‘Traditional values have served India’s powerful family businesses well for generations, but is the need for modernisation now too strong to ignore?’

The Indian model of family-controlled business dynasties, often spanning a dizzying range of industries, shows few signs of dying out.

About 90 per cent of the nation’s enterprises are family affairs, from behemoths such as Tata and Reliance Industries right down the food chain to SMEs and micro-businesses.

Even as India’s economy has grown, modernised and become more closely integrated with the rest of the world over the past two decades, this model has changed little.

While family firms are often seen in the West as something of an anachronism, in India they remain the lifeblood of the economy.

One of the main factors behind the durability of the family-owned business is that the ancient bonds of kinship and caste remain powerful forces in India.

These serve to ensure that commercial skills and expertise continue to be passed down from one generation to the next.

Many of India’s most successful business empires come from tight-knit communities such as the Baniya and Marwari trading clans from the western desert states of Rajasthan and Gujarat.

Both India’s richest man and India’s richest expatriate – Mukesh Ambani of Reliance and London-based steel tycoon Lakshmi Mittal – are Marwaris.

If caste and community ties help to explain why families have become important repositories of business know-how in India, what explains their fondness for conglomerates?

One reason is that many of these enterprises have expanded into new areas because vertical integration has been the easiest way for them to prosper.

India’s soft state throws up endless challenges. Court decisions can take decades, contracts are hard to enforce, infrastructure is weak and red tape is a constant problem.

In an environment where so little can be taken for granted, becoming self-sufficient and developing internal economies that enable groups to operate with the minimum of external interference is an obvious answer.

Is there any likelihood that the family model will diminish in influence as the country suffers its worst economic slump in over a decade?

Not according to Praveen Chakravarty, chief executive of Mumbai-based investment bank Anand Rathi, who knows many of the most prominent families well.

“During a downturn the resilience of a family-owned business is actually far superior to that of a conventional plc,” he says.

“The element of continuity is almost taken for granted in a family business, so there’s no question of changing management or selling up when times are tough – as there would be in the West. Instead, the focus automatically goes on managing costs.”

This approach has helped many Indian families to retain control of their companies through the ups and downs of multiple economic cycles.

For all its benefits, the model does have a particular flaw when it comes to succession planning and the division of assets when a new generation assumes control.

Sibling rivalry even has the potential to rip apart businesses that have taken decades to build.

The death of Dhirubhai Ambani, the founder of Reliance, in 2002, for example, led to one of the most notorious family feuds in Indian business history.

One solution is to adopt more modern codes of corporate governance and develop more professional managers.

With rich Indian families increasingly sending their sons and daughters to study and work overseas before returning home to run the family firm, it’s a trend that’s likely to grow.

Illustration: Lyndon Hayes/Dutch Uncle

19/09/2013

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