Family-owned business enterprises (FOBE) in India began in the 1854, when Cowarjee Nanbhoy Davar built India's first cotton textile mill.

The seeds of entrepreneurship in the FOBEs in India were first sown when the cotton mills came up all across Mumbai (then called Bombay) in the mid-nineteenth century. Since then, family-owned business enterprises have survived the British Raj, the partition of India and the reforms in the nineties.

Many FOBEs do not operate smoothly once the baton is passed from the first generation to the second. The late Prof Pulin Garg of the Indian Institute of Management, Ahmedabad, believed that it was natural for FOBEs to split.

He used to say: "Haweli ki umar saath saal (An FOBE lasts sixty years)."

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A research conducted by the US life insurance company Mass Mutual in the late nineties suggested that 67 per cent of the FOBEs split after the second generation took over, with the proportion increasing to 90 per cent by the time the third generation comes in.

The Indian business scenario is littered with examples of FOBEs splitting once they enter the second and the third generations. Most of the Indian business families do not make it to the third generation in one piece (the Thapars, the Goenkas, the Shrirams, the Birlas and Bhai Mohan Singh Group. . . just to name a few).

The first splits started in the early 1950s but the momentum really picked up the early 1980s with the death of industrialist G D Birla and the six-way split of the Birla clan that followed. The splitting of FOBEs became even more common in the late 1990s.

Given these facts, the recent problems at Reliance Industries [Get Quote], India's largest private sector company should not come as a surprise. Splits in FOBEs are at times inevitable because of the owner-manager pattern of FOBEs in India.

As the family grows, all the male scions want a business of their own. But there is only so much to share. Reliance Industries does not perfectly fall into this pattern because there is enough business to be shared between the two brothers, Mukesh and Anil Ambani.

As Gurucharan Das says in his book, India Unbound, "In a sense, the life in joint families is like life under socialism. They do not work in the long run as socialism does not work. Joint families require strict equality, because human beings are unequal and need material incentives to perform, joint families break down."

This explains the situation prevailing at Reliance Industries to a great extent.

Reliance Industries has a market capitalisation of nearly Rs 100,000 crore (Rs 1,000 billion) and it employs over 80,000 people. The kind of uncertainty that prevails is not doing anybody any good.

Its large number of shareholders, who have got handsome returns over the years, obviously must be not liking the fact that the two brothers are fighting it out in the media rather than sitting and discussing things across the table.

The situation at Reliance has reached such a stage wherein it is difficult to see the two brothers patch up. So in such a situation it is best that the complex cross-holdings (through a web of investment companies) be unbundled and each of the brothers be given his own business to manage.

The unbundling of complex cross-holdings is a difficult task but it has been done successfully in the past. Ghanshyam Das Birla did it successfully during his lifetime and the Bajaj family is doing it now.

The splits in the FOBEs reduce the combined group advantage to raise money or to negotiate common purchases. But the split is not always bad. Often after a split, there are two diamonds of great value. In few cases, in which the FOBEs have split logically and along industry lines, the spilt has worked.

The three way split in the Bhai Mohan Singh group between the late Parvinder Singh (Ranbaxy [Get Quote]), Analjit Singh (Max India