White Paper- Family
Businesses: The emerging landscape, 1990-2015
Indian family businesses flourished and
contributed significantly to the growth of the economy in the post
liberalisation era
A study conducted by the Thomas Schmidheiny Centre
for Family Enterprise at the Indian School of Business (ISB) reveals that
liberalisation led to the rise of Standalone Family Firms (SFFs) in India and
they were the primary drivers of accelerating the growth of the Services Sector
in the country.
Authored by Dr. Nupur Pavan Bang and Professor
Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at
ISB and Professor Sougata Ray of IIM Calcutta, the study chronicles the
evolution of family businesses in India since the initiation of liberalisation
in the country. A first- of- its kind, the study traces the progress of Indian
family businesses over a 26 year period from 1990 to 2015. The authors studied 4,809 firms listed on the
Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) of India as a
part of the study.
The year 1991 ushered in a new dawn in the Indian
economy with sweeping reforms across sectors. There were widespread
apprehensions about the capabilities of the family owned and managed businesses
to withstand the pressure of the newly created “freedom”. However, the study finds that not only did
the family firms withstand the new rush of competitive forces in the economy,
but also adapted to the changing business environment.
Based on their shareholding and management control,
the companies were classified into two categories: Family Businesses (FBs) and
Non-Family Businesses (NFBs). Family businesses were further classified into
Family business group affiliated firms (FBGFs) and Standalone family firms
(SFFs) and NFBs were further classified into State-owned enterprises (SOEs),
Multinational subsidiaries (MNCs), Other Business group affiliated firms
(OBGFs) and Standalone non-family firms (NFFs).
Key Findings of the Study:
The rise of standalone family firms: Close to 73 percent of the listed standalone
family firms were incorporated in the period 1981 to 1995. In comparison, only
49 percent of the business group affiliated family firms were incorporated in
the same period. As the pace of reforms picked up with liberalisation, more and
more standalone family firms started to leverage the changing business
landscape. While the family business group firms did take advantage of the
reforms in the early stages, it was the standalone family firms that emerged as
the single largest ownership category in terms of number of firms.
The growth in the number of standalone family firms
was driven primarily by the new firms in the services sector. Wholesale trade,
financial services and Information Technology were the most favoured industries
for the listed standalone family firms. This was reminiscent of the rising
contribution of the services sector to the GDP.
Growth of the Services sector: In the
financial year 1990, services sector accounted for about 45 percent of India’s
GDP while its contribution was close to 60 percent in 2015. Traditionally, family businesses were strong
in manufacturing but they showed an equal penchant for the services sector,
when the opportunities arose. But,
standalone family firms were the fastest growing category in the services. It
was because of their entrepreneurial acumen that India’s services sector has
grown so well in recent years.
While manufacturing and services contributed almost
equally to the total assets for family firms, in the case of non-family
businesses, the services sector accounted for more than 90 percent of their
total assets. Amongst the non-family firms, the State-owned enterprises
dominate the services sector with large assets in the banking sector, whereas,
the sector accounted for just 18 percent of the total assets of multinational
companies.
Family Businesses grew faster and contributed
more to the GDP and Exchequer: The study shows that the representation of
family businesses grew at a much faster rate than the non-family businesses. In
fact, evidence suggests that removal of restrictions and controls in the
liberalised era actually unleashed their entrepreneurial spirit. In 1990, family firms represented 15.7
percent of the GDP in terms of their total income, whereas by 2015, they
represented 25.5 percent of the GDP. In comparison, Non-family firms formed
20.5 percent of the GDP in 1990 and 26.6 percent in 2015.
Family firms accounted for 28 percent of all
indirect taxes and 18 percent of all direct corporate taxes in the financial
year 2015, while non-family firms accounted for 26 percent and 25 percent
respectively. Though, the pattern has oscillated over the years, overall, the
contribution of family firms has gone up from 1990 to 2015.
Asset Creation: The total assets were
highest for State-owned enterprises owing to their monopoly and massive
investment by the government, followed by business group affiliated family
firms. In 1990, family firms accounted for 24.7 percent of the total assets of
all firms in our sample. This grew to 27.7 percent in 2015. The standalone
family firms were able to grow in spite of not having the resources available
to a group affiliated firm. While the standalone family firms were large in
number [of firms], they were smaller in size. This was perhaps due to their
focus on services sector which were less capital intensive and also the lack of
resources.
Access to capital markets: The average
difference between the listing year and the incorporation year for business
group affiliated family firms was 14.76 years, whereas for standalone family
firms it was 10.01 years. The standalone family firms were probably forced to
list earlier compared to those affiliated with business groups due to the
capital constraints and limited sources of financing.
The SOEs were the last to resort to equity markets
to raise funds. The average number of years taken for SOEs to list was 34.07
years, as opposed to 14 to 17 years taken by MNCs, standalone non family firms
and other business group firms. The
study also noted that the average number of years taken for the firms to list
has been going down over the years pointing to the ease of access to capital
markets due to the regulatory changes post liberalization.
Impending succession challenges: Succession
remains the number one concern for most family businesses even today, as the
senior management comprises of family members in most cases. It needs to be
seen if the family businesses, especially the ones that are at the crossroad to
either transition to the next generation or on the cusp of making non-family
professionals their agents, survive the change.
The listed standalone family firms were younger at
an average age of 28.73 years than the business group affiliated firms. More
than 50 percent of the standalone family firms had been in existence for less
than 30 years. The first generation founder would still be actively involved in
most of these companies but many of them must be staring at a change of guard
in the near future. On the other hand, the non-family firms typically have
senior management personnel who are nominated by the board members and
appointed for fixed tenures.
The family business group firms have been around
for 38.44 years on average and the State owned enterprises have an average age
of 54.04 years. The MNCs, other business group firms and the standalone
non-family firms have 42.09, 36.9 and 35.16 years of average existence.
Conclusions
The study throws up two important developments that
are worth mentioning:
· One, the process of liberalisation in India
enabled family firms to take stock, restructure and open up new opportunities
in the services sector, thereby, increasing their contribution to the economy.
· Two, there was a wave of entrepreneurial spirit
that got unleashed due to conducive environment.
Indian family businesses have shown resilience and
have been progressed well over the years. They have increased their footprint
in the Indian economy. With better governance and more transparency, they will
only get better. Their capacity to transcend time is their greatest strength.
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