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It’s all in the family
Bad succession planning, flawed strategy, non-professional management and conflicting business and family interests have hurt the fortunes of many Indian business houses
COMMENTS PRINT

"For us it was like coming back from the brink of bankruptcy," recalls Vinay Bharat Ram,

DCM

ICON FROM THE PAST: The Delhi Cloth Mills (DCM) was a symbol of the times

Chairman and Managing Director, DCM, of the time (1995 to 2005) when his company had run up a huge debt of Rs 400 crore and personal guarantees of Rs 90 crore had to be furnished. "I would have regular nightmares about defaulting," says this son of Bharat Ram and grandson of Sir Shri Ram, who was responsible for turning the erstwhile Delhi Cloth & General Mills into one of the biggest conglomerates of pre- and post-Independent India (till the early 1970s). The company's interests spanned textiles, sugar, chemicals, food, alcohol, fertilisers and cement, among others.

Sitting in his sparsely-furnished third floor office in New Delhi's Kanchenjunga building, it must be difficult for the Harvard-returned economist to come to terms with his current position. The company's fall from grace, he argues, is the result of a double whammy—a lengthy legal battle with Swraj Paul, a British businessman of India origin, trying to take over Escorts and DCM through stock market operations in the mid-1970s, and the government's decision to close the company's mills in the heart of Delhi in tune with the Delhi Masterplan of 1962.

Although still saddled with Rs 200-crore debt, Vinay Bharat Ram is confident his company is back on track with help from a debt restructuring package worked out by the financial institutions. But this fourth largest conglomerate of the early '70s is a pale shadow of what it was in its glorious days. His son and the new Chief Financial Officer Hemant Bharat Ram, sums it up: "That was our time and now it is theirs." His reference is to the new stars of business, the Ambanis, Bhartis, Premjis and the still strong Tatas, Birlas and Mahindras.

The feeling of having got left behind in the business race is palpable in the tenor of voices of the old league—the Doshis, Goenkas, Kirloskars, Mafatlals, Modis, Shrirams and Singhanias, among others. But was it just a twist of fate in all these cases that did them in? Well, not so.

Ominous Splits

Says Gurcharan Das, former CEO of Procter and Gamble and a keen observer of family businesses: "The split in the Shriram Group (DCM) left their companies in a financial mess." Vivek Bharat Ram, co-promoter of DCM Daewoo, did not have the cash to subscribe to the expansion of the car company's capital. So his family's share in the company declined from 34 to 10%. Arun Bharat Ram defaulted on paying Rs 70 crore, the final instalment for taking over Ceat's nylon tyre cord division. Vinay Bharat Ram defaulted in 1996 in repayment of inter-corporate deposits.

Family disputes and the lack of succession planning triggered the decline in fortunes of many business families. The onward march of the Singhanias, who were leading national players post-Independence, was slowed down by the division in 1979 of the businesses between the three sons of Kamalpat Singhania, representing the third generation.

The Modi group, founded by Rai Bahadur Gujarmal Modi in the early 1930s, was among the largest conglomerates in the early 1980s, with businesses ranging from chemicals to sugar to airlines to sponge iron. But following the family split in 1989, turf war among the third generation family members—five sons and three nephews—pulled the buisness down for all. Many of these businesses like Modipon, Modi Industries and Modi Rubber continue to flounder from one crisis to another.

Many business houses failed as they could not adjust to the new rules of the game

Infighting did in others, too. Fortunes of the Kirloskars, who had a pole position in engineering, plummetted with the death of the patriarch, Shantanurao Kirloskar (SLK), in 1994. When Vijay Kirloskar, the eldest of the third generation of the family took charge, it was resented by the Pune-based grandsons of SLK—Atul, Sanjay and Rahul—who wanted to venture out on their own. The Group touched its nadir with the default by Kirloskar Finance on payments to depositors and the parting of ways with Cummins Engine Co of the USA. Vijay Kirloskar's exit as Chairman seemed imminent.

The three brothers took independent charge of Kirloskar Oil Engines, Kirloskar Brothers and Kirloskar Pneumatic. In 2000, Vijay Kirloskar and six companies under him separated from the group. Says Arun Kirloskar, Chairman of the erstwhile Kirloskar Cummins: "The cohesiveness and the ability to work together, seen in the older generations of business families, were absent. Perhaps the succession plans in the group were not robust."

But rarely has any business house suffered such a steep fall as the house of Dalmia-Sahu Jain.

Modi Mills

PAST GLORY: Labour unrest ruined the Modi mills in Modinagar, UP

Started by Ramakrishna Dalmia, it emerged as a big player in the 1930s and within four years (1948 to 1952) took control of Punjab National Bank, Bennett Coleman & Co (the publishers of the
Times of India), Bharat Insurance, Lahore Electric and the Govan Group of Companies. Rohtas Industries, which he started with a sugar mill in Bihar, diversified into paper, vanaspati, chemicals and spun pipes, besides other segments.

