This article was first published in the Economic Times, January 18, 2021, Co-author: S. Subramanian; https://economictimes.indiatimes.com/news/company/corporate-trends/lessons-from-tvs-group-rejig-towards-filling-each-others-cup-but-not-drinking-from-the-same-cup/articleshow/80322258.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
The announcement by the TVS group
to rejig its ownership structure nudged us to examine the changing weave
structure of business groups in India. Business groups are an integral part of
the social and economic fabric of emerging economies. Their ubiquity suggests
their continued relevance and impact on the economy. They are here to stay but
are we seeing the beginning of a change in the form in which they have
traditionally existed in India?
In a highly cited research paper
published in the Journal of Finance in the year 2000, Harvard Business School professors
Tarun Khanna and Krishna Palepu wrote, “the most diversified business groups
add value by replicating the functions of institutions that are missing in this
emerging market [India]. These institutional voids make it costly for
individual firms to deal with product, capital, and labour markets because of
information problems, imperfect contract enforcement, inability to enforce
property rights, and flawed regulatory structures.” As such, it is argued that
affiliation to a business group enables a firm to reduce the negative effects
associated with weak institutional setups of emerging markets such as India.
In India, business groups also
emerged as a tool to diversify into different businesses and set up multiple
companies to overcome a few of the license-quota-permit raj challenges.
Affiliated firms benefited from the reputation, political and bureaucratic
connections, internal lending mechanisms, access to scarce resources,
synergies, and economies of scale of the business group. Business families
exercised substantive administrative control over the group firms, often
ensuring that the whole (group) was greater than the sum of its parts
(affiliated firms).
There have been apprehensions, however,
about the functioning of the business groups, especially inefficient allocation
of valuable group resources, poor reporting, transparency, and governance. In
recent years, high profile corporate misadventures such as the Satyam scam
where the promoter pledged the shares of Satyam to fund the operations of
another group firm, Maytas; unravelling of the Zee group; fund diversions at
Fortis-Religare group; group level governance opacity suggested by the exit of
Cyrus Mistry from the Tata group; have pointed towards the agency costs
associated with the business group structure. However, there seems to be a
consensus that business groups have a net positive impact on the economy as
well as the affiliated firms.
Since 1991, the Indian economy
witnessed several policy reforms aimed at opening up of the economy. It
resulted in concentrated efforts to improve the institutional mechanisms. Legal
and regulatory reforms with respect to financial markets and efforts towards
ease of doing business hint at the impending weaning away of the “filling
institutional voids” advantages associated with business groups in the long
run. Does this mean that business groups would eventually disappear in India?
Evidence from the developed economies with limited institutional voids suggests
otherwise. Business groups are thriving in Japan (ex. Mitsubishi group), South
Korea (LG group), and Hong Kong (Jardine Matheson). We believe that they will
continue to remain relevant in India too though with renewed contours.
Consider for example, the situation
when units of a family have crossholdings in the group companies even though
each unit may manage just one company. The ultimate benefit due to a family
unit from the company that it manages may not be in congruence. The
synchronizing of ownership at the TVS group suggests an attempt to simplify the
ownership structure at the group level and doing away with crossholdings. It
also points towards a greater alignment of interests between the owners and
managers. Over time, the influence of a unit of the family over the companies
managed by other units of the family may come down.
The family would need to keep in
mind the ties that bind them, even as each unit claims greater independence. Common
traditions, social practices, and collective identity should be strengthened
further and capitalized on. Maintaining familial togetherness, despite being
separate, will be the key to continuing to support each other when in need.
Formal efforts towards sharing of learnings, goals and gaps in resources would
be needed to ensure greater family awareness (as opposed to involvement) and
thereby timely pooling of resources when needed by any one unit. Similarly,
efforts to evolve a sense of belongingness amongst the different units of the
family and the stakeholders of each of them will need to be undertaken.
As such, we might see the emergence of “family groups” separate from “business groups”. Where, the broad family is together, but businesses are separate. Where the purpose is not to fill institutional voids, but to “fill each other's cup but drink not from one cup”, as Kahili Gibran would have put it.
