Murugappa plan to split Group into 3 hits a bump

Mumbai: A plan to divide the Murugappa Group The deal, which has been in the works for more than two years, has stalled among three family groups, people familiar with the matter said. Murugappa The Chettiar family had been negotiating an amicable split of the diversified business empire with more than $9 billion in revenue in FY23 after five generations of working together for more than a century, they said.

The much celebrated change of direction of CG Power within four years of its acquisition by a group company Investments in Indian Pipes (TII) has become a key point of contention between the different family groups that make up the promoter group.

Shares of four Murugappa group companies, including Wendt India and Shanti Gears, returned over 50% in FY2023. But it is the meteoric 15-fold jump in CG Power’s share price after the TII buyout that has grabbed attention. Another highlight has been the performance of Investment in Cholamandalam and Finance Co. Ltd, the group’s main financial services arm, a publicly listed company with a market value of over Rs 1 trillion.

The rapid appreciation in the value of a handful of the group’s companies relative to others has led to serious differences between at least two of the three factions of the extended family. The discussion revolves around how three equal groups can be created from the current corporate structure (collective ownership of seven branches of the company). Murugappa family The deal was signed through the family holding company Ambadi Investment, which owns shares in several companies, without reviewing the terms of an old family agreement that has already been in place for some time. ET could not independently verify the exact date of that agreement.

Murugappa is ranked number 10 on Barclays Private Clients Hurun India’s 2024 list of most valuable family businesses.

The 124-year-old group has about 30 companies, a third of which are listed, spanning sugar, fertilisers, abrasives, bicycles, polymers, financial services and engineering. The family-owned operation was inspired by the TVS Group’s break-up plan, under which the family faction holding the largest economic interest in each of the companies bought out the other groups’ cross-shareholdings.

The latest disagreement comes a year after Valli Arunachalam, the eldest daughter of the late MV Murugappan, and the rest of the family called it quits after a protracted dispute, casting a shadow over the media-shy group.

The factions
One faction is led by MA Arun Alagappan, CEO of Coromandel Internationalalong with his second cousin Arunachalam Vellayan, president emeritus of EID ParryThe previously agreed price levels for the exchange or barter of shares of listed group entities between family factions for an equal split among three parties are being questioned following the rise in share prices of companies such as CG Power, its parent TII and even Cholamandalam Finance.

Coromandel International, formerly Coromandel Fertilisers, is India’s second largest manufacturer and marketer of phosphate fertilizers.

The three companies are headed by Vellayan Subbiah, executive vice-chairman of TII, who is also chairman of Cholamandalam Investment. He and his second cousin Arun Murugappan, executive chairman of TII, find any upward revision of the agreed share exchange price and formula unacceptable. Together they form the second group.

Brothers MM Murugappan and M Muthaiah Venkatachalam constitute the third group. Between them they supervise Carborundum Universal Ltd.Cholamandalam MS General Insurance Company, Cholamandalam Financial Holdings and EID Parry as its presidents. According to two sources in the group, the duo is also believed to be aligned with Vellayan Subbiah and Arun Murugappan. But this could not be independently verified.

Typically, business families split up their companies after conducting independent valuations. Even if share swaps do not lead to an equal split, the differences are covered by cash payments.

Most observers of the Murugappa group are of the view that Subbiah, a fourth-generation member of the family, is a star performer among the various family members. The IIT Madras and University of Michigan alumnus is a McKinsey consultant-turned-entrepreneur. He is largely credited with transforming fraud-hit CG Power into a growth engine after taking over, making it debt-free in FY22, well ahead of a five-year deadline. He has started building India’s first outsourced semiconductor testing facility.

TII, the group’s engineering arm, has ventured into new areas such as green mobility and contract manufacturing for the pharmaceutical and medical segments as well as specialty chemical solutions. Since taking over the helm of the 70-year-old flagship manufacturing company, Subbiah has helped TII’s share price grow 13 times till June 2024. He has also helped Investment in Cholamandalam The group has managed to emerge from the turmoil following the global financial crisis and has increased its market capitalisation by 60 times during his tenure. The group’s three largest listed companies by market capitalisation – Cholamandalam Investment, CG Power and TII – are under his supervision.

