Kolkata/Mumbai: If you were an arbitrator presiding over the separation of ownership and business interests of a joint family, you could consider your job well done only if all claimants were, in the end, dissatisfied with what they got,” says Deepak Khaitan, a Kolkata-based industrialist, who is vice-chairman and managing director of battery maker Eveready Industries India Ltd.
The hallmark of an “equitable partition” is dissatisfaction among all claimants, according to him. This explains why families spar over separation of business interests, and later claim the separation was “amicable”— the word most commonly used in this context. Meanwhile, brothers or cousins shaking hands in public post-partition almost invariably becomes a front-page photo opportunity.
“The conventional wisdom is that business families should voluntarily separate ownership in the second or third generation before relationships begin to get bitter,” says S.K. Birla, head of the eponymous group. “It isn’t impossible to separate business interests without any bitterness at all, but it is certainly very difficult.”
Yet, defying conventional wisdom, the extended Bajaj family—Rahul Bajaj and his cousins Madhur Bajaj, Shekhar Bajaj and Niraj Bajaj—want their children to carry on under the yoke of common ownership. The family is “deliberately not disentangling” the web of holding companies, through which businesses are controlled, to make sure that “separating isn’t easy”.
“If four of us can continue to do business together, why can’t four more in the next generation do the same?” asks Niraj Bajaj, the spokesperson for the family and its “common wealth manager”, who is on the board of nearly all key holding companies and heads steel maker Mukand Ltd as its chairman and managing director.
A little over two years ago, Rahul Bajaj’s brother Shishir Bajaj carved out his business interests from the joint family, while selling his 25% stake in the family holding companies. While settling claims through a valuation, the family chose not to touch the closely held investment companies because, if they were to be broken up, the Bajajs could have jointly faced a huge tax liability—probably in excess of Rs1,000 crore.
For generations, the extended Bajaj family has controlled its businesses through a web of holding companies such as Jamnalal Sons Pvt. Ltd, Bajaj Sevashram Pvt. Ltd, Bachhraj and Co. Pvt. Ltd and Baroda Industries Pvt. Ltd. “It is a tax-efficient way of controlling the businesses,” says Niraj Bajaj, which means disentangling the cross-holding in these investment companies could have serious tax implications.
Money isn’t ever the consideration for separating business interests, but a huge tax liability could act as a deterrent for their children, the Bajajs appear to be thinking. There is no longer any moral compulsion on staying together, admits Niraj Bajaj. “It is no longer a question of right or wrong.”
But the behaviour of the daughters in the family could change things, unless they give up their stake in the holding companies in return for cash. Rahul Bajaj has two sons; Shekhar Bajaj and Niraj Bajaj have one each; and Madhur Bajaj has none—he has two daughters.
And there are five girls in the next generation. Though girls are encouraged to join the family businesses and social initiatives—the Bajaj family runs charitable trusts with over Rs4,000 crore in assets—“it is expected that the ownership of the holding companies remains within the Bajaj family only”, according to a person close to the family who did not want to be named.
If an extended family were to remain together under common ownership, people managing individual businesses need to have “complete autonomy”, says Birla. “It reduces conflicts, and makes it easier for each company to pursue growth opportunities.”
Within the extended Birla family, businesses were run independently, and they continued to remain under the yoke of common holding companies till the late 1980s, says Birla. There was hardly any acrimony even though the family took almost 20 years to reach a settlement on disentangling the last holding company—Pilani Investment and Industries Corp. Ltd.
The importance of autonomy is felt by nearly all business families, but some such as the extended Bajaj family insist on “autonomy under a family oversight”, according to Niraj Bajaj. Each person in his family has clearly assigned roles, he says, but at the same time every key decision is vetted by a consultative group, which includes patriarch Rahul Bajaj, that guides people to a consensus even if there are disagreements initially.
What possibly led to differences between Rahul Bajaj and his nephew Kushagra Bajaj is the practice of seeking the approval of the consultative group within the family, according to analysts who did not want to be named. While Kushagra Bajaj is ambitious and wanted to take the group’s sugar business to a leadership position globally, the extended family wasn’t immediately keen to pump resources into it.
“He could have just as well expanded the sugar business without separating it,” says Niraj Bajaj. But he admits “individual aspirations” are one of the key reasons for splits in business families. For education, people now go to the West, where unitary families are the norm, he says. So, their value system is changing from that of their fathers.
People now are very ambitious and fiercely independent, says Birla. “It is difficult for them to work under a joint family structure.”
The founder of the undivided Birla group, G.D. Birla, began separating personal assets, such as homes, in the early 1940s, recalls S.K. Birla. “This ended by 1955, and since then we have been living in separate houses.”
This is extremely important because “at times wives play a key role in determining relations within the extended family”, he says. “G.D. Birla used to say that they come from different families; so one shouldn’t expect them to have same values as our own.”
“Separation of personal assets often leads to acrimony, especially if it is done along with businesses,” says a lawyer, who did not want to be named. “It became a big stumbling block in one of the most recent separations in a large business family.”
So it is best to separate personal assets much ahead of businesses, he adds. “It should ideally be done as part of the succession planning in the first generation.”
Sum of parts
The Surajmal Nagarmal Trust, which held together two large business families of Kolkata—the Jalans and the Bajorias—was one of the first to be carved up. The families ran one of the biggest conglomerates in India, until they decided to split business interests in the 1960s.
There were some 16 claimants, and even though luminaries such as R.P. Goenka, head of the eponymous group, and industrialist B.M. Birla presided over the separation as arbitrators, the split resulted in each claimant receiving such small assets that the businesses lost their leadership position, recalls the lawyer cited above, who has worked with several family business groups on such settlements.
Still, in more cases, splits help unlock shareholder value because large companies are carved up and the sum of parts is often found to be greater than the whole. The Ambani brothers have demonstrated it most notably in recent times.
The combined market capitalization of the undivided Reliance group on 17 June 2005— the last trading day before the separation was announced— was Rs1.02 trillion. But the current combined market value of listed companies run by Mukesh Ambani and his brother Anil Ambani is Rs3.87 trillion, a gain of 279%, which translates into a compounded annual growth of around 30.5%. During this period, India’s benchmark stock market index Sensex has grown at a compounded rate of 20.8%.
This led Hamish McDonald, author of the book Ambani and Sons, to famously say in September that the separation of business interests between the two brothers was “better for India”.
“Competition has made them more aggressive,” says S.P. Tulsian, an independent stock market analyst. That apart, because they carved up the erstwhile Reliance Industries Ltd, they were able to pursue a lot of growth opportunities separately, he adds.
For instance, Mukesh Ambani-controlled Reliance Industries has announced that it will bid for so-called ultra-mega power projects (UMPPs) following the termination of a non-compete pact between the two brothers last May.
Anil Ambani-controlled Reliance Power Ltd has already secured three UMPP projects, the maximum that a company can execute under Indian competition laws. Had the two brothers not separated, they could have secured only three UMPPs, but now Reliance could secure three more, says Tulsian.
Conflicts among founders impede business growth. One way of addressing it is by separating.
“But if ever we have a situation that we have to choose between the interests of the small shareholders and the extended family, small shareholders will always get preference,” says Niraj Bajaj.