FAMILIES SPLIT. Most often with disastrous consequences. So, what’s special about the Ambanis? As with most other things with them, especially their very nasty public acrimony, the contours of today’s settlement should go down as a landmark in the history of Indian family businesses. It’s too early to predict which of the two Ambani brothers — Mukesh or Anil — will eventually outperform the other. But one thing is clear: unlike past family splits across corporate India, this settlement seems to leave little scope for a loser. This is because both brothers are set to inherit huge growth opportunities. Mukesh Ambani, a global scale petrochemicals business. Anil Ambani, the telecoms and energy ventures, that though nascent, have the potential to emerge in the global big league in the future. The split takes into account the need to preserve the business integrity of RIL, built on the matrix of forward and backward linkages. Today’s settlement leaves that entire matrix intact. It also preserves the business integrity of Reliance Infocomm and Reliance Energy. Other than that, the settlement promises to untangle cross-holdings across the companies in question, to make the split clear-cut and permanent, virtually leaving no room for one brother to disrupt or manipulate the other’s business plans. Only time will tell how soon the brothers will untangle the cross holdings and buy each other out from their respective businesses. But by providing clear hints of their intention for a cash payout, the Ambanis appear to score better over other business dynasties that split in the past.
With the exception of the DCM Group of the Shriram family, most family business splits have only resulted in the change of management control where individual stakeholders from the families have taken charge of the boardrooms of their respective business units and corporate nameplates without resolving ownership issues. In the case of the Shrirams, the split, though painful, was methodical and cross-holding issues were resolved with judicial intervention. It took the Shrirams only a year to effect the split once individual family members decided to go their own ways. Effecting the final settlement took only about six months. The Shrirams hammered out a settlement without resorting to external intervention or seeking government mediation. The reason why most of their businesses failed subsequently and only a few survived the separation is a remark on the management signatures of individual family members.
The Birlas, India’s biggest business dynasty till the ’80s, are perhaps the best example of family settlements being skewed in favour of one branch of the family at the cost of the other. When the Birlas split in 1983, following Ghanshyam Das Birla’s death, they only resolved to demarcate management control among the various stakeholders in the family, without actually resolving ownership issues. As a result, tangled inter-corporate holdings across businesses controlled by rival factions have not been resolved to date, sapping management energy and making profitable businesses vulnerable to hostile takeovers as with Pilani Investments and Century Mills. The discomfort of the Birla clan members with R S Lodha’s inheritance of the late MP Birla’s assets is a distinct pointer to their vulnerability to hostile takeovers.
The Birla family split also did not provide for preserving the business integrity of their ventures. The Birlas split their textiles, cement and other commodity interests under various group companies that went to the successors of G D Birla. As a result, the bigger beneficiaries started on a stronger wicket, while others were denied the advantage of operational scales. Ideally, the Birlas should have integrated their individual commodity businesses under distinct corporate banners before carving up the empire among the various claimants instead of carving up assets as existing business operations under individual companies. Had they done so, the separation would also have imparted integrity to their respective scales of operations, be it in cement or textiles and made those businesses viable.
The history of splits in Indian business families reserves the biggest failure for the Modis. The Modi empire, set up by the late Gujar Mal Modi over 40 painstaking years, was built around two distinct lines of business activity — textiles and commodity manufacturing with sugar as its mainstay. G M Modi built his business around these two nuclei, setting up several companies and providing forward and backward linkages to the core businesses. Like most other industrial houses, the Modis set up separate companies for similar operations as giant operational scales were not possible because of licensing restrictions.
When the Modis finally split in 1989, they sought the easy option — of effecting change in management control among the various claimants without resolving cross-holding issues or securing the business integrity of their various operations. The untangling of cross-holding remains a subject of judicial dispute among the Modis. And none of the family members have survived the changes forced by the opening of the economy to foreign investments and the scaling down of financial support from state-run funding agencies. Also, managerial incompetence resulted in once blue-chip companies turning sick, leading to closures or sales to investors outside the family. Further, wherever inter-corporate linkages in the manufacturing chain were broken, as in their huge chemicals businesses that were linked to their textile operations, the separated companies became unviable because individual family members were no longer committed to supply sourcing from sister companies that were no longer under their management control.
To an extent, the Singhanias too became victims of family separation leading to the disintegration of business linkages among the split entities. This, coupled with management incompetence led certain branches of the family, as with JK Synthetics, to turn sick, while those with control over core business operations of the undivided group continued to prosper.
On the other hand, in the case of the Thapars even during their joint family business days, individual members managed separate business units as an integrated whole without interference from other family members. Business leaders within the family were individually responsible for the success or failure of business operations under their control as with JCT, Ballarpur Industries, Crompton Greaves and Greaves Cotton (later Greaves Ltd). This was achieved even as the role of a constitutional patriarch was respected. This made the Thapar family split less painful, reserving existing management rights of individual family members over integrated businesses while leaving cross-holding issues to be resolved at a later date and granting the rights of permanent proxy to heads of separated businesses.
What are the lessons from this?
Family businesses that grow into sibling partnerships and cousin confederations can be best preserved by either of several options. One way out could be through a complex restructuring of the top management by inducting new family members creating new positions, and sharing management responsibilities and processes. This has been successfully tried out by some of the southern business dynasties such as the Murugappas and the TVS Iyengars. A second way out could be through the break-up of businesses by restructuring both ownership and management responsibilities. This has been unsuccessfully tried out by most north Indian business families as explained earlier in this report, resulting in the collapse of both family and business structures. For the first time in the history of Indian family business, the Ambanis having taken recourse to such a strategy, seem to stand a solid chance of success. But the verdict on this will have to wait for another day. A third option is to simplify the ownership structure with fewer, or even one family shareholder retaining the management command concentrating absolute powers in the hands of the group patriarch. This seems to be the case with the Munjals of the Hero Group where absolute power rests in the hands of group chairman Brijmohan Lall Munjal who heads a diversified business empire, individually managed by an army of family members, and interlinked to each other in an integrated whole.
Back to Essays