Chequered past, uncertain futureT.N.NINAN
The function of business is to satisfy consumer wants; the purpose is to earn a profit. The debate about the future of India’s business families (rather than about Indian business itself) is not, therefore, a business debate in the strict sense of the term. It is not even in most cases a management debate, relating to the practice of management – except to the extent that you might debate styles of family management and compare it with ‘professional’ management. But then, that is not a debate on business families per se.
This is not to split hair, for the differences are important. A debate about businessmen is not a debate about business, which can prosper even as business families go into decline (and the other way round too, as we know too well). In the language in which the debate is conducted in the contemporary context, it becomes essentially a political subject, aimed fundamentally at influencing political attitudes (legislators, decision-makers in the government, media), and influenced by almost reflexive ideas about economic nationalism and about how best to promote autonomy in a globalising world. These ideas relate as much to the realm of politics as economics, if not more so. Because, as we shall see, neither the consumer nor the investor is overly concerned about the business families; both groups indulge in rational behaviour when (as they should) they look at the marketplace to see what is in their own best interest.
But while the two subjects should not be confused one with the other, there is inevitably an overlap between the two worlds, for that after all is the political economy or the economic polity. But economies that inject too much politics into business debates inevitably suffer as economies. When discussing business and the creation of economic wealth, it is usually more profitable to discuss processes and organisations than the fate of specific individuals, even if the story is best told through individuals and their actions.
Before Independence, the story focuses on the founders of the business houses, their daring and even heroism in the face of colonial prejudice and bias. Jamshedji Tata setting up a steel mill, and a hotel because he was not allowed to stay in one near the Gateway; G.D. Birla being insulted because he had the temerity to try and run his own jute mill; Walchand Hirachand’s legendary struggle to set up a shipping firm, his visionary approach to aircraft manufacture, and so on. But in the socialist air that Indians breathed after Independence, the brown sahib replaced the white man, the Brahmin mandarin had as much disdain for commerce as an Oxbridge aristocrat, Fabianism replaced colonialism, and through these three changes indigenous businessmen came to be seen not as the underdog but as people who expropriated surpluses. In a climate of shortages (created by policy, not by businessmen), the prime minister threatened to hang hoarders on the nearest lamp post.
In Pakistan, it was Zulfiqar Ali Bhutto who raised a political storm about 22 families owning Pakistan, and about their role in influencing politics. In India, it was not 22 but 75 families that attracted attention, culminating in the monopoly law of 1969. Parliament was constantly obsessed with the ‘monopoly power’ of these business houses; special enquiry commissions were set up to investigate their activities (the Sarkar Commission for the Birlas, the Vivien Bose Commission for the Sahu Jains); and each year the Department of Company Affairs put together information, dutifully placed before Parliament, on the growth in assets and turnover of these houses. They controlled the press (derisively called the ‘jute press’ as a result), they reportedly controlled dozens of individual parliamentarians by financing their election campaigns, and they cornered the industrial licences that were designed to broad-base enterprise but which, as a consequence, perpetuated their control of markets.
How things change in barely a decade! Today no one cares a tuppence about the monopoly law; indeed, the finance minister has promised to replace it with a competition law. And certainly, no one is bothered by the monopoly power of large houses, because they have none. The world of Indian business has changed because import controls have mostly gone, tariff levels have dropped, and India is nobody’s private preserve any more; however haltingly, it wants to be a part of the global economy. Licensing restrictions on domestic enterprise have gone too, for the most part, so anyone can go into any field without capacity restrictions. And the big international companies are now fighting for more corners of the market. Liberalisation and economic reform have put an end to fears of monopoly by ushering in a more competitive marketplace.
Foreign portfolio capital has made even more fundamental changes by buying into the companies controlled by the business families. In many instances the portfolio managers now have more of a company’s shares in their safes than the controlling families themselves. This does not mean any threat to the families’ control, but it does mean that the investor is now watching more closely, and is more demanding and questioning. The discipline of the stock market has become a reality. Managements are under pressure to perform. Whether you belong to one of the 75 families or not is no longer central to how the market sees you. For poor performance means the fiis dump your shares, the market capitalisation (share price multiplied by the number of shares) of the company drops, and the value of your business declines.
