Indian Family Businesses

In India family has been the hub of every activity; prevalence of joint family system and traditional caste system wherein 'vaishya' caste people are engaged in trade and business, have led to strengthening of family businesses. Sociological factors in India reflect a deep relationship between families and businesses, father's business is divided among all children who eventually manage the business. This provides a safe heaven for the children who also diversify into other areas or expand original business and a business group emerges. This also provides an added impetus for creating an off-the shelf business for the son rather than asking him to set up his own. A survey of 25 leading business houses in India has revealed that every business house has expanded its range of activities and has raised resources for their diversification into new areas (Piramal 1998). Indian family business sector was smaller in 1946. Of the 127 largest companies in India, 58 were under foreign or British management at the time of independence. In 1994, family businesses dominated the private corporate sector, as 80 percent of the 500 biggest companies, as per Business Today (22 July 1994), were family businesses, though they experienced split over the years (Annexure 1). Indian family business has attracted the confidence of foreign investors which is reflected by the success of Reliance 100-year and 50-year bond issue in the US in the eighties. In addition, a number of new family groups appeared on the corporate landscape in the 1990s. These included Nambiars (BPL), Guptas (Lloyds Steel), Jindals (Jindal Strips), Oswal (OWM and Vardhman), Singhs (Ranbaxy), Shahras (Ruchi Soya), Mehtas (Torrent), Lohias (Indo Rama), Dhoots (Videocon) and Premjis (WIPRO). These groups have elbowed out the former stalwarts such as Dalmias, Modis and Walchands. Similarly, many new business groups have emerged after 1991 liberalisation measures; these have been the result of foreign collaborations, or cross border acquisitions or business restructures as a result of family split. These include Bhartis collaborating with Wallmart, and big-ticket deals like, Tata-Corus, Lakshmi MittalArcelor; Zee Telefilm's stake in Dubai based Taj TV, Vodafone-Hutch, Hindalco-Novellis. Their main strength lies in understanding the environment that they operate in" (Piramal 1998). A 1996 analysis by Business Standard shows that 714 companies out of 1000 are single companies of groups in the listing. Similarly, the Business India Super 100 of 1993 shows that 51 of the 74 family businesses in the first 100 private sector companies in India belonged to family groups with more than one company on the list. "About 75 percent of the largest companies are family businesses. There is some variation in the number of family firms in the biggest companies" (Dutta 1997). The Business India Super 100 puts the number of family businesses in the top 100 companies by sales, at around 75 percent. Birla family business is one of the examples of family businesses in India where families have not always fought over wealth, as after the death of Ghanshyam Das Birla in 1983, his five sons amicably divided the mighty empire left, though there were certain unpleasant surprises. Nitin Podar, a noted lawyer who has handled many family separations, says that, "second generation always fights for control, and not to establish itself" (BW Sept 2007). However, business legacies are rarely so uninterrupted. Some of the recent examples include, Mohan Shetty, a hotelier, shot and wounded his older brother Manohar in a literal succession battle witnessed by their mother in their lawyer's chambers; dispute between two

brothers, Shisir Bajaj and Rahul Bajaj over the business empire founded by their father Ramkrishnalal Bajaj, and acrimonious feud between the Ambani brothers. Split in Ambani family had a synergy effect as both the brothers are vigorously competing to grow and sum total of the wealth of the two warring empires is higher than the size of the pre-split business. Of late, promoters are increasing their family stakes in the businesses so as to strengthen their family business. The top 17 private business groups by market capitalisation --Mukesh Ambani, Tata Group, Aditya Group, Rahul Bajaj Group, and Vijay Mallya-have increased or maintained their stakes in at least 55 companies out of the total of 91 over the past year (BW Sept. 2007). These business groups are increasing their stakes to leverage the India growth story and exercise greater control. Among the listed companies in the S&P CNX 500, promoters are opting to stay in control of 282 companies with promoter stake of over 50 percent. Of the remaining 218, only 39 have a promoter stake of less than 26 percent. Changes in the financial system of the country and also take-over threat are some of the reasons for the increase in the stake by the promoters, though in the old days, promoters relied heavily on FIs for support and were, therefore, able to run their companies with a small percentage of holding. For example, promoter's of Tata Steel have increased their stake from 30.26 percent in December 2006 to 33.77 percent in June 2007 after the takeover of Anglo-Duch steel giant, Corus; in Tata Tea, the promoters have increased their stake from 28.95 per cent in June 2006 to 35.40 per cent in June 2007 (Table2).

