Question

What is the nature of business networks in India? Analyse the relationship between ownership patterns and networks.

Answer 1

Business Groups are an important part of a nation’s economy and a major contributor to the GDP of the country. The industrial scenario of many developing economies is identified by various business groups. They have been an essential part of the economy ever since the emergence of the industrial activity in the latter half of the nineteenth century. In India, 90% of the businesses are family-owned. They have played an important role in the development of the Indian economy by filling the gaps from sluggish markets and institutions.

Major Business Houses in India

Adani Group

Adani Group is one of the well-known business houses in India. The company has its headquarters in Gujarat. It was founded in the year 1988 as a commodity trading business. First generation entrepreneur Gautam Adani is the founder & chairman of Adani Group. It is an Indian multinational conglomerate working in diversified business sectors which includes resources, logistics, agribusiness and energy sectors. The subsidiaries of Adani Group are Adani Gas Limited, Adani Ports & SEZ Limited, Adani Power.

Aditya Birla Group

Founded by Seth Shiv Narayan Birla in 1857, the Aditya Birla Group is one of the best business houses in India. The group has its headquarters in Worli, Mumbai. It is functional in 40 countries with more than 120,000 employees internationally. Aditya Birla Group is the largest MNC in the USA constituting 95% of the American employees engaged in manufacturing operations. The group is active in sectors of viscose staple fibre, metals, cement (largest in India), viscose filament yarn, branded apparel, carbon black, chemicals, fertilizers, insulators, financial services, telecom, BPO and IT services.

Bharti Enterprises

Bharti Enterprises was founded by Sunil Bharti Mittal in the year 1976. The company has its headquarters in New Delhi and is operational in 16 countries across Africa and Asia. The company has businesses in the field of telecommunications, agribusiness, financial services, and manufacturing. It has its presence in many sectors but its largest revenue comes from the telecom industry. Some international companies like Singtel, IBM, Ericsson, Nokia, Siemens, and Alcatel-Lucent are the current key partners of the company in telecom. Its charitable arm, the Bharti Foundation is reaching out to 2,40,000 students and engaging 8,000 teachers across 13 Indian states to revolutionize the education sector.

Reliance ADA Group

The Reliance ADA Group came into existence after Anil Ambani separated from his elder brother Mukesh Ambani in the business. The company is having its headquarters in Navi Mumbai. The market capitalization of the company is $14 billion and its net assets worth $28 billion. This group operates in more than 20,000 towns and 450,000 villages in India and abroad. The company is engaged in the business of telecom, financial services, construction, entertainment, power, healthcare, manufacturing, defence, aviation, and transportation services.

Reliance Industries Ltd

Reliance India Limited was founded by Dhirubhai Ambani in 1966 as Reliance Commercial Corporation. The company is now headed by Mukesh Ambani after his split with his brother, Anil Ambani. It is an Indian conglomerate holding company having headquarters in Mumbai. Reliance is the most profitable business house in India. On 18 October 2007, Reliance became the first Indian company to crack $100 billion market capitalization. It has been ranked 203rd on the list of Fortune Global 500 in 2017. Reliance contributes almost 5% to the total revenues of the Government of India from customs and excise duty. The company is operational in the sectors of energy, petrochemicals, textiles, natural resources, retail, and telecommunications.

Tata Group

Tata Group is a global enterprise established by Jamsetji Tata in 1868. Having its headquarters in India, it comprises of more than 100 companies operating independently. The Tata Group is operational in more than 100 countries across six continents in the world. Tata Sons is the primary investment holding company and promoter of Tata companies. The company has more than 695,000 employees working under it. In 2016-17, the revenue of all the Tata companies, taken together, was $100.39 billion. Tata companies with significant scale include Tata Steel, Tata Motors, Tata Consultancy Services, Tata Power, Tata Chemicals, Tata Global Beverages, Tata Teleservices, Titan, Tata Communications, and Indian Hotels.

The Structure of Business Groups in India    

So far it has been emphasized that the Indian business group is a multi‐company firm but nothing has been said with regard to the nature and numbers of companies constituting a group, and their placing in relation to each other within the group structure. In reality, there has been tremendous heterogeneity amongst groups on these counts. Only some sense of this heterogeneity can be given here. It is nevertheless important to appreciate this diversity because of the difficulties it poses for the conceptualization of business groups.   A variety of different kinds of legal entities have been the objects of a common centralized control in the Indian business world. These have included companies with shares publicly traded on stock exchanges, narrowly held companies not listed on exchanges, and even partnership and proprietary firms. One dimension of variation between multi‐company firms has been the numbers of each of these different kinds of entities. If we consider the MIC’s identification of companies of 75 groups with assets more than Rs. 5 crores in 1964, we find that the total number of group companies ranged from a mere 4 or 5 in some cases to as many as 151 in the case of the Birla group. The number of companies in the Birla group which were reasonably large individually (i.e. with assets more than Rs. 1 crore) were 54 while the other amongst the two largest groups, Tata, had 27. On the other hand, as many as 5 groups had only one such company and another 11 had only two. In the case of the Birla group, less than 8% of its total assets were accounted for by the largest company in the group, but there were also many groups where a single company accounted for over 90% of the total group assets.  

