Eveready Industries: How the Khaitans lost control of their crown jewel company
During the week, the Burman family added a 14.3% stake in Eveready to take their total stake in Eveready to 38.3%. This gives them effective control, but the story is more about how the Khaitan family lost control of Eveready, which was a crown jewel in their portfolio.
How Khaitan lost Eveready
It all began with the troubles at the two group companies of the Khaitan group viz. McNally Bharat and McLeod Russell. In the case of both the companies, it was a case of too much debt on their books and the company not being able to service the debt. It had reached a point when McNally Bharat and McLeod could not pay their debts and pressure was mounting for the Khaitan family. That is when they pledged shares.
To give comfort to creditors, the Khaitan family pledged a stake in Eveready with the financers. The first problems came when Yes Bank went to NCLT to declare McLeod bankrupt. However, the real problems for the group started when the debts could not be recovered and Aditya Birla Finance decided to sell the shares in the open market to recover the dues. The outcome was that the Khaitan family which owned more than 22% stake in Eveready, ended up with just a 4.9% stake. At that point, the Burman family intervened and managed to mop up a sizable stake from the market. The idea was to give breathing space to Khaitan family to help retain control.
Burmans step into the board
While the Khaitan family was offered a timeline of up to 2 years to be in a position to buy back the stake from the Burman family, the Khaitan family could not muster the funds to buy back the stake. This resulted in the Burman family gradually increasing its stake in the company. About 3 months back, the directors of the Khaitan family on the board of Eveready resigned and made way for the Burman family to take over. After that, the Burman family appointed JM Financial to increase the stake in the open market and also made an open offer to the shareholders of Eveready, thus increasing their stake in the company to 38.3%. Now the Burman family has effective control of overall management.
Larger lessons from Eveready
The bigger lessons are not only for the Khaitan family but also for corporate India in general. Promoters must be a lot more cautious when pledging shares of their crown jewels to rescue other group companies. A similar problem also arose in the case of the Zee group and the promoters almost lost control in trying to bail out the beleaguered group companies. The basic thumb rule is to not pledge more than a percentage of shares held by promoters. Ironically, it was the Khaitan family that had fought a pitched battle with the Wadia family in 1993 for control of Eveready. One bad decision has cost them the company!