Lessons from TVS Group rejig: Towards filling each other’s cup but not drinking from the same cup

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.