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Avoid unnecessary restructuring

Ownership restructuring seems to be the current buzzword with several prominent Indian business families. The Essel Group, a major player in the entertainment space, has just completed restructuring that aligns ownership of each business with the family member currently managing it. The fifth generation of Kirloskar Group has also announced a restructuring that aims to facilitate increased identity of ownership for individual family units. However, it appears that family groups are yet to understand the processes and benefits of keeping their families and businesses together.

The Essel Group is a second-generation family business with a market cap of $3.2 billion. Its Zee Entertainment division, which accounts for two thirds of the group, has been given to Subhash Chandra, the eldest of four brothers, for his outstanding contribution to the group. His brothers have been given other businesses as part of the restructuring, but they are relatively small companies by comparison.

The equity holding pattern also varies widely across companies. Interestingly, the younger brothers thought it right to reward Subhash disproportionately. The brothers thought that the best way to avoid possible bitter fights later was to amicably allocate 70–80% of family holding in each company to the brother who is managing it; the balance is held by the other brothers. In the event of a brother wishing to exit, he will swap his shares in the other companies with the 20–30% held by the rest.

While this appears to be a simple calculation, there are a number of uncomfortable thoughts that linger:

  • The asset base of each business will vary in the future since a number of the variables that determine business performance are uncontrollable. At the end, one may find siblings at different points on the wealth continuum, some struggling while others are relaxing.
  • The group will lose the advantages of mutual consultation and collective thinking among the brothers and key executives once the walls of the silos are hardened with separation of ownership loyalty among brothers. In a business such as entertainment that is facing tough competition, the family members stand to benefit from the wisdom of all working together. With the imminent disappearance of the group loyalty, it will be difficult for any single business unit to benefit from the vision of others.
  • The net result of division of a rapidly growing group is the resultant limitations in benefiting from scale advantages of resources including brand, funds and manpower. Members will find it difficult to raise resources in the market as each one is small.

The Kirloskar family, going a step further, announced that individual family units would hold shares in individual companies, apparently making the holding company that held all group shares defunct. This appears to be an initial salvo in creating more freedom for individuals and facilitate easier separation, if necessary.

There are plenty of such cases. The amoebic pattern of splitting as the organisation and family grow seems to be perceived as the best option. Families and their ill informed advisors do not attempt to develop options to stay together that will enable them to grow big and compete in a globalised economy. They take the more convenient route out.

During the pre-liberalisation era when scale of operation was not critical, the amoebic model would not have had significant economic implications. The situation is different now and there are a few families that are trying to reap the benefits of togetherness. The Rathi family, owners of Sudarshan Group, has now created a family governance mechanism that enables them to work together and perpetuate the emotional and material wealth of the family. 

They had an ill-advised split many years ago when one of the leading family patriarchs suggested they keep dividing the family as the business grew. Interestingly, his own family is highly fragmented now and only has an influence in one branch of the business.

There is an urgent need for families and their advisors to be educated on perpetuating family business. This is particularly important in India because of the natural way the joint family system prevailed (and is still prevailing in many parts) over centuries. It will be difficult for Indian family business groups to meet their global growth aspirations without good governance mechanisms in the family. 

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