The fortunes of the house, however, declined just as fast. The process started with the quiet break-up of the combine in 1952—the first major business split in Independent India—with Ramkrishna Dalmia and his son-in-law Shreyans Prasad Jain dividing the assets. What hurt the group more was the involvement of the founder in several cases of tax evasion. Many shady business practices were brought to light in 1962 by a special commission appointed by the central government. This caused irreparable damage to the group's reputation.

The absence of a clear succession plan, business focus, strategy or professional management and inability to separate family interests from business interests precipitated the decline of these families, says Richard Rekhy, Chief Operating Officer of consulting firm KPMG.

But not just the larger groups, such as the Birlas, Sarabhais, Bangurs, Mafatlals, Thapars, Walchands and Goenkas fell victim to this virus, the younger ones, too, like Raunaq Singh's Apollo, Bhai Mohan Singh's Ranbaxy and Manohar Chhabria's Jumbo fared no better.

It isn't surprising, therefore, that today's leading business houses are looking more closely at succession planning, like the Bajajs, for instance. The Ambani brothers' parting is still fresh in the minds of many, but interestingly, the post-split performance in their case has been inspiring—both have a networth of a trillion rupees on the basis of their stakes in group companies. Can family splits therefore be considered in isolation as a cause for failure? Even among groups that split, certain factions have done exceedingly well. Take for instance, the AV Birla family vis-a-vis the Ashok Birla faction, LM Thapar (Ballarpur) wing vis-a-vis MM Thapar (JCT) or Ranbaxy vis-a-vis Montari.

Licence Raj Hangover

Management consultants say the inability to cope with the changing environment, ruined several business houses. "Many were angry when the environment changed," recounts Arun Maira, Chairman of The Boston Consulting Group in India. The connections in high places that ensured licences to expand and grow while stalling the plans of others, were of less use in a de-licensed regime.

The desire to be present in every possible business, rather than sticking to their core businesses, only added to their woes. Says Das, "Diversification is a disease that many of the earlier groups succumbed to and found it rather difficult to come out of when the rules of the game changed."

It was Rajan Nanda's decision to diversify into telecom and healthcare that had become the albatross around the neck of the Escorts group, a company built from scratch by his father Hari Prasad Nanda. The telecom business—Escotel Mobile Telecommunications, a 51:49 joint venture with First Pacific, Hong Kong—initially did well and even managed to break even in 1997 despite having cellular mobile licences in the not-so-lucrative circles of Uttar Pradesh (West), Haryana and Kerala.

However, the lack of funds to make Escotel a national player and the government's licensing policy changes spelt mounting losses for him. The Nanda family was eventually forced to sell the telecom business at a loss of Rs 176 crore in mid-2004, and the red ink is still visible on its books.

His venture into healthcare with the acquisition of the Escorts Heart and Research Centre, fared no better. With little relevant managerial ability, Nanda eventually had to sell it off to the Ranbaxy-backed Fortis Healthcare for Rs 650 crore, despite opposition from younger brother Anil Nanda. The case is still in the courts.

A source discloses: "There was very little professional management in the group because Rajan Nanda was taking most of the decisions himself. Also, there was no attempt to grow the hospital business."

An interesting possibility highlighted by Vivek R Gupta, Managing Director at AT Kearney, is that the second and third generations in many of these business families perhaps had it too easy. A large number having studied overseas, tried to implement the management practices they had learnt. Not all of these were relevant or beneficial. In fact, a study of wealth created by multinationals in the post-liberalisation era reveals they have been far outperformed by Indian family-run businesses as well as public sector enterprises, contends Maira, as a pointer to the follies of deploying a one-size-fits-all approach.

Shriram clan

The Shriram Clan

Dwijendra Tripathi, former professor at IIM Ahmedabad and author of
The Concise Oxford History of Indian Business, says the inability to diversify into new products and services consistent with the opportunities thrown up by liberalisation felled many of these family businesses. He points to factors such as a trading approach and the lack of professional management as reasons for the setbacks suffered by some like the SK Modi family, which entered the airline business by launching Modiluft Airlines, a venture that failed.

Modi family scion BK Modi's joint ventures with Xerox Corp, Alcatel, Motorola and Olivetti ran into trouble once the foreign partner realised that the domestic player was bringing little to the table other than managing the environment. But even that became unnecessary once the economy opened up. "They were no longer interested in just paying rent to the landlord," adds a source.

Management inertia and the failure to respond to a rapidly changing industrial climate found a prey in the Ahmedabad-based Mafatlal Group that ruled the roost in the 1930s, with nine textile mills and fingers in insurance, retail, financial services, textile trading, jute mills and shipping. The group's fortunes took a dive in the early 1990s, when low investments in technology and the growth of the powerloom sector sapped its textile business. Family fights exacerbated the fall. So, can the Mafatlals and their peers make a comeback or is their extinction foretold? Not necessarily, says Das.

As long as they can separate their own interests from that of the companies, create an environment to recruit and retain outside talent, bring focus to their operations, use joint ventures to upgrade their skills and knowledge and follow a consistent strategy, they can still emerge winners. Will it happen? Only time will tell.

(With inputs from Naren Karunakaran, Ranjana Kaushal and
Anurag Prasad)

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