No comparable comprehensive listing of groups and their companies has been done since the 1960s. But there is sufficient evidence to suggest that the kind of variety amongst groups existing then has not disappeared subsequently. A contemporary indication is provided by the number of publicly listed companies that different groups have—which range from a single one to numbers in double digits. If the multiple public company criterions were to be strictly applied, then many of those classified as groups in the standard databases used by researchers, like Prowess of the Centre for Monitoring the Indian Economy (CMIE) would not qualify as groups. On the other hand, if a multiplicity of public companies was not insisted upon, then many Indian private companies that are not classified as group affiliated in the same databases and therefore assumed by most to be stand‐alone, would become group affiliated. This would be revealed by a simple examination of the composition of what is termed as the promoter’s stake (what is admitted as the part of the company’s equity controlled by those who manage it) in these companies. Table‐4 is based on such an investigation for a sample of Indian companies not classified as being attached to any group in the Prowess database. The sample consists of 171 such companies included in the BSE‐500 index and additional stand‐alone companies which had assets exceeding Rs. 500 crores in 2006–07 . Data on the promoters’ stake and its composition for these companies was accessed from their filings of shareholding pattern with the Bombay Stock Exchange

The MIC as well as the ILPIC had in the 1960s identified many that the latter called large independent companies, which were large stand‐alone companies, many of whom were larger than some of the groups they had identified (Government of India,1965 and 1969). Subsequently, because of the discovery of other companies affiliated to them or because of the floating of additional companies by their controlling authorities, these companies acquired the character of groups. Examples of such groups are Godrej, Escorts, Larsen & Toubro, Mohan Meakins, Rohit, and Chowgule.

The ubiquity of the multi‐company firm however does not mean that all the companies constituting the firm play the same role. The cases discussed above point towards one kind of variant of the multi‐company firm, where all the businesses of the firm are concentrated in a single company, with other companies play a peripheral role such as serving merely as holding companies for some part of the equity of that core company. This structure represents one end of the spectrum and stands closest to the stand‐alone company. Other multi‐company firms may however have their businesses distributed between many companies. The roles of serving as holding companies or as companies through whom business activities are undertaken may be clearly demarcated in some cases between typically narrowly held investment companies and public companies respectively. In others however, public companies may simultaneously perform both functions.

The structures of firms, as illustrated by the case of independent companies turning into groups, are not only variable across space but also time. An interesting example of such variations is provided by the Reliance group. Before the public listing of Reliance Industries in 1977, the group had incorporated six companies, none of which was listed on any stock exchange, and its manufacturing/processing activities were spread between four of them. After that there was a rapid proliferation in the number of companies of the group though manufacturing activities and productive assets came to be concentrated in the 1980s in what was the sole publicly listed company of the group for over a decade. Currently, the two factions of the group have about 10 companies listed on stock exchanges. Depending upon the specific definition used for a business group, one could arrive at different conclusions about when Reliance was a group and when not.

Another related dimension in which we find significant variations is the pattern of inter‐ corporate investments between group companies, and the specifically pyramidal structure has not been known to be very prevalent in India. A set of narrowly held investment companies sharing the holding of a controlling stake in one major company is one simple form. At the other end could be an extremely complex structure of different companies of different types being connected through chains of such investments, of both linear and circular varieties, with any single company being simultaneously part of many separate chains of both types (Hazari, 1966; Singhania, 1980). In fact, at the time of their divisions, many groups have confronted difficulties in disentangling the complex web of connections between group companies. Such complexity is produced by the fact that the structure of inter‐connections is not made at one time but rather evolves historically through a series of group actions spread over time.

Tunnelling amongst Indian Groups

In a study available in more detailed as well as concise form (Bertrand, Mehta and Mulainadhan, 2000 and 2002), a quantitative analysis was undertaken to find evidence of tunneling amongst Indian groups, to quantify its extent, and to identify its mechanism. There are many methodological issues that can be raised in relation to this study. We however focus on one fundamental one that is related to what has been discussed in the previous section. The point of course is not that siphoning out of resources from public companies by those who control them does not happen in India. The problem with Bertrand et al’s method instead lies in the fact that such siphoning out may be more commonplace than they presumed.

The basic method relied on was a comparison of the responses, of group affiliated companies and stand‐alones in a sample data set, to profit shocks in their own and other industries by examining the respective deviations of their actual from predicted (average industry) responses. The lower responsiveness of group affiliated companies to such profit shocks in their own industries and greater responsiveness to that in other industries was treated as the evidence of tunneling. The appropriateness of this method however rests absolutely critically on the correctness of the underlying assumption that the siphoning out of resources from public companies by controlling families at the expense of other shareholders happens in the case of group companies but not in stand‐ alones. Only then could there be differences in their responses to profit shocks. But is there any basis for this assumption? Bertrand et al did not provide one and in fact could not have because it follows from the discussion in the previous part that there is no ground for distinguishing between stand‐alone and group companies as far as this aspect is concerned.  