However, some people within the group insist that Arun Alagappan, his father MA Alagappan and A Vellayan also played a major role in the turnaround of Cholamandalam Investment after the exit of DBS, Singapore.

Despite repeated attempts, A Vellayan, Arun Alagappan and Arun Murugappan remained unavailable for comment. A spokesperson for the group told ET that it had no comment to make.

“Vellayan Subbiah has given a flip-flop to TII, CG Power and Chola. Asking for a review of the share swap is a violation of an agreement,” said a family member close to the faction on condition of anonymity as the negotiations are still private. “It is like punishing excellence.”

Others who work closely with the other side believe that each branch of the family has, at different times in history, played a role in the success of each company, especially the larger ones. Previously, all family members held positions of responsibility on a rotating basis, according to the old family arrangement.

“TII, Chola Finance was not built by one or two family members,” said an executive who has known the family for decades. “Its foundation was built with collective efforts of all branches of the extended family and today it has reached new heights only because of the solid foundation work that was done earlier. You cannot separate the past from the present.”

Family Letter
The Murugappa Group follows a family constitution. A board looks after all family matters and resolves disputes between shareholders.

Since late 2020, the Murugappa Group has agreed to move to a corporate structure that separates management from ownership. The first stage of this transition has largely been completed with professional corporate boards, with just two family members on each, overseeing business decisions.

Executives said work on the division of ownership could begin only after the agreement with Valli Arunachalam. She had questioned the practice of seats on the board of Ambadi Investment being given only to male members of the family. She said six branches of the family were represented on the board except her own. She sought a seat on the board to represent her family by virtue of her 8% ownership of the holding company. She remains a shareholder and part of the promoter group in several Murugappa entities.

Following the final separation of the various group companies among the three main family groups, it is expected that different holding structures and business trusts will be created.

“Over the generations, the Murugappa empire has become a confederation of cousins,” said another senior executive close to the family. “The group is committed to certain traditional values, including fair and equitable separation to ensure smooth management and business continuity.”

An independent Murugappa Corporate Board (MCB) was set up in 2000, but in 2001, at the end of MV Subbiah’s chairmanship, the family members decided to step down from the role and make way for an outside professional to help introduce modern corporate governance norms. MV Subbiah belonged to the third generation of the family. Infosys founder NS Raghavan and later PS Pai, former vice chairman of Wipro, took over as chairman of the Murugappa Corporate Board. But after Pai’s tenure in 2006, the family returned the role to the family. MA Alagappan, A Vellayan and MM Murugappan have served as MCB chairmen.

Inherited problems
“Historically, the group has not been very comfortable with making large capital allocations to companies, but in recent years many group companies have invested in new sectors such as silicon wafers, which requires large investment,” said Ranganathan V, former director and partner at EY who worked at the Murugappa Group. “A clear demarcation of who owns what, rather than monolithic corporate ownership, will ensure independence of shareholders, management, decision-making and capital allocation.”

The developer family may also have to abandon its “patriarchal approach” in the future and allow women to run their businesses, he said.

This rule came into effect in the 1940s, four decades after the founding patriarch, A. M. Murugappa Chettiar, expanded his banking and money-lending business in Myanmar (then Burma) but had to abandon much of it because of the world wars. In 1945, his second son, A. M. M. Vellayan, returned to Myanmar to take stock of the family’s business interests after the Japanese occupation, but was shot dead at the age of 40 by an unknown assailant. Chettiar decided to withdraw from all overseas investments (the family had property in Malaysia, Sri Lanka and Myanmar) and focus solely on India. Secondly, he insisted that his eldest son, who had only daughters, adopt Vellayan’s second son, thus beginning a tradition of male supremacy that went unchallenged until it was contested by Arunachalam.

The 1940s also saw the birth of two of the group’s leading companies: TI Cycles (now TII) and Coromandel Engineering Co. The following decade, the group formed what is now another publicly traded entity, Carborundum Universal Ltd.