Scions of India's old family businesses are just picking up the threads; financing is in their business genes

Given these large scale changes in structure of family businesses, it is not surprising that focus of some of them has shifted to managing family investment offices.

Uday Kotak, Founder and non-executive director of Kotak Mahindra Bank, recently remarked that younger heirs of Indian family businesses are not interested in running them. Instead, they are busy establishing and running family offices which manages investments of the family business by investing in stocks and mutual funds. Kotak is one of the leading voices of Indian business and his observations will not be taken lightly.

Harsh Goenka, the chairperson of the RPG Group responded in a tongue in cheek manner adding that “the family office is the hottest career choice — it’s risk-free, stress-free and tan-friendly”. He even provided a daily routine of the young of family businesses where they get up at 11 AM (compared to 6 AM for the earlier generations) and spend their day just hustling around and posting messages on social media. Srinath Sridharan a columnist commented that true entrepreneurship should be driven by merit and not lineage.

One of the subjects I have thoroughly enjoyed teaching and reading about, is Indian Business History (IBH).The IBH course is a deep dive into evolution of Indian businesses over centuries of political and economic cycles. Dwijendra Tripathi and Tirthankar Roy have written monumental books on the subject which are a must-read to understand this long arc of Indian business history.

Managing Agencies provides Indians a platform

Post battle of Plassey in 1757, the East India Company (EIC) started taking control of the Indian economy. EIC’s former officials and others started getting into multiple businesses such as trading, banking, plantations etc. The one question British merchants faced is how is the business to be controlled from London?

To achieve this control, a new form of business organisation was developed called the ‘Managing Agency’ (MA) system. Under it, British appointed agents to manage their business. Given India’s vast and diverse landscape, customs and language, British had no choice but to appoint Indians as managing agents.

Birth of Indian family businesses

The appointment of Indians as agents gave them an exposure to running and managing businesses. Many Indians eventually formed their business ventures going forward. When they started their own business they adopted the MA system. But who would be agents in Indian enterprises? Family, of course! The practice of employing and deploying families, gave birth to the whole edifice of family business in India.

Second, it is one thing to have business ideas and another to raise finances to run their businesses. British counterparts of Indian family businesses could arrange finances from London and from British banks in India, Indian enterprises did not have any such advantage. Though stock exchanges and banks were established in late 19th and early 20th century, they could not provide enough financial resources. Family businesses had to rely on the wider family and social networks for raising finances. The reliance on family networks for finance further solidified the family as a form of business organisation.

Third, apart from emergence of the family business network that dabbled in industry, functions of trading and moneylending remained active. There was a nexus between traders and industrialists with former financing the latter.

There were certain traders that had higher prominence than industrialists such as Purshottam Thakurdas in Bombay, Badridas Goenka in Calcutta and TV Sundaram Iyengar in Madras. Badridas Goenka eventually shaped the Goenka group and Iyengar established the TVS group of industries. The essential point is moneylending has been an integral part of Indian businesses.

1991 reforms bring in a new paradigm for family businesses

Post-independence, things changed dramatically for Indian enterprises. India adopted socialism where the State led the path for economic development and the private business took a backseat. The MA system was abolished as over the years it became opaque, with a few players controlling most of India’s business. The families nonetheless maintained hold on their businesses.

The turning point for Indian businesses was the 1991 reforms. The reforms opened Indian markets for foreign competition and also allowed Indian companies to compete abroad. The financial market reforms enabled both, old business and new business firms to raise capital from stock markets and banks. Reforms changed the dynamics of the family businesses empires.

Preference for family offices doesn’t represent regression

The ties of family business weaken with every generation. This has led to infighting in many groups. Managing conflicts remains one of the biggest weaknesses and concerns in family business groups of all kinds.

Also, later generations generally lack the drive to run business. Some of the family businesses also gave away day-to-day management of their businesses to professional managers but maintained ownership and control.

The 1991 reforms also pushed the younger scions to break away from traditional areas of business and look to new types of business as they could now raise funds from external sources due to financial market reforms, and were no more dependent on internal family networks.

Given these large scale changes in structure of family businesses, it is not surprising that focus of some of them has shifted to managing family investment offices. There is not one answer to this shifting of priorities. It’s a combination of inadequate drive, conflict management and emergence of new opportunities.

We are also seeing emergence of other entrepreneurs who are either running their firms professionally or creating new family groups.

The more important thing is these older family businesses manage their family offices well and not get completely wiped out as many family businesses have done in the past. Moreover, financing is a very old business for most of these family businesses. For all you know, they are going back to their glorious past and could come back in a new avatar in future.