We have seen that there is no clear dividing line between groups and stand‐alones and apparently stand‐alone companies also have other ‘group’ companies to which resources could be potentially transferred. Moreover, such companies are typically narrowly held where the cash flow rights of a business family would inherently be greater than in any public company controlled by it where there are other shareholders. Since the group as a firm is a deliberate creation, there is nothing to prevent business families from creating such companies. Since the business group structure provides the mechanism and not the motivation for tunneling, no correlation should in fact be expected between the extent of siphoning out of resources from public companies by their controlling families and the number of public companies controlled by that family. If the incentive for tunneling arises from the difference between controlling and cash‐flow rights, then such incentive would exist in all cases of public companies controlled by a business family or a group of individuals where there are other shareholders. If the mechanism necessary for that is a ‘group’ structure, it can be easily created. If laws and their enforcement cannot prevent siphoning out in case of group affiliated companies, they would not prevent them in this case either. In such circumstances, tunneling should happen in equal measure in all such public companies and evidence of tunneling and its quantification cannot be arrived at by comparing companies that are apparently either stand‐alones or group affiliated.  

The differential responses of these two kinds of companies to profit shocks that were Bertrand et al’s results may, at least partly, be explained by the likely nature of the sample and the existence of inter‐corporate investments between companies in it. Inter‐ corporate investments and the consequent flow of dividends between companies connected through them create a natural channel for profits of companies in different industries to reflect shocks in each other even without any tunneling activity. Significant in this regard is that the evidence of tunneling that Bertrand et al find operates entirely through the non‐operating profits, in which would be included dividends received from equity holdings in other companies. Since the sample of companies in the data set used presumably included only public companies, they would have included some inter‐ connected companies of companies classified as group affiliated so that companies receiving dividends would be part of the sample. In the case of those classified as stand‐ alone on the other hand, any such potential dividend recipient companies would be private limited companies outside the sample. Only the ‘group’ companies would therefore show this responsiveness to profits of other companies.  

Stability/Instability amongst Leading Groups

The literature on business groups in developing countries contains not one but many different conceptualizations of such groups. None however provides a clear cut and precise conception of a business group which is in tune with the reality of such groups. That they are unable to identify a set of features that can be said to be common to all groups has been illustrated here in relation to Indian groups. Multi‐company structures are actually quite common in India, not as stable arrangements of coordination between different firms, but as the form that individual firms often take and retain even as they change and transform themselves over time. Yet such are the diversities amongst groups along many different dimensions that it is hard to pin down a set of stylized facts that can be used to separate business groups from non‐groups. This does raise doubts about whether it is at all possible to identify anything beyond the multi‐company form, which itself concretely can take many different shapes—that is common to all groups. Might it not be better to simply acknowledge the fact that there is a lack of identity between companies and firms because the multi‐company structure serves some useful purposes for those who create it, try and discover what these are, and take such structures into account in studying what firms are and what they do?

The lack of correspondence between the reality of Indian groups and general conceptions about groups may of course be attributed to the specificities or peculiarities of the Indian case. That however is precisely the point that needs emphasizing, namely that not only intra‐country but also inter‐country differences could be associated with business groups. Speculating about the reasons for the existence of business groups in developing countries in general, without first identifying precisely what features are general and what specific, may be consequently a pointless exercise. Particularly important in this regard is the need to first establish whether groups in their specific contexts are firms or coalitions of firms because of the fundamental differences between these two multi‐ company structures and the questions they throw up.

The deficiencies in the conceptualization and explanations of the business group in the literature do not however simply reflect the absence or dearth of information in the hands of those attempting to comprehend this institution. That information gap is also produced by a prevalent approach that does not attach value to the essential task of putting together and sifting at least the basic relevant information on business groups and is content with proceeding from extremely superficial observations of the real world towards constructing explanatory models about it. Consequently, even information that could be reasonably easily harnessed is not always made use of as exemplified by the numerous instances of lack of correspondence between perceptions and Indian reality that have been highlighted here. That this has even led to gross errors in the study of specifically Indian groups should serve, as a warning for those attempting to study business groups anywhere in the world and as a caution for the consumers of the literature on the subject.

CONCLUSION

Finally, the analysis of business groups needs to move away from trying to explain them as efficiency enhancing responses to institutional voids. Such an approach is firstly completely a historical and static—attaching little significance to either the shifts in the environmental and institutional context of groups or the fact that these groups themselves are entities that change and get transformed over time. It also assumes, as the theory of the firm similarly does, precisely what it needs to establish—that the economic, social, and political mechanisms of developing countries and their international context work towards creating in the form of a group an efficient organizational structure and also ensure an efficient distribution of economic activity between different such groups. In the process of making these assumptions of how the system works in relation to business groups, however, it devalues the importance of an examination of its actual working. It is an objective examination of this working, unhindered by any prior conception that the historical function of business enterprises is to deliver efficiency and the proof of that lies in their success, which is necessary.