The trials of keeping it in the family
In a landmark judgment last week, India's supreme court ruled in favour of Mukesh Ambani, India's richest man, quashing his younger brother Anil's appeal to honour a family deal to access natural gas from the offshore Krishna-Godavari basin abutting India's east coast.
The deal was brokered by their mother in 2005 while partitioning the Reliance industries empire built from scratch by their father, the late Dhirubhai Ambani. According to the pact, Mukesh's company, Reliance Industries (RI), promised to supply gas to Anil's Reliance Natural Resources (RNR) at a price far lower than that set by the government. But soon after he agreed, Mukesh sought to annul the deal with his brother, reckoning it was a money-losing proposition for his company. It led to a court battle that raged over two years and a series of bitter public exchanges.
Last week, chief justice KG Balakrishnan and justice P Sathasivam ruled the family agreement was not in the corporate domain and was not approved by the shareholders. The accord was therefore not legally binding, they said. "RNR looks forward t0 expeditious and successful renegotiations with RI ? to secure gas supply for the group's power plants in line with the [verdict]," Anil said after the judgment, indicating he would strive for a truce with his brother.
But the acrimony remains. Observers say the high-profile feud between the world's richest brothers - hardly about natural gas alone - is symptomatic of the power struggles and the in-fighting raging within the second and third generations of family-owned business conglomerates that dominate India's corporate sector. Such groups are the backbone of the Indian economy. About 95 per cent of all businesses in India are family owned, which contribute between 60 and 70 per cent of India's GDP. More than 90 per cent of India's 13 million small and medium enterprises in the manufacturing sector are family owned. At least half of the top 30 companies listed on the benchmark Bombay Stock Exchange index are controlled by founding families, revered by employees and shareholders alike.
Family-run business empires have held sway in India for more than a century, with conglomerates such as Tata, Birla and Reliance dominating industries including cars and telecommunications. Their owners have been lionised in films and hailed as visionary entrepreneurs who emerged from modest backgrounds to achieve enormous wealth and fame. Dhirubhai Ambani is regarded as a pioneering business leader who started by trading yarn and built an empire that has become India's largest industrial group. He introduced India to the equity culture, drawing the savings of India's burgeoning middle class to the Reliance stock.
Thanks to his business acumen, more than 3.5 million Indians - one in every four investors in the country - became Reliance shareholders. Mr Ambani died in 2002 without leaving a will and Mukesh and Anil became the undisputed inheritors of his legacy. But differences soon surfaced. Their mother mediated in 2005 to partition the Reliance assets. Mukesh was given oil, gas, and petrochemicals, while Anil received control of the power, finance and telecoms businesses.
The recent gas dispute, analysts say, highlights the need for family-run enterprises to plan more judiciously for succession. The Ambanis are not the only ones to fall out over inherited businesses. Since the 1970s, high-profile break-ups have occurred at conglomerates operated by the Birla, Modi, Singhania, Mafatlal, Shriram and Goenka families. Only 30 per cent of family businesses survive to the second generation, barely 12 per cent to the third and just 3 per cent remain family controlled by the fourth generation, according to a research paper by the Sterling Institute of Management Studies, based in Mumbai.
"Inadequate estate planning, failure to properly prepare and provide for the transition to the next generation, coupled with lack of funds to pay estate taxes were among the three leading causes for the failure of family-owned businesses," says the research paper Future of Family Business in India. It found in almost 50 per cent of the cases the splintering of an enterprise was precipitated by the founder's death.
Despite these examples, 19 per cent of family businesses have not introduced any estate planning or any other strategic succession planning besides writing a will. "Family control per se is not a problem," says Kavil Ramachandran, a professor of family business and wealth management at the Hyderabad-based Indian School of Business. "In fact, family control provides a long-term dimension. Individually, you're like a private steward with a short-term goal. A family has a longer vision to grow the business."
The Barclays Wealth-Economist Intelligence Unit survey conducted last year during the peak of the economic recession, found that family-run businesses were better geared to bear the impacts of the downturn than other enterprises. Ninety per cent of the more than 2,000 respondents from family-run businesses based in India said they had no plans to sell or exit their businesses, while 67 per cent said they were keen to ensure financial security for their dependants.
"These findings reflect strong family values among Asians, especially Indians who perceive their business as an asset to be passed down to the next generation rather than just a source of personal wealth," Satya Bansal, the chief executive of Barclays India, said when he released the study last year. Meanwhile, a 2003 study by the Grant Thornton International Business Owners' Survey in India conducted among 504 medium sized family-run businesses found most had set up tighter internal audits to combat fraud. Forty-six per cent had already formed an audit committee compared with a global average of 34 per cent.
But the Satyam alleged fraud scandal that rocked India early last year shook the faith in family-run enterprises. As a teenager, Ramalinga Raju inherited a grape growing business from his father, Satyanarayana Raju, which was profitable enough to support entrepreneurship into the next generation. Banking on that prosperity, Mr Raju built Satyam Computers in 1987. From there, Satyam expanded to a point where it had 185 fortune 500 companies and more than 53,000 employees.
Mr Raju, like Ambani, was praised as a visionary. But from about 2002, he allegedly perpetrated a fraud that totalled about US$1.5 billion (Dh5.5bn) by early last year. In January last year, he confessed to having cooked the books for years. He said as the situation had worsened he found he was "riding a tiger, not knowing how to get off without getting eaten". Mr Raju is in custody in India awaiting trial.
According to the Indian Central Bureau of Investigation, retail and large institutional investors lost 140 billion rupees (Dh11.36bn) in the alleged Satyam scam due to the dramatic erosion of the company's stock value after Mr Raju was arrested. "He destroyed the family inheritance and the legacy his father had so diligently built," Mr Ramachadran said. "The family members who lead these firms are not private citizens. Their actions impact the stock market and the economy. They can't afford to have a narrow, myopic vision."
Published: May 15, 2010 04:00 AM