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Split-proof strategy?

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To limit losses from internal fissures, has handed the reins of the family council to wife Bina. The couple explain the reasoning to Bhupesh Bhandari.

For long, was happy to stay in the shadow of her industrialist husband, KK Modi. She ran restaurants in Delhi and collected art for his offices, but had little say in business. Now she has an onerous responsibility: Bina heads the KK Modi family council which comprises, apart from husband and wife, their three children — sons and and — and grandchildren. The council’s job is to safeguard the family’s interests in group companies Godfrey Phillips (tobacco and tea), Indofil Industries (agro-chemicals) and (direct marketing), act as a sounding board for new business ideas, and see how youngsters can be broken into the business. “I made it a point when KK (Modi) suggested to me that I will take it only if he gives me the veto power. They have all given it in writing. I insisted,” says she. It’s clear who wears the pants.

Bina says the family council has been formed because the business has become big — close to $1 billion now — and the third generation is ready to join. “Our first grandchild (Charu’s daughter Priya) has joined the business. She trained with Montior for a year and is now in Godfrey Phillips. The other one will be ready in two years. Lalit’s (former IPL commissioner Lalit Modi) kids will also be ready soon,” says she. “Instead of everything going into the board room for discussions, we have regular meetings of the family council.” Some meetings of the family council have taken place. Lalit, along with his wife and children, participates through a video link from London. Minutes are kept. Sarthak Behuria, the former chairman of state-owned Indian Oil Corporation, who has joined as group president, also attends to answer any question on the operations and performance of the companies.

KK Modi has a slightly different take on it: he is convinced that it is a good way to keep his children from splitting the business in the days to come. Nobody perhaps knows the toll family squabbles take on business better than him. The Modis, at one time, were amongst the top five families of India. Patriarch Gujarmal Modi, KK Modi’s father, held the family together, and the group made everything from sugar to alcohol, hurricane lanterns, vanaspati, tyres and textile. Once Gujarmal Modi died in 1976, fissures erupted within the family and there were a series of splits. As a result, the Modis failed to grow and innumerable newer businessmen became bigger than them.

Gujarmal Modi had six daughters and five sons. The business went to the sons; the daughters got nothing. KK Modi is perhaps aware that such a situation is not tenable in present times and does not want to exclude his daughter. She runs a business school and serves on the board of Indofil. “Division is troublesome if you want to become a global company,” says he. Bain & Co was brought on board to suggest a way out. There was no precedent within the country; so the Modis went abroad to study family businesses including the Ferragamo family in Italy. Finally, a solution to the puzzle began to emerge. The first piece was a corporate centre to manage the day-to-day affairs of the group. Behuria heads this team, and all group CEOs report to him. He had initially joined as an advisor “because he had other commitments” and became full-time group president in April this year. The centre acts as a buffer between the family council and the companies.

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The next was the family council. And the third was the trust that now holds all the family shares in group companies. Its four beneficiaries are KK and Bina Modi and the three children. KK Modi, 71, is the managing trustee; Bina will take over after him. The articles of the trust say the beneficiaries will appoint a person unanimously to run the business for a period of three years, after which the person can seek reappointment. If they don’t agree, merchant bankers will take over the businesses and sell them; the money will be divided between the beneficiaries. “This money will be 50 per cent or 70 per cent of the real value; so there should be a tendency not to sell. The idea is either we sell or we remain together. If you sell piecemeal then the value of the group gets destroyed,” says KK Modi. The memory of the erosion in the Modi group’s brand equity because of the incessant fights is clearly too recent in his memory.

KK Modi is also wary of inducting family into senior management positions without accountability. “If things go bad, the management should be changed. With family members, that option is gone. Even if a family member gets into the business, he has to perform and work under the group president,” says he. “We don’t want the kind of situation that arose in the Modi group when there were two managing directors. We will sell rather than be in such a situation. If we sell at the beginning of the dispute, the price we will get will be several times more than if we do so after 10 years. This is what happened in the Modi group. When the dispute started, the Modinagar units (between Delhi and Meerut) were prosperous; by the time it finished, most of the units were gone.”

The new structure, KK and Bina Modi hope, will help the group treble in size to $3 billion by 2014-15 and improve its valuation from around $750 million now to $5 billion by 2016. There is a 30-30 plan, says Bina, to make the revenue as well as profit grow 30 per cent every year. But if the group wants to attain that size, this growth won’t be enough. According to Behuria, growth could also come through acquisitions in India and abroad. The group, he says, can make acquisitions of up to Rs 1,000 crore (over $200 million).

KK Modi wants to grow the tobacco business, which accounts for almost two-thirds of his turnover. The agreement with Phillip Morris, which owns 25 per cent in Godfrey Phillips, has been reworked so that the company has the right to use brands like Four Square, Red & White and Cavenders in perpetuity. With Marlboro, it has entered the premium segment of the cigarette market. Expansions have been made into bidis (under the Sona 24 brand) and pan masala (Pan Vilas). KK Modi also thinks that Godfrey Phillips could create a space for itself in the cigarette market overseas, especially in the economy segment.

KK Modi hasn’t taken a puff in all his life. And the public sentiment against smoking is on the rise. So, isn’t tobacco in general and cigarettes in particular a dying business? KK Modi says he is not looking at new smokers, and wants to give safer options to the existing buyers. The Godfrey Phillips bidis, which are currently being test-marketed in Rajasthan and Haryana, thus come fitted with a filter. Of course, these will have to sell at a premium over normal bidis. “We are helping people have safer products,” adds Bina. Clearly, the move has the blessings of the family council.

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