Change and continuityDwijendra Tripathi
Public business in India is in private hands. Even a casual look at the capital structure of public limited companies in the private sector on the one hand and their management on the other, will bear out the truth of this assertion. While a major part of the share capital of most of these companies is held by the investing public and government controlled financial institutions, it is the founding families or their successors who control the management. So dominant is the position of these families that the popular mind regards them as virtual ‘owners’ of the companies functioning under their managerial umbrella.
The roots of this paradox lie in the manner in which industrial capitalism originated and developed in India. Before the onset of modern industry, Indian business comprised of numerous commercial undertakings of varying size. These were family businesses in the sense that they were owned either by a single family or a partnership of two or more families. These were joint families, as were all others, regardless of the occupations their members pursued, as the joint family system was then the pivot of the Indian social structure.
The quantum of finances required for conducting trade was such that the families engaged in these activities could arrange them on their own without contributions from outside parties who in return might have demanded a voice in managing the operations. The credit for bringing industrialisation to a level of maturity in India belongs to these families, even though some of the early initiatives to set up industrial undertakings were taken by persons with no prior experience of business.
Requiring larger finances, involving longer gestation period, and yielding slower returns, industrial enterprises entailed much higher risk than commercial operations. To spread the risk, therefore, the families setting up industrial undertakings enlisted the cooperation of others, usually close friends or relatives, and allotted to them blocks of shares, while making sure that the majority control and, therefore, the management of the company remained with the promoting family. Thus was born a system of corporate management that was a strange combination of joint stock principle and family control.
As the stock markets were yet to develop sufficient momentum, and the joint family system remained firmly intact, there never was a threat to the power of business families over their industrial empires built up through the ingenious device, popularly known as the managing agency system. All critical decisions about the firms were taken by the promoting families, euphemistically termed managing agents, with their heads exercising as much authority over the companies under their care as over any other matter affecting their families in any other sphere of life.
In due course this system of corporate management became so deeply entrenched that on the eve of India’s Independence, hardly any industrial firm of consequence was out of its orbit. This meant that practically all business operations in the country were controlled by a few families. R.K. Hazari, a well-known industrial economist, had concluded after an exhaustive analysis that most of the prominent industrial firms on the contours of Indian business during the 1950s, were in the hands of just 18 Indian families and two British houses. The companies were much smaller in size and their operations were much less complex by present day standards, with the result that the controlling families needed little outside financial contribution to conduct their affairs.
Some of these families were so sure of their ability to mobilise the needed finances that they preferred to form private limited companies, with closely held share capital, to public limited concerns which were subject to the stock market operations and open to much larger number of shareholders. The Sarabhais of Ahmedabad, a prominent business house then, had for instance only one public limited company in their vast empire that was largely made up of private limited units. The Godrejs’ of Bombay, backbenchers but an upcoming group, had no public participation at all in their enterprises. Even a company like Larsen and Toubro, though not a family concern in the strict sense and still a shadow of what it would become in the near future, went public only after the Controller of Capital Issues refused permission to increase its share capital unless it shed off its private limited character.
Within a decade of India’s freedom, three major developments disturbed the tranquil situation that earlier prevailed on the business horizon. One, the nation’s resolve to accelerate the pace of economic development held out an attractive invitation to the private sector to partake of new opportunities for business gain, notwithstanding the myriad restrictions imposed on the freedom of enterprise. Two, both the Union and various state governments set up a number of financial institutions to provide industrial finance to private sector companies. The Life Insurance Corporation of India and the Unit Trust of India too emerged as major sources of industrial credit. And three, the joint family system, once the bedrock of the Indian social structure, began to increasingly experience severe strains, thanks to growing urbanisation and westernisation.
These developments taken together had far reaching consequences for family businesses. For one, the financial requirements of most of the projects the private sector was called upon to undertake to meet the targets of the nation’s five year plans were in most cases too large for any business family to mobilise out of its own resources. No business family, therefore, could now do without the financial participation of the government controlled financial institutions, unless it chose not to exploit the emerging business opportunities and let its operations stagnate.
