India’s Family-Ownership Factor

This article was first published by the Global Association of Risk Professionals, Risk Intelligence, November 26, 2018

https://www.garp.org/#!/risk-intelligence/market/investment-management/a1Z1W000004BThsUAG

Study underscores preeminent role of family-controlled businesses, even as multinational and holding-company investments rise

Promoters (founding shareholders/owners) of family firms have increased their shareholdings while non-promoters, institutional as well as small non-institutional investors, have reduced their stakes, a study by the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB) reveals.

Authored by Dr. Nupur Pavan Bang, Professor Kavil Ramachandran and Anierudh Vishwanathan of the Thomas Schmidheiny Centre, and Professor Sougata Ray of Indian Institute of Management-Calcutta, Family Businesses: Promoters' Skin in the Game finds that a pattern of declining stakes by promoters in BSE 500 companies, as shown by some prior analysis, is not true for all categories of firms. Confining the analysis to BSE500 firms does not give a true picture, as the BSE500 excludes most of the smaller, standalone family firms.

The study provides insights into the ownership pattern of family, as compared to non-family, firms and explores the heterogeneity within family firms. The study covers trends in equity ownership by various classes of shareholders for 4,615 firms listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), across different ownership categories, for the 2001-2017 period.

Key Findings

Rising promoters' stake. In India, family-controlled firms are greater in number than non-family firms. Lack of a strong legal framework to protect minority shareholding and other institutional voids make concentrated ownerships natural in India.

By steadily increasing their shareholdings, the promoters of family firms – both family business group firms (FBGFs) and standalone family firms (SFFs) – signal their growing confidence in the potential of their company, thereby instilling confidence among the investors.

Promoters of multinational corporations (MNCs) have also increased their stakes in Indian subsidiaries, probably indicating their belief in the “India story.” The promoter stake in State Owned Enterprises (SOEs) has been steadily falling over the past decade. 

This is in line with the policies of successive India governments to divest their holding in SOEs. Other business group firms (OBGFs) and standalone non-family firms (NFs) have also witnessed a decrease in promoter shareholding.

Rising trend of holding shares through companies. In FBGFs, the preferred mode to hold shares is through holding companies, while in SFFs the family members prefer to hold shares directly as individuals or as Hindu Undivided Family (HUF). 

In FBGFs, holding companies or trusts that hold shares of all companies on behalf of the family members enable better resource allocation, control, realization of synergies and tax planning within all group-level firms, and better management of ownership, inheritance and payouts at the family level. It also enables the family to professionalize each firm, while the family maintains a bird's eye view at the group level.

SFFs are younger, with less complex structures, both at the family and the business front. As they grow, complexities of inheritance, succession and growth would force them, too, to adopt better ownership structures. Therefore, we see a gradual increase in shareholding through companies even in the case of SFFs.

Declining institutional shareholding in family firms. Non-promoter institutional shareholding is lower in family firms when compared with non-family firms, and it has decreased further between 2007 and 2017.

As block holders, institutional shareholders influence the governance and strategy of the firm; if they refrain from investing in family firms, the pursuit of governance will take longer. Non-family firms in general have strong formal internal control mechanisms to keep the personal interests of managers out of the company's functioning.

Consequently, the probability of a strong and independent corporate governance mechanism is greater for a non-family firm. Institutional investors have a strong preference for firms with good governance. Thus, we see higher institutional shareholding in NFs and OBGFs.

Reluctant non-institutional shareholders. Except in NFs, the study shows a decline in the shareholding of non-promoter, non-institutional shareholders. It suggests that investors' preferences might have further shifted to alternative asset classes like real estate, gold, and fixed deposits, or they might be investing through institutions like mutual funds.

Most of the decline is due to small investors with up to Rs1 Lakh worth of shares. These small investors have reduced their holdings across all ownership categories. This may be due to the lack of disposable income in the hands of small investors.

Conclusions

This study has attempted to give a bird's eye view of the shareholding pattern of listed Indian firms. We found that promoters of family firms have increased their stake in their companies over the last decade, while SOEs, OBGFs and NFs have seen a decline in promoter shareholding.

This reinforces the preeminent role of family-controlled businesses in India. It seems to imply that the engine of growth of Indian businesses will not be dependent on overseas or other promoter categories. Instead, promoters of family firms will continue to play a major role.

The ownership pattern of listed businesses in India is fairly concentrated, especially in the case of family firms, SOEs and MNCs. While this has significant positive effects, there is also a need to keep close vigil on their governance practices.