Shield minority shareholders from business family feuds

The Securities and Exchange Board of India took a significant step last year by expanding the scope of disclosure requirements and addressed the prevalence of undisclosed family arrangements within business groups that directly impact the operation and ownership of listed entities.
The Securities and Exchange Board of India took a significant step last year by expanding the scope of disclosure requirements and addressed the prevalence of undisclosed family arrangements within business groups that directly impact the operation and ownership of listed entities.

Summary

  • Why should non-family stakeholders suffer? Stricter Sebi rules could disincentivize disputes that disrupt family-held firms, depress stock prices and hurt shareholder value.

All seems good when the parents are around. After their passing, human greed and jealousy seem to strain relations in many business families. The distribution of wealth and power within a family to everyone’s satisfaction is a universal challenge. In many parts of the world, timely transitions from family-run to professionally managed businesses have helped mitigate such conflicts, driven in part by the fear of shareholder lawsuits.

With nine-tenths of India’s publicly traded companies being family-owned or controlled, the complexity and pressure of keeping control of these businesses intensifies as families enlarge across generations. Family feuds can manifest in diverse ways, often beginning with minor disagreements among members over business strategies or priorities, often with personal egos at play. However, seemingly trivial issues can quickly escalate into major disputes, fuelled by friction around inheritance matters or control of a majority stake in a listed corporation.

The Securities and Exchange Board of India took a significant step last year by expanding the scope of disclosure requirements under Sebi’s listing Regulation 30A. It addressed the prevalence of undisclosed family arrangements within business groups that directly impact the operation and ownership of listed entities. These arrangements, whether formal or informal, can restrict the freedom of listed entities to conduct business or dictate succession plans for key management positions, while remaining hidden from the scrutiny of the business’s board and shareholders. Sebi’s notification mandates the public disclosure of all such covenants, shedding light on any exclusion of family members from ownership or control, or the allocation of specific entities to particular branches of the family. Such transparency is essential to ensure that the governance of listed entities stays free of undue familial influence and manipulation.

Compliance with this regulatory shift, previously regarded as closely guarded family proprietary information, will not occur spontaneously. Sebi may need to take proactive measures to compel all companies to make a one-time disclosure.

Moreover, while even written agreements can be contentious, oral or loose arrangements pose an even greater challenge, often leading to fierce disputes. We have seen this play out many times in India. The bulk of Indian enterprises have had family feuds. Be it the Kirloskar family, the current Kalyani- Hiremath feud, the old Ambani brothers dispute, Murugappa group muddle over one of the daughters asking for a board seat, the Chhabrias of Finolex, the Singhanias of Raymond, the Wadias ofBombay Dyeing and Britannia, or the K.K. Modi family discord and the recent Tata-Mistry battle. Who has paid the price for these wars ? Is it not their minority shareholders ?

So long as family-run businesses dominate our corporate landscape, family succession battles will remain a risk factor for minority investors. If reputational risk does not seem to concern business families, it’s primarily because institutional investors are just waking up and yet to find their voice.

Unfortunately, much of India Inc still resorts to age-old tactics to resolve disputes. In addition to airing grievances in public and pursuing costly litigation, factions within families have been found to instigate media mud-slinging as well as investigations by authorities against one another. The repercussions of such manoeuvres inevitably hit shareholders. Is there a way to shield investors from the fallout of succession battles?

Most family conflicts are resolved through litigation or private mediation. Large businesses are often influenced by the policies and principles of founding families, blurring the distinction between the firm and its owners. While investors may initially benefit from trust and confidence vested in promoter families, the record has shown high potential for investors to suffer as a result of prolonged family disputes that depress share prices and market cap.

Perhaps rules that get warring factions to step aside until disputes are resolved could provide a solution. Reluctance to relinquish management control (and thus access to company funds, especially for legal battles), may compel all parties to come to the table and reach a pragmatic resolution. But then, that’s what boards are partly for, some say.

While there are ‘independent directors,’ how many are truly independent? Most directors owe their seats to their proximity to promoters, the management or goodwill earned in their previous official capacities. Those who dare assert themselves risk swift ejection, with informal power networks ensuring their exclusion from other board invitations. This dissuades many from challenging the status quo. Consequently, the expectations placed on independent directors remain fictional, as they lack the freedom and authority needed to enact meaningful change in such circumstances.

Although the law provides general guidelines, Sebi should establish specific regulations for companies to protect minority shareholders’ interests, especially in cases of business-family spats. This underscores the importance of Sebi’s proposal to separate the chairperson and managing director roles in the top 500 listed entities—an initiative that promotes better corporate governance and accountability. However, it’s evident that India Inc, driven by a sense of entitlement, opposes the idea of any regulator dictating the distribution and transparency of familial power within companies.

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