Many families also diluted holdings in their older companies to release resources for investment in more challenging ventures. The result was that the family ceased to be a critical source of business finance as was the case before freedom. In most cases it is now the financial institutions, and not the promoting families, that have controlling interest in the private sector concerns. Family stranglehold, at least in the matter of finance, is now a thing of the past. This further reinforced the fissionary trends in most of the business families that until yesterday appeared to be impregnable fortresses.
The Dalmias were the first prominent business house to break up after freedom. That happened in the early ’50s. It was then regarded as an isolated incident. Nobody thought that it pointed to the beginning of a process that would soon engulf practically all business families in some measure, sooner or later. Splits were few and far between during the first two decades after freedom. The pace, however, accelerated beginning with 1970 and the following 25 years witnessed splits in at least as many business families. And these included such illustrious names as the Birlas, Modis, Sarabhais, Bangurs, Singhanias, Mafatlals, Shrirams, Thapars, Walchands, and Goenkas.
Strangely enough, the older houses were not the only ones to contend with fissionary blasts; some of the younger groups such as Raunaq Singh’s Apollo, Bhai Mohan Singh’s Ranbaxy, and Manohar Chhabria’s Jumbo too could not escape it. Most of the South Indian groups have somehow been luckier in this respect, perhaps because the family ties in the South have so far proved to be too strong for the hostile forces in the outer social environment.
Inspite of the loosening financial control over their companies and growing splits, the control of business families over the management of their concerns remains almost unimpaired. It is significant that as many as 12 in Hazari’s list of 18 Indian families that occupied centre-stage in the nation’s business in the ’50s (Tata, Birla, Dalmia-Sahu Jain, Kirloskar, Shriram, Lalbhai, Walchand, Thapar, Mafatlal, Mahindra, Ramkrishnan, and Singhania) are still among the top 50 business families according to a list drawn by Business Today (BT) in 1997 on the basis of the total assets of the companies they control. And if we count all the splinter branches born out of splits in some of them, this number would go up to 17.
The BT list also includes 12 other families (not included by Hazari as his list was limited to 20) that have continued to manage their companies and expand their business empires since pre-Independence days. This shows that almost two-thirds of today’s leading business families have had a firm control over the management of the companies promoted by them for several decades, despite revolutionary changes in the business environment since Independence. It is also significant that out of the six families in Hazari’s list that do not appear in the BT tally, only the Mookerjees, managing Martin Burn then, and Indra Singh are out of business. The remaining four (Bangur, Shapoorji, Seshasayee and Khatau) are still very much on the scene, even though they have been left behind in the race for supremacy by later entrants.
That so many families have remained at the forefront and maintained their hold over these companies for such a long time is a clear testimony to the critical position that the family continues to occupy in Indian business. According to a recent tally the management of as many as 461 of the 500 most valuable companies is under family control.
This must be considered to be a remarkable feat by any standard. It would appear to be even more remarkable if we recall that most of the changes in company laws effected after freedom should have, if anything, drastically reduced, if not altogether eliminated, the family presence in the private sector. For, ever since the advent of freedom, the managing agency system, that principal supporting prop of family business for almost a hundred years, was fighting a losing battle and was eventually abolished with effect from April 1970. Henceforth, a chairman-cum-managing director and a functional board, and not a managing agency, would constitute the apex management for every firm.
However, the new legislative provisions resulted in mere cosmetic changes in the form of the private corporate sector, as members of business families now became chairmen or managing directors or both of the companies for which their families had been managing agents in the past. The changeover required nothing but a board resolution. As all companies had boards even under the old system, whose members were handpicked by the managing agents themselves, the transition caused no dislocation of any kind. Nor did it entail the dilution of the powers of business families over their business operations to any significant degree.
True, the company boards now have some government appointed directors, just as the financial institutions have their nominees by virtue of their financial participation. But even these members usually go along with the management team headed by the chairman-managing director in all critical matters. In fact, in all known cases, these official/nominated members have stood by the families in the event of any external threat. Just a few years ago when Swaraj Paul, the London based Indian tycoon, made a determined bid to take over Delhi Cloth Mills and Escorts from the Shriram and Nanda families respectively, it was the financial institutions that tilted the balance against the corporate raider. We know of no case where the government nominees or representatives of the financial institutions ever attempted to unsettle the applecart of family dominated management in private sector companies.
