dharmvir Brahmbhatt is an advocate at Gujarat High Court and Mr. Jay Shah is a fifth-year law student at Gujarat National Law University.

Introduction

The Kirloskar Group, one of India’s oldest and most reputed business families, is at the centre of a legal dispute with far-reaching implications for corporate governance and disclosure norms in India. The issue stems from the 2009 Deed of Family Settlement (DFS), an agreement delineating the division of ownership and control among different branches of the Kirloskar family. The Securities and Exchange Board of India (SEBI) has directed Kirloskar Oil Engines Ltd. (KOEL), a publicly listed entity, to disclose the DFS, citing investor interest and regulatory compliance. KOEL has challenged this directive before the Securities Appellate Tribunal (SAT), arguing that the DFS is a private family arrangement with no direct impact on shareholders.

The DFS was intended to resolve family ownership issues and avoid conflicts by allocating specific businesses to different branches. Sanjay Kirloskar retained control of Kirloskar Brothers Ltd. (KBL), a major pump manufacturer, while Atul and Rahul Kirloskar took charge of KOEL, specializing in engines and related products. The DFS also contained a non-compete clause preventing family members from entering competing businesses.

Core Legal Issue

The dispute originated when Sanjay Kirloskar alleged that KOEL had breached the DFS in two ways: first, by selling shares in KBL to Kirloskar Industries, another family-owned entity; and second, by acquiring La Gajjar Machineries, a pump manufacturer that subsequently used the Kirloskar brand name, allegedly causing brand confusion and harming KBL’s business interests. Despite mediation attempts, the matter escalated to SEBI in 2018, which dismissed the complaint. Appeals followed before SAT in 2021 and the Supreme Court in 2022.

In 2023, SEBI introduced new regulations requiring listed companies to disclose agreements impacting management or shareholder interests. SEBI invoked these rules to mandate KOEL’s disclosure of the DFS, arguing that its provisions, particularly the non-compete clause, constituted material information. KOEL maintains that the DFS is a private family matter that does not impose operational constraints on the company and is therefore exempt from disclosure requirements.

Retroactivity of SEBI regulation

In the case of Securities and Exchange Board of India v. Rajkumar Nagpal (2022), the court discusses the nature of retroactive laws, highlighting that simply because a law operates on circumstances that are antecedent to its passing does not mean it is retrospective. According to the court’s opinion, the SEBI Circular has retroactive application, meaning it can apply to events that occurred prior to its enactment but the effect of which is subsisting, provided it does not take away or impair any vested rights.

Legal Analysis

1.     SEBI’s Position: Necessity of Disclosure for Market Integrity

SEBI contends that the DFS is material information that must be disclosed under securities regulations. It argues that the DFS is of a subsisting nature and indirectly impacts the functioning of a public company, thereby affecting investor confidence and market transparency. In the case of Securities and Exchange Board of India v. Mega Corporation Limited (2022), the Supreme Court emphasized that the disclosure of material information enhances transparency and protects the fairness of proceedings, allowing SEBI to argue that disclosure requirements serve broader regulatory objectives that outweigh private interests. In the case of Cdr Amit Kumar Sharma v. Union of India (2022), the court acknowledged that the right to disclosure is not absolute and must be balanced against third-party interests; however, it underscored the duty of regulators to mandate disclosures when they serve the public interest, a ruling SEBI could invoke to justify its directive. Additionally, the Adjudication Order against Consolidated Securities Ltd. (SEBI, 2014) reiterated that disclosures are essential for regulatory oversight and market transparency, allowing SEBI to argue that the DFS, given its implications for shareholder interests, should be disclosed to uphold these principles.

2.     KOEL’s Position: DFS as a Private Family Agreement

KOEL asserts that the DFS is a private document that does not fall within the ambit of mandatory disclosure obligations. It maintains that the DFS creates no liabilities on any company and is a private arrangement of non-compete, similar to any other contractual agreement, and thus does not require disclosure. In the case of T. Takano v. SEBI (2022), the court reinforced the protection of commercial confidence and competitive positioning, stating that confidential information should not be disclosed unless there is an overriding public interest. KOEL could argue that the DFS does not materially impact shareholders and should remain confidential. Moreover, in Vodafone International Holdings BV v. Union of India (2012), the Supreme Court recognized that separate corporate entities cannot be compelled to disclose private agreements that do not directly impact corporate operations, enabling KOEL to leverage this ruling to argue that the DFS does not create legal obligations for the company.

Additionally, In the case of Gujarat NRE Mineral Resources Ltd. v. Securities and Exchange Board of India (Securities Appellate Tribunal, 2011), the court addressed whether the decision to dispose of a part of its investment is price-sensitive information requiring mandatory disclosure. The ruling indicated that any information that could influence an investor’s decision is considered material. Similarly, in the case of ICICI Bank Limited (Securities Appellate Tribunal, 2020), the court confirmed that disclosures regarding potential risks and impacts on share prices related to amalgamation are material and must be disclosed under LODR, emphasizing the potential for information to affect market prices as a crucial aspect of market interest. However, a Deed of Family Settlement (DFS) does not constitute market interest or affect share prices for several reasons. Firstly, a DFS is a private agreement among family members to resolve disputes regarding family assets, and as such, does not involve public or market stakeholders. The contents of a DFS are not intended for public disclosure, meaning they do not influence market sentiment or investor decisions. Additionally, the terms and conditions outlined in a DFS often pertain to the distribution and management of family-owned assets without directly impacting the operational performance of a public company, thus not containing information considered material to shareholders or potential investors. Finally, regulatory bodies mandate the disclosure of information with a direct impact on market performance and shareholder interests; since a DFS is a private arrangement with no direct implications for a company’s financial health or market activities, it is not subject to these disclosure requirements and does not affect share prices.

3.     Constitutional Considerations: Right to Privacy and Regulatory Overreach

KOEL may also challenge SEBI’s directive on constitutional grounds, particularly under Article 21 of the Indian Constitution, which guarantees the right to privacy. The Supreme Court has affirmed privacy as a fundamental right in K.S. Puttaswamy v. Union of India (2017). If KOEL can demonstrate that the DFS is a purely private arrangement without market ramifications, it may argue that SEBI’s directive infringes upon this right. Further, in Vishal Tiwari v. Union of India (2024), the court underscored that regulatory policies should not be interfered with unless they violate fundamental rights or statutory provisions. KOEL might assert that SEBI’s mandate oversteps its jurisdiction, interfering with private family agreements beyond the purview of securities law. Additionally, North End Foods Marketing Pvt. Ltd. v. SEBI (2019), reinforced SEBI’s duty to act in the best interests of investors and market integrity. However, it also suggested that regulatory interventions should be measured and proportionate, a point that KOEL could use to argue against SEBI’s stance.

Conclusion

The Kirloskar dispute presents a pivotal legal issue concerning the disclosure obligations of publicly listed entities versus the confidentiality of private family arrangements. SEBI’s directive seeks to uphold transparency and investor protection, whereas KOEL contends that the DFS is a private document beyond SEBI’s regulatory ambit. SAT’s ruling will likely have significant implications for the governance of listed companies with family-controlled structures, setting a precedent for future cases involving private agreements that may affect corporate decision-making. The decision will test the boundaries of regulatory oversight and privacy rights within India’s evolving securities framework.