The Way Ahead According to the 1972 Dun and Bradstreet study, 70 percent of family firms either close or are sold after the founder retires or dies (Lansberg 1988). Similarly, in India, in a sample of 105 companies in 1947, 35 continued to exist in 1987; 43 shut down because of extraneous factors like partition and change from British to Indian government. Thus the survival rate over 40 years (1947-87) of about 56 percent is comparable with the rates in the US. However, Indian companies change hands less often than the US ones. An analysis of India's 200 biggest companies shows that 16 are more than 75 years old and about 80 percent continue to be with the same ownership. The comparable figure in the US was 65 percent (Ward 1987). Also since 80 percent are amongst the largest Indian companies, Indian family businesses show greater significant growth over this period as compared to the West. Comparison of top ten family companies of 1997-98 with that of 2007, one finds that only six companies of 1997-98 find place in the list (Table 3).

Place in the Share Market How do family businesses in India figure in the stock exchange? Sensex (BSE index of 30 equity shares) with 1978-79 base, had eight (or 26%) non-family companies in 1996. Similarly, in the broad based National Index of Equity Prices of 100 companies, with 1983-84 base, there were only 20 non-family businesses. On the other hand, in Korea, only 30 percent of the Chaebol are listed on the stock exchange, and the biggest four Chaebol contribute 50 percent of the country's GNP. Table 4 shows that family businesses are not only splitting, they are fast losing values, as their market capitalization has

shrunk from 67.95 % in 1992 to 55.71% in 1998. The share of trans-nationals has increased from 22.28% to 33.69 % in the meantime. Family businesses, thus, are migrating from being the owner-managers to strategic investors and are bringing in more professionals. In the words of S. Goenka of RPG Enterprises, "Family businesses must change. They must think big and become nimble-footed". The share of market capitalization of family businesses was approximately 40 percent in value (as well as in number) as on March 16, 2007 (see Annexures 2 &3). Indian businesses, according to Piramal (1998), are subject to five threats viz. splits, succession-planning, takeovers, trans-national competition, and lack of focus. Of these, the transnational competition poses the biggest danger followed by splits in the family. Further, the three major dilemmas faced by family businesses are: * How to find, and hire, the best managers a group can afford? * How to ensure that the next generation is able and capable of taking over the baton? * How to encourage each business unit within the group to become focused, and to maximize its core competencies to best advantage? Similarly, the reported relative perceptions are: * Family-owned companies are the least-preferred employers * Career development is uncertain * Business families strategise by lobbying for protection * The level of transparency in business houses is below average * Family businesses compare poorly on leadership qualities

"While the increasing compulsions for professionalizing the managerial functions will almost, certainly, force the appointment of qualified senior managers from outside the family, the business house could well choose to reserve the rank of commander-in-chief for one of its own" (BT, Jan 7, 1998). "Succession planning.... integrates three considerations, namely, ownership issues, family relationship related issues and business related issues. Studies show that less than 30 percent of closely held businesses have succession plans (Desai, 2007)." Lastly, how come family businesses pass through generations without much of inside bickering and disputes? Settlement of family business feuds becomes difficult where there is a single business which has grown larger and larger; example is that of Hindustan Construction Company (HCC), which was created on the separation of century-old Walchand Hirachand group. In case of a number of successors, says Ajit Gulabchand, chairman HCC, a trust should be created and the management should be left to professionals like Ford Motors did in the US. There cannot be one single model to end family disputes. Three possible options are: a) the family can divide the shareholding amicably among members; or b) the family's shareholding can be pooled into a trust which manages it

as in the US and Europe; or c) to hold the family wealth in a single investment company such as Pilani Investments by the Birlas, or through investment companies, like that of Reliance held before the split (BW Sept 2007).

Sum Up Family businesses are undergoing transformation, reformation and restructuring. In India, as in other countries, family businesses have fought for wealth and control, have experienced splits over the years and are increasing their respective stakes to tighten their hold. At times there are differences on amicable settlement among family members; and in the absence of the practice of pooling of family shareholdings in a trust, it is essential that family businesses should have succession plan to guard against the risk of discontinuity. Splits are inevitable, and in order to survive they have to be creative and think of newer businesses to survive in the competitive environment. Family businesses, though experienced split due to sociological, economic and political factors, have robust growth and a bright future, primarily because of understanding of Indian environment and image.