Three factors may account for the remarkable resilience that the family business has demonstrated in free India. First, the family holdings in companies, even though much lower than during the pre-Independence days, are still sufficient to ensure that the family cannot be easily displaced from management. The investing class is now considerably expanded in response to much more vibrant stock markets. As a result, shareholdings in the companies have become more widely disbursed than even before. The amorphous group of individual investors cannot pose any real threat to the family supremacy. The financial institutions with their large shareholdings can do so but, as we have stated before, they have obviously considered it more prudent to stand by the existing managements.
Second, the post-Independence leadership in most business families has been in competent hands, capable of leading their managerial workforce from the front and evoking great deal of trust from the shareholders in their companies. While few of the leading lights of the private corporate sector before Independence could boast of high levels of education or professional training, their successors are well-educated and well-versed in the art of management. So are the leaders of the new business families that have sprung up in recent years. The younger generations may or may not have the vision and entrepreneurial traits of their forbears, but with their managerial capabilities and technical skills they have been able to introduce a certain measure of professionalism in the management of their concerns.
Third, until very recently, the private sector firms have been operating in a protected atmosphere. Though constrained by the licence-permit dispensation, they had an almost undisputed sway over a large domestic market. Their products admittedly were shoddy and services poor by world standard, but the virtual absence of competition from superior quality goods helped most of the companies offer good returns on investment. The investors, therefore, had little reason to feel dissatisfied with the management. Firms in unprotected sectors such as textiles did suffer, but it caused no irreparable damage to the standing of most of the prominent families, as they had highly diversified portfolios.
And lastly, there is no tradition of corporate raiding in India. Swaraj Paul learnt this the hard way when he tried to grab the dcm and Escorts in the ’80s. The failure of the mighty Dhirubhai Ambani to take over Larsen and Toubro during the early ’90s proves the same point. Although there are some feeble straws in the wind pointing to the possibility of change in the near future in this respect (such as Kishore Chhabria’s attempt to snatch a Vijay Mallya firm), so far only few moves to grab companies through stock market operations have been made, and still fewer have been successful.
There is no doubt, however, that great business feats can now be achieved through stock market operations. It is now possible for an ambitious individual, without much financial strength but the capability of harnessing the stock markets, to raise finances for sizeable projects. Dhirubhai Ambani, the son of a poor Gujarati school teacher who started his working life as a petrol pump operator in Aden, built his gigantic empire in this manner and rose to number three position in the private sector within a span of just three decades. Friendly acquisition through stock exchanges has been another route to build business fiefdoms. The Goenka and Khaitan families who, for instance, were still backbenchers in the Indian business scene in 1947, but are now included in the bt list of top 50 business houses, started their rise through acquiring British business firms after Independence. A little later Manohar Chhabria, who was nowhere on the scene until the early 1970s, chose the same route.
What all this means is that the family business has gone from strength to strength since Independence despite a rather turbulent environment it had to contend with during this period. It survived the popular socialist rhetoric of the early years of the Republic, braved the pressure of uncertain directions during the ’70s and early ’80s, and now seems to be all set to face the challenges of a more liberalised economy. During this period, while the older business families held on to their own and even expanded their operations, a large number of new families have entered the scene. The result is that the social background of the families dominating the private corporate sector has become much more variegated than ever before.
On the eve of Independence, prominent business families were either Hindus (Vaishyas, Brahmins, Khatris, Patidars and so on) or Jains and Parsis. Now new social groups, that were nowhere in the picture or were still on the periphery in 1947, have risen to the centre-stage. The entry of the Chhabrias and the Hindujas (both Sindhis), Mappillais of MRF Group (Christian) and Hasham Premji of Wipro Group (Muslim) into the hallowed class of the top 50 is sufficient proof.
With business having now become a much more respectable profession in the eyes of society, the chances are that the composition of Indian business would become still more varied in the near future, giving lie to an oft-repeated myth that there is something subversive of material ambition and attainment in Indian culture.
It would all depend on how the business families cope with the competition that is bound to become far stiffer as the Indian economy gets increasingly integrated with the global economy. Their initial response has been promising, and if we go by the resilience they have displayed in the past, family business can hope to remain a dominant fixture of the Indian business scene for a long time to come.