For over a century, family-run business empires have held sway in India, but acrimonious succession battles are now turning off foreign investors and prompting Indian corporations to adopt post-dynastic strategies.
With names such as Tata, Birla, Godrej and Reliance, they are some of the biggest players in the world in industries that range from steel to concrete, autos, telecoms and petrochemicals.
Yet some of India’s largest conglomerates are still family affairs, much to the chagrin of investors who have seen some family-run companies implode as the founders have died and their children have squabbled over their business empire inheritance.
“Badly-run family firms run the risk of not being able to grow profitably and of scaring off potential investors,” said Anjan Ghosh, a general manager at ICRA, a unit of Moody’s Investors Service that has studied family firms in India.
As India faces the fallout of the credit crisis and fears of a global recession rise, family-run companies may need to quickly determine how they will handle succession or risk being badly buffeted by a turbulent global economy. “Especially in the current market environment where access to capital is such an issue, unless you are professionally run and have a succession plan in place, it will be tough,” Ghosh added.
Inheritance wars between feuding siblings such as Mukesh and Anil Ambani, the world’s fifth and sixth riches people according to Forbes magazine, have tarnished India’s allure as a top investment destination, raising risks for investors in a country where corporate legislation and regulation are in their infancy and shareholders largely stand passively on the sidelines.
With families controlling 18 of the 30 firms on the benchmark BSE index, the risks are serious. Certainly, some family-run companies have made ambitious acquisitions recently and taken on global rivals, while others are drawing up tentative succession plans, hiring professionals in leadership positions, divesting assets, and even surrendering control.
Private equity firms invested more than $14 billion in Indian firms in 2007, while last year foreign funds bought shares in Indian companies worth a record $17.4 billion. These welcome signs of maturity are lost in the clamor around the squabbling Ambani siblings and other corporate succession battles. Mukesh, the elder brother, took control of energy and petrochemical giant Reliance Industries Ltd, India’s biggest private sector company after the Ambani empire was split in 2005, three years after its founder Dhirubhai’s death.
Anil gained control of mobile services firm Reliance Communications, Reliance Capital and other power, infrastructure and entertainment assets. The two brothers, however, have continued to fight in the full glare of the media.
Recently, a judge at Mumbai’s city court that is hearing a gas supply dispute between companies headed by the brothers is reported to have suggested they go back to their mother to settle the matter, rather than fight in court.
The judge was referring to their homemaker mother Kokilaben, who had brokered the deal in 2005. The feud, which also extends to other businesses, is causing real damage to India’s economic development and its appeal as a top investment destination, and even spilling into the political arena, think-tank Oxford Analytica said in a recent report.
“The rivalry ... reflects fundamental questions of business ethics (and) threatens to exert a serious impact on the economy, notably (in the short term) by introducing uncertainty into energy regulation and delaying investment in the gas sector.” These and other public spats and legal battles over succession have put the spotlight on the future of family-run businesses in India, among the world’s fastest growing economies. Most Indian family-run companies date back more than a century to the British colonial era, with the notable exception of Dhirubhai Ambani, the son of a school teacher, who founded the Reliance group in the 1970s. While it is quite common for groups to split to resolve succession issues, in many cases it is simply adherence to tradition or sheer procrastination that hinders planning, said K. Ramachandran, a professor at the Indian School of Business.
“It’s human nature to assume things will go smoothly forever and that there will never be any conflicts,” he said.
The Bajaj family that controls Bajaj Auto Ltd, India’s No. 2 motorcycle maker, besides other firms, also split their businesses to end a simmering feud between the brothers.
Even the widely respected Tata Group, the second-largest Indian conglomerate which controls the world’s sixth-largest steel maker, has not identified a successor to Chairman Ratan Tata, who is scheduled to retire when he turns 75 in 2012.
But the lack of succession planning is especially worrying in an emerging market like India, where legal and institutional frameworks for companies and governance are still being developed and an activist shareholder culture is largely absent, ICRA said in a report. “Leadership transition is a key governance and credit risk.” While traditionally, the eldest son inherited the business mantle, Tata, who is single with no children, has said his successor could come from outside the family.
Meanwhile Sunil Mittal, a first-generation entrepreneur who set up the country’s top mobile operator Bharti Airtel, has appointed professionals at the top of the group alongside his two brothers.
Tougher market conditions may encourage more family businesses to look at succession and exit options seriously, said Thomas Kaestele, a managing director of advisory firm Rothschild.
“The owners may think: we’ve been reasonably successful, but do we really want to do this forever? We can instead play golf.”
Regulations such as those requiring independent directors and a new generation of leaders, armed with MBA degrees from abroad and carrying less emotional baggage, are transforming business.
