Road to 70: Family comes first for India Inc

Business Standard analyses top corporate groups since Independence and how they have stood the test of time

Indian economy has gone through a roller-coaster ride since the country's Independence. In 1947, India was an open economy but by the mid-1950s, big business was a bad word and soon the government placed regulatory limits on growth of big firms. Public sector firms were at the centre of the economy. Economic policy came a full circle in 1991, as P V Narasimha Rao government unleashed reforms and liberalised the economy. Big businesses and foreign capital were now objects of desire, rather than derision.

All through this change, one feature of Indian economy, has remained unchanged - the dominance of family-owned enterprises. Fifteen of the top 20 business groups in 2016 are family-owned. Together, they controlled nearly Rs 26 lakh crore ($390 billion) of assets at the end of FY16, accounting for 84 per cent of the combined assets of the top 20 business groups. They generated revenue worth Rs 18 lakh crore in FY16, accounting for 80 per cent of the sample combined revenue, demonstrating resilience in the face of dramatic changes in the economy since Independence.

But, beneath this apparent status quo, there has been a big churn. Except for a handful, most family-owned groups have fallen by the wayside. Conversely, many of today's top business groups were either very small in the early 1950s or are products of post-Independence economic growth. In all, only three business groups that were among top 20 in 1951 - Tata, Birla (AV) and Mahindra - are still in the league table. And, in case of of Birlas, only one of the branches have managed to maintain its dominance.

Experts attribute the churn to a group's (family) adaptability factor. "The groups that adapted to the new environment such as 1956 industrial licensing or post-1991 market reforms continue to grow, while others fell off the radar," says Jayati Sarkar, economic historian and professor of economics at the Indira Gandhi Institute of Development Research (IGIDR).

For example, the 1969 anti-trust Monopolies and Restrictive Trade Practices (MRTP) Act placed limits on growth of big businesses, directly hitting prominent family-owned groups. But this also made way for newcomers such as the Om Prakash Jindal group, which took advantage of the growth restriction on incumbents such as Tata Steel (then TISCO). Many of today's cement barons also owe their rise to the same law.

The 1970s also witnessed the rapid rise of the Dhirubhai Ambani group. The Ambanis grew by tapping opportunities in sectors where corporate India's old money was hardly present - synthetic textiles and its entire value chain from petrochemicals to crude oil refining.

In all, 16 of today's top 20 business groups are products of the post-independence economic growth. They now account for two-third of the combined assets and nearly 70 per cent of the combined revenues of the top 20 in FY16.

The 1991 economic reforms accelerated the churn. Nine of the current top 20 business groups owe their rise to the opportunities unleashed by the reforms - abolition of industrial licensing, free cross-border movement of capital and opening of sectors such as banking, infrastructure and telecom for the private sector. This led to the rapid growth of business groups such as Bharti, Adani, GMR, HDFC and the Jaypee group.

With the global software boom, Infosys and Wipro became the 15th and 16th largest business groups, respectively. Tata Consultancy Services is the most profitable and valuable company in the Tata group, while Tech Mahindra is the group's second largest business after farm equipment and automotives. Others put the blame on internal factors. "The succession issue has been the Achilles heel for family businesses. Groups with smooth transition to the next generation have been better at taking advantage of new growth opportunities in contrast to those where succession led to family squabbles," says Saurabh Mukherjea, Chief Executive Officer institutional equity, Ambit Capital.

A case in point is the contrast in the performance of the AV Birla Group and other branches of the family. Similarly, 1980s championS such as Nanda of Escorts, Modi and Bangur lost out in the 1990s due to the division of the original empires and resultant inability of individual branches to fund growth and expansion.

Many family-owned businesses are under stress due to high debt and poor financial performance of their capital-intensive ventures in the metal, power and infrastructure sectors. This raises a few questions about the future of family enterprise in India.

Sarkar, however, remains optimistic. "Large family-owned business play an important role in emerging markets like India, where institutions are not fully developed. They have their own internal markets for capital and labour that helps them overcome the challenges of an underdeveloped factor market outside," she adds.

Mukherjea, however, says family-owned businesses will gradually lose their importance as capital availability improves and market institutions mature in India. "I still see a future for family-owned businesses but those which focus on their core competencies and are global leaders. There is little hope for groups that are large but not industry leaders."

He could already see future champions in single company but industry leading family-owned enterprises in sectors such as automotive, pharmaceuticals and banking & finance among others.