'Business families like the Godrej group are increasingly realising that an amicable settlement is better.'
'Else, the wealth of all shareholders gets destroyed.'
The amicable split of the 127-year-old Godrej group will ensure that the shareholder value is not hit, governance and market experts said on Wednesday, while expressing hope that it could also boost the stock prices of the five listed group firms.
After years of negotiations, the Godrej family announced a 'shareholding realignment' after the market hours on Tuesday, April 30, 2024.
Under the new arrangement, Jamshyd Godrej, along with his niece Nyrika Holkar and their families, will oversee the unlisted Godrej Enterprises Group (GEG), encompassing Godrej & Boyce and its affiliates.
Nadir Godrej and Adi Godrej, along with their immediate families, will control the Godrej Industries Group (GIG), which houses listed firms such as Godrej Industries, Godrej Consumer Products, Godrej Properties, Godrej Agrovet and Astec Lifesciences.
Experts said there are several recent examples of shareholders' wealth getting destroyed and business growth getting impacted on account of disputes over family settlements.
The way such a large and complex group like Godrej has handled the ownership issue will be welcomed by the stock markets, they said.
"Business families like the Godrej group are increasingly realising that an amicable settlement is better," said Shriram Subramanian, Founder and Managing Director, InGovern Research Services.
"Else, the wealth of all shareholders gets destroyed. Also, the new Sebi regulation on disclosure of any family agreement is pushing families to have simple structures," Subramanian added.
"Overall, how this has been handled shows dignity in the whole process. Unlike other business families, there is no acrimony. Post this, the focus of each of the subgroups will be much sharper," said Amabareesh Baliga, independent equity analyst.
Experts said the Godrej settlement ensures that minority shareholders don't come in the crosshairs of a bitter family feud. Some of the recent examples of this is the dispute between Baba Kalyani and sister Sugandha Hiremath over ownership of Hikal.
Shares of Hikal are up just 2 per cent in the past one year even as the Nifty Smallcap 100 index has rallied 75 per cent.
Another example of a family feud cited by experts was the battle between the three Kirloskar brothers which led to a lot of charges and counter-charges before market regulator Sebi intervened; the feud between the cousins Prakash Chhabria and Deepak Chhabria of the Finolex group.
Governance experts urge India Inc to chalk out a succession plan to ensure business continuity.
"Business families also need to think of how the next generations will benefit from the wealth and work to separate ownership from management," said Subramanian.
Hetal Dalal, President, Institutional Investor Advisory Services, a corporate governance firm, believes companies can learn from other's mistakes and also empower their independent directors.
"Corporate history in India is replete with family feuds causing the downfall of companies. Learning from history and avoiding these mistakes is critical for boards.
"Independent directors must ask whether the board needs to get embroiled with intra-promoter group disputes.
"While it is impossible for the disputes not to be taken to the board, it is the independent directors' responsibility to protect the company from such battles.
"If not, the company will be dragged into endless litigation and the management will remain distracted. None of this is in the interest of the larger set of stakeholders," she wrote in a blog on promoter family feuds.
Bhavini Mishra
A family settlement is defined as an arrangement between members of the family with the intent to avoid disputes.
The multi-billion-dollar amicable split of the Godrej Group into two, between patriarch Adi Godrej/Nadir Godrej family and his cousin Jamshyd Godrej/Smita Godrej Crishna family, may not attract tax, say lawyers.
The multi-billion-dollar Godrej family has decided to amicably split the Godrej Group, which spans from real estate to consumer products, into two groups by untangling the cross-holdings held by the two family branches across group companies with a division of businesses and assets between the Adi/Nadir Godrej family and the Jamshyd Godrej/Smita Godrej Crishna family.
Statements sent by the group's listed companies to exchanges late on Tuesday said the promoters -- Adi Godrej, Nadir Godrej, Jamshyd Godrej, and Smita Godrej Crishna, heads of the respective family branches -- have sent a joint letter about a family settlement agreement (FSA) and a brand and non-compete agreement having been entered into amongst some members of the Godrej family.
"With a transaction of this size and nature, the tax implications can be quite significant and at times can break the complete exercise despite all agreements. However, the fact that this is a family settlement will come to the favour of Godrej Group," said Ankit Jain, partner, Ved Jain & Associates.
The courts, Jain said, have held that the transfer of shares pursuant to a family settlement would not attract any capital gains tax.
"The courts have held that members of a family may, to maintain peace or to bring about harmony in the family, enter into such a family arrangement and if the arrangement is bona fide, then no capital gains tax will apply," Jain explained.
A family settlement is defined as an arrangement between members of the family with the intent to avoid disputes, settle rival claims, maintain peace, or to maintain the reputation of the family wherein the various constituents with rights in the business or property take a share in the assets owned by the 'family'.
Pallav Pradyumn Narang, partner, CNK, said that from a tax perspective, a family arrangement is not considered a transfer and is therefore not subject to tax.
However, Narang says that questions may arise under Section 56(2)(x) of the Income-Tax (I-T) Act which stipulates that the value of assets/property received without adequate consideration be taxed in the hands of the recipient.
"While gifts received from relatives are outside the purview of Section 56(2)(x) of the I-T Act, there have been a number of decisions that have held that maintaining family peace, settlement of disputes, and relinquishing of other claims is enough consideration and that no tax should be leviable on assets received upon a family settlement even if such assets were received from non-relatives," Narang said.
However, if the family settlement also involves companies as parties to the arrangement, in that some companies are alienating assets to other entities as part of the arrangement, then the same ratio may not apply, and tax could be levied in such an instance, he added.
Jain echoes the same perspective.
"If the above restructuring necessitates the transfer of shares owned by the company to another person, then such transfer may not enjoy the exemption available as above. Those transfers of shares would be taxable.
"The company would need to undertake a valuation of the company as laid down under Rule 11UA of the I-T Rules, and the difference between such value and the amount invested would attract a capital gains tax," he explained.
Godrej Industries holds 64.9 per cent stake in Godrej Agrovet, and 23.7 per cent stake in Godrej Consumer Products, and 47.3 per cent stake in Godrej Properties.
Godrej Industries, a listed entity, will be the main holding company of the Adi/Nadir Godrej family.
The unlisted Godrej & Boyce Manufacturing Company, the oldest company of the Godrej group, will be the main company of the Jamshyd Godrej and his sister Smita Godrej Crishna family.
Godrej Industries holds 64.9 per cent stake in Godrej Agrovet, and 23.7 per cent stake in Godrej Consumer Products, and 47.3 per cent stake in Godrej Properties.
The Godrej group listed entities are not party to the family settlement agreement or the brand and non-compete agreement and have not undertaken any liability.
The parties to the family settlement agreement and the brand & non-compete agreement consist of the promoters and/or members of the promoter group and their immediate relatives of the Godrej Industries Group companies and the Godrej & Boyce group companies.
As per the settlement plan, all five listed companies will now come under the Adi/Nadir Godrej family while G&B will be managed by Jamshyd Godrej family.
According to Tuesday's closing prices, the value of Godrej family's stake is worth Rs 1.53 trillion in the five listed companies, which have a combined market capitalisation of Rs 2.44 trillion.
The Godrej Enterprises group (GEG) comprises unlisted Godrej & Boyce (G&B) and its affiliates, which have a presence across multiple industries spanning aerospace, aviation, defence, IT, software as well as infrastructure solutions among others.
Feature Presentation: Ashish Narsale/Rediff.com
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