It is not a coincidence that these trends were underway when the Bombay Club was born. Fighting to retain privilege, if not control – the Club’s companies, if not markets. Seeking a ‘level playing field’. Cribbing about international partners who walk off with control of joint ventures. Seeking a place in the Indian sun for Indian enterprise. Some issues were genuine, others inevitably focused on the concerns of the businessmen, not their businesses. And, as a consequence, it was more than anything else a crypto-political debate.
At one level, this is yesterday’s zamindar fighting to delay reform of land laws. At another, it is a battle to prevent the tilting of scales in favour of the Indian consumer, rather than the producer – for when has the consumer had so much choice, of products that can lay claim to world quality, at prices that reflect international levels? A TV set today costs no more than it did a decade ago; a refrigerator is available at the same price as existed two decades ago. Maruti cars are priced today at the same level as seven years ago. At a third level, it is a debate on globalisation, raising latent fears about losing control once again to the white man. What will happen if the top 200 companies in the country move into the hands of foreigners, asks Rahul Bajaj.
In its clearest form, therefore, this is a battle that is not being fought by either Indian consumers, or even Indian investors. It is not being fought by the people who work in these companies. It is a battle of the 75 families. Do they have a case? And if so, what is the case, and what is it not meant to be?
Some answers might emerge by looking first at the relationship of India’s vaunted business families with the two groups at either end of any business: the consumer and the investor. Take a look at the typical start of a day for the typical Indian consumer, at least the consumer who belongs to the consuming class. With what does he shave? Or brush his teeth? What toilet soap does he use for his bath? Who makes his shampoo? Or aftershave? Or deodorant?
That’s easy, I suppose. The manufacturers who have supplied our consumer with all these goods are most likely Hindustan Lever, Procter & Gamble, Colgate-Palmolive, Indian Shaving Products (i.e. Gillette) and .... You guessed it. The Indian business family supplies virtually none of the things with which the Indian consumer starts his day.
What about the clothes which our consumer wears? If he is into buying branded clothes, Indian manufacturers (defined for the moment as companies predominantly owned and controlled by Indians) have a presence through Park Avenue, Color Plus, Weekender, Wearhouse and so on, though the premium shirt brands, for instance, have become Louis Philippe, Van Heusen and Arrow. The watch he straps round his wrist could be from Titan or HMT, but the watch market is about to be opened up, and soon it might be Longines or Seiko. The pen he slips into his shirt pocket is likely to be a Parker or Cross. And his dark glasses: Ray-Ban, presumably.
Having got dressed, what does our consumer have for breakfast? Like it or not, his cereal is probably from Kellogg’s, his preserves from Hindustan Lever, his coffee from Nestle; as the sole exception, his butter is likely to be from the very desi Amul. If he wants to catch some news headlines on the box before he drives off to work in any of a dozen possible choices of cars (almost all of them made in factories controlled by overseas companies), his choice will be CNN, BBC, Star or Zee, all of which are foreign owned and controlled to some degree, as are Sony, CNBC, Discovery and National Geographic. And the TV set itself could be either from the desi BPL or Onida, or increasingly from Philips, Samsung, LG or Sony. En route to the office, the mobile phone he uses would be from Nokia or Motorola.
What this boils down to is brands. Do the Indian business families own them, understand how to build them? In most cases, the answer is No. Year after year, the magazine A&M does a survey of which are the leading Indian brands; and year after year, the findings are the same. The foreign-controlled companies that operate in India control the dominant brands. Of the top 30 brands listed last year by the magazine, 19 were foreign-owned/controlled, and only 11 were desi. Of the next 30, only 10 were desi, the rest were MNC-controlled. So two-thirds of the 60 leading brands are MNC-controlled.
