The Magnificent History Of Indian Family Businesses

India has a rich and magnificent history of family businesses. The country’s rich history and culture have molded the edifice and character of family businesses over the years. Yashodhara Basuthakur and Dr Nupur Pavan Bang from the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business explain more.

The joint family system was the backbone of these businesses and provided the required resources and capital for the cohesion and growth of the firms. In the early eighteenth century, India was predominantly an agrarian economy, with a deep-rooted caste-based social system that defined the occupational choices of the communities. Agriculture was the primary source of income and livelihood. The manufacturing industries were few and mostly in textiles, handicrafts. But India was lagging in the development of the economic, political, and commercial infrastructure essential for trade pursuits.

The turn of the eighteenth century marked the transition from mercantile capitalism to industrial capitalism. The colonial rule led to the decline of the vibrant Indian merchant community. The Indian businesses faced discrimination in trade, policy and bank loans. During the Industrial Revolution in 1850, India became the supplier of raw materials and a market for the products of the British factories (cotton, iron and steel, chemicals, etc.).

Some of the businessmen who emerged during this time were the Birlas, Kasturbhai Lalbhai, Walchands and the Tatas. They constantly criticised economic racism and created bodies of commerce and trade associations to lobby for the Indian companies. They invested in research and development and introduced new product lines. The Indian led business enterprises had expanded in scope and scale across the country by the end of the 1940’s when India gained Independence.

The Indian family businesses also actively engaged in social causes and philanthropy through generous contributions to charitable trusts and other institutions driven by the cultural and religious traditions of “daan” (giving) as a sense of duty to the community. They played a pivotal role in institutional building by partaking philanthropic activities such as setting up premier educational institutes, research, and cultural centres for the progress of the country.

The post-independence period marked with communal unrest was not very conducive for business. Additionally, the new Industrial Policy (1948) of free India was introduced which saw increased participation of the government in economic affairs. The large-scale nationalisation and government monopoly of critical industries such as utilities, transportation, iron and steel, heavy industries, armaments, atomic energy, manufacturing curbed the freedom of operations of the private enterprises.

The Monopolies and Restrictive Trade Practices Act, 1969, put severe bottlenecks with respect to the quantities and types of goods or services that could be produced by the private sector. The firms now had to obtain licenses or permits to expand or start new businesses. Because of the limited licenses and capacity constraints, firms focused on diversifying into areas wherever they could acquire the required licenses instead of building on their core competencies.

Some of the multi-generational business houses focused on restructuring by consolidation and expansion within the new framework by acquiring overseas companies and expatriate houses to enter new industries. Other business houses acquired a significant number of licenses to thwart competition and block other firms from entering the space. Also, there was a new genre of technology-savvy entrepreneurs who were well-educated with degrees from abroad and joined their family business or started new ventures. Some of the legacy business groups even lend their expertise in areas like engineering, iron and steel (Tatas) and shipping (Walchands) to the newly formed government enterprises. However, this period also witnessed some of the older business families already in their third generation going through splits due to waning family ties. The families had not yet adopted professionalisation, and the dominant family coalition still controlled the ownership and management.

The economic liberalisation in 1991 was a landmark decision which opened the economy and introduced several macroeconomic and structural reforms. These reforms brought in a gamut of opportunities and challenges for the family businesses. While the businesses now had to compete with foreign multinationals and new entrepreneurial organisations for capital and resources, but they could now enter sectors which were earlier exclusively reserved for the public sector. The family firms were quick to restructure and respond to environmental changes. Some of the multi-generational businesses were able to weather the turn and came out triumphant in the new economy, while others who couldn’t sustain disappeared from the thriving business scenario. This era also witnessed the dawn of a new set of stand-alone first-generation family firms who harnessed the information-led economy by investing in research and technology.

A study on Indian family firms by Bang, Ray and Ramachandran (2017) looks at the listed firms during the period from 1990 – 2015. The study categorises the firms based on ownership and management into two categories, namely family business group firms (FBGF) and stand-alone family firms (SFF) . According to the study, ninety-one percent of the listed firms are family-firms, which is a key driver of the Indian economy.

In the year 2015, the top 30 family firms contributed to almost 50 percent of the total revenue of all listed family firms, which translated to 13 percent contribution to the GDP of India. Overall, listed family firms contributed to 26 percent of the GDP (Total Income). Out of the listed family firms, the FBGF’s contributed to 21 percent, and the SFF’s contributed 5 percent to the nation’s GDP. The family firms contributed to 28 percent of indirect taxes and 18 percent of direct corporate taxes collected by the government exchequer.

The family-firms built more assets in the manufacturing sector, which has a long-standing impact across all industries. The SFF’s were predominantly in the services industry, owned and managed by the founder (or first-generation). The SFF’s played a critical role in the rapid development of the services sector and generated large-scale wealth and employment opportunities. During the post-liberalisation period, there was increased participation in equity markets by the family firms to meet the financing needs for expansion and growth. Among the listed family firms, the firms incorporated before the 1980’s were more likely to create business groups as a response to the macroeconomic conditions. The average age of the listed FBGF’s in the sample is 38.44 years, whereas that of SFF’s is 28.73 years.

The family firms have displayed resilience, character, and adaptability over their long history and played a pivotal role in India’s growth story. However, with the current shifts in the economy and society, there are major challenges that family businesses must surmount.

The family firms at the crossroads of succession have to take the decision on either to transition to next-generation or professionalise by inducting non-family managers. The family firms have to adhere to stricter and transparent corporate governance guidelines, better leadership and connect with the community to continue to chart the success story in years to come and ensure the perpetuity of the business and family.

The authors are Yashodhara Basuthakur and Dr Nupur Pavan Bangfrom the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business.