A&M also surveys advertising spends, and once again it is the foreign-controlled companies that dominate. It is only natural, then, that the market in at least the top segment will watch the extinction of the Indian business family as consumers switch loyalties to the ones who understand brands – in other words, understand the consumer. If the retail consumer has deserted the Bombay Club, what about the investor? The critical differentiator to look at here, if you want to judge investor attitudes, is the ratio of share price to company earnings. The greater the investor’s confidence in the company maintaining or improving its earnings, the greater becomes the price-earnings (or P:E) multiple. A low P:E ratio signals diminished faith in the company’s future, lack of confidence in the management, the unsustainability of the present business position.
Viewed from this angle, it is telling that the foreign-controlled companies uniformly and almost without exception, have much higher P:E ratios than the Indian-controlled ones. Hindustan Lever will have a P:E ratio that is 60; Indian Shaving Products P:E will be even higher, well over 120, and Cadbury over 50. But Ceat will be 4, Videocon 3, even Titan only 25. Ranbaxy in the fancied pharmaceutical sector commands a P:E of 48 after a rapid climb in recent times, but Glaxo is at a p:e of 65. The investor on India’s stock exchanges is saying that his preference is for the foreign-controlled companies, or the sectors which they dominate, or the specific business they are in. Even Reliance, assiduously cultivated as an investor favourite, has seen its return to the shareholder in terms of market capitalisation (i.e., the combined value of all the shares it has issued) remain virtually unchanged over the last few years. In other words, the company has not been able to add to its existing shareholder value.
The other major business houses have done demonstrably worse. The Tata group’s total market capitalisation has fallen by a staggering 64% in the last four years, mirroring a 66% fall for the Aditya Birla group, and a 49% fall for the RPG group. Some have done well (Munjal, Mahindra, TVS), and Bajaj has fallen by only 7%. But the total market capitalisation of all the established Indian houses has taken a massive beating at the hands of the investor who prefers MNC stock. And like the consumer, they clearly don’t care a fig for either the Bombay Club or its agenda.
Is there a reason for the preference that the investor has shown? Apparently, yes. Studies of the rate of return achieved by Indian companies are telling; close to a third among them are earning less than the cost of the capital they use. In other words, the system as a whole would benefit if that capital went elsewhere.
Similarly, a longer-term study of the market value added by the big companies shows that a goodly chunk are actually destroying shareholder value. Investors have obviously caught on to who is creating value and who is destroying it, and their wisdom is reflected in the price-earning ratios that you see on the stock market.
Now, you could argue that this picture is overdrawn, and in any case is too simplistic. The highest P:E ratios on the stock market today are obtained by the computer software companies like Infosys, Wipro, NIIT and Satyam, all of which are Indian-owned and Indian-controlled. These are also matters of stock market fashion: the financial institutions, for instance, have seen their share prices crash in the last six or eight months because perceptions changed overnight, even though their performance is not particularly worse than before. IDBI’s share price, for instance, has dropped to a third of what it was a year ago.
Also, it could be pointed out very correctly that while the international brands might begin to capture consumer imagination at the top end, or the thin upper crust of Indian society, the broad range of consumer goods used by millions of Indians in the lower strata are produced by Indian companies using Indian brands. This would apply to everything from shirts to tooth powder and from washing detergent to lipstick, not to speak of textiles and of course the whole range of ethnic products, from pickles and curry powder to bidis and sandals. Isn’t it a mistake to look at the upper crust and judge that that is the whole? And in any case, does this not strengthen the swadeshi argument, about protecting Indian business from foreign threat?
But the point is that if the Bombay Club or the government or the Swadeshi Jagran Manch or anyone else wanted to do something about foreign brands dominating the market or foreign companies commanding the best prices on the stock market, the only viable action that can be taken is in the marketplace – because that is where the battle is fought for the consumer’s heart and mind and wallet. And when you win that battle, you win the investor’s confidence too.
At some point in the argument, the question must come up (and be answered): what is an Indian company? The Indian business families have defined this through shareholding: if the dominant and controlling shareholding is in Indian hands, then it is an Indian company; if not, then it is a foreign company, no matter what FERA might say.
But surely, there is an alternative way of looking at this. And the easiest way to get to the nub of the issue would be to look at a wholly Indian-owned company that does a screwdriver business: import sub-assemblies from overseas, assemble the final product in a makeshift factory and sell it to Indian consumers. And then, to compare this with a foreign-controlled company that has invested heavily in Indian plant and equipment, developed local vendors, uses domestic raw material and sells to Indian consumers. Which of the two is more Indian?
Arguably, the second one. For Indianness is defined not by ownership but value addition: where is the value being added, in India or overseas? Any company that becomes rooted in the Indian economy through local value addition is Indian. For, when you think of it, what foreign shareholding means is that the profits get repatriated abroad. But profits in most cases account for barely 5% of sales, and of that the government keeps something like 3%. That leaves just over 3% of revenue for the shareholder, of which typically less than half would get distributed as dividend, the rest being retained by the company in India; and if there is some degree of Indian shareholding, then a part of even that 3% stays in India. Unless there is substantial transfer pricing, or heavy fund transfer through devices like head office charges or royalty payments for technology, the foreign shareholding matters less than the question of local value addition.
The nationalist would argue, as Rahul Bajaj has done, that the nation surely loses if the top 200 companies in the country pass into foreign hands. And that would of course be true. Because the lesson of the East India Company experience is that it is political power that swings the balance against local business. Domestic merchants were able to hold their own till political power in Bengal passed into foreign hands; it was then that the rules were rewritten to destroy or incapacitate or handicap domestic enterprise. Even in an independent country in the modern age, foreign ownership or control of the biggest businesses would mean some loss of economic autonomy – never forget ITT and Allende in Chile.
It is easy to dream up scare scenarios at this stage of the argument. So it is important to try and stick to the facts. And the fact is that the top 200 companies have not passed into foreign hands. Indeed, hardly any companies have changed hands through contested takeovers; where local promoters have sold out, it is usually in joint ventures where the local partner was not adding much value to the business after the initial escort service provided at project stage (the use of local contacts, the knowledge of the domestic business scene), or where they feel they have no long-term stake or future. In such instances, the presence of an international buyer actually helps improve the value which the seller gets – so he shouldn’t be complaining.
Where markets have become dominated by the international players, the companies were mostly foreign-controlled from the beginning. There would be exceptions, as with Voltas which was the dominant player in air-conditioners. But pride of place now goes to Carrier Aircon, which entered the market in the mid-1980s and never had an Indian promoter. But isn’t this Voltas’ fault? In any case, how has the consumer or the government or the Indian system lost? If Voltas can’t compete against Carrier, LG or Samsung or National will, and so long as they all add value in India if not elsewhere, why cavil at the forces of the market?
There are other scenarios too, of course. The Malhotras dominated the shaving equipment/razor blade industry, but have sold out to Gillette. The Chauhan brothers sold out to Coca-Cola. And so on. But hang on a minute. First, Ramesh and Prakash Chauhan got something like $40 million for the sale of their soft drink brands, and then some more for giving up bottling rights in some territories. In contrast, Coke alone has already invested roughly $500 million in its Indian business, and Pepsi presumably has done likewise. If the Chauhans hadn’t sold out, they would have been wiped out. And with the money they got, the brothers are building entirely new businesses. Ramesh Chauhan, for instance, has launched a mineral water business which, he believes, will be much bigger than the coloured water industry.
The second argument comes back to the consumer: does he have a say? Were the Malhotra blades good, or was the group holding the Indian shaver to ransom? Did Voltas lay itself open to strong competition by not updating its product, or switching to a more modern, energy efficient compressor? India makes and exports millions of pens each year, perhaps hundreds of millions of pens. But the minute Parker comes in, the consumer sees potential long-term value in the business. And the company’s pens become at least an aspirational norm. So, if that’s the consumer’s choice, then so be it.
Where does this leave us? Other things being equal, it is obviously better to have companies owned by Indians rather than foreigners. But the entire raison d’etre adopted by the Bombay Club was that ownership was all; the consumer didn’t figure in the calculations, value addition was not an issue, shareholder return was not the reason for business; control and ownership were. This is the attitude that gives the consumer a raw deal (shoddy goods at inflated prices), takes the investor for granted, presumes to draw on the nation’s resources, and then wraps the issue in the national tricolour so that business logic becomes obfuscated.
Zulfiqar Ali Bhutto used to harangue crowds in Pakistan that 22 business families in the country either owned or controlled the state, or did both. In India, it wasn’t 22 but 75 families that dominated business. They controlled the banks and insurance companies, so they had access to capital; they cornered the industrial licences; they paid the politicians, who therefore did their bidding; and they parleyed in various ways their control of the system.
All that has now changed. With the opening up of the economy, the system has become more demanding on those who draw on its resources; it has also become democratised, as new groups have emerged while many illustrious names from the stellar list of the top 10 have bitten the dust or lost their glitter (Sarabhai, Dalmia, Walchand, Lalbhai, Shriram). Also, as each new generation has come into its own, there have been splits, disputes and the carving up of groups that meant a loss of critical mass. But far more important, the nature of the game has changed.
The Indian business family excelled in the commodity game. India was developing after centuries of colonial rule, there was demand for everything from steel, cement and aluminium to copper and chemicals; the exit of the colonial masters meant opportunity to acquire their businesses: the plantations and the trading houses. And growing consumer numbers meant demand for a host of agro-based products – sugar, edible oils. Besides, traditional trading skills, financial acumen and a low-cost style made it possible to turn even marginal businesses into profitable ventures. Although government policy was restrictive, the import substitution game was supremely profitable. When all this was put together, the opportunities were marvellous, even if the business environment was problematic.
Today, the game is technology, knowledge-based industries, effective branding, distribution efficiency, systems and processes in companies, empowering managers at all levels, and a host of things that the 75 families have not mastered. The devastating result is that 75 million consumers have turned away from the 75 families. And import substitution is no great strategy when import controls are being dismantled and tariffs lowered.
The old ways of acquiring promoter capital have also become more problematic. Then, all that you needed to do was cream off 10% or more from the capital cost of your project, recycle it as the promoter’s equity contribution, and then build even further capital by creaming off through sole selling arrangements and the like. But in today’s world of pesky equity analysts who respect nobody, none of this helps. Markets are too competitive for transferring sales commissions into private pockets, because it costs you in price competitiveness. Business valuation suffers, the competitive edge is lost. Now the game is gaining the trust of the investor. Winning it is difficult enough; winning it after it was lost earlier is doubly so. And if, at the same time, the financial institutions are beginning to ask questions, if talk of corporate governance is in the air, and if raising fresh capital becomes even more difficult in the new environment, the 75 families can survive as significant business entities only by changing the way they do business.
Why focus only on the 75, when others with fresh daring and entrepreneurship are emerging all the time? It’s a valid question, for the Infosys chief N.R. Narayanamoorthy’s personal wealth was valued the other day at Rs 750 crore, based on his holding of Infosys stock; in comparison, the entire market capitalisation of the RPG group (i.e., the value of all the shares of RPG companies, whether held by the Goenka family or the public) is barely Rs 800 crore. Surely, the world of Indian business is changing; and it’s not just old Indian business family vs. MNC; it’s also old family vs. new entrepreneur. In other words, this is the old renewal process all over again. And so long as the environment for business is such that new names and faces can take the place of the old, and where MNCs don’t shut out local faces, and where there is a sufficient premium on local value addition, it doesn’t matter what happens or doesn’t happen to the 75 families. Neither the Indian consumer nor the investor will care very much, and frankly, the political establishment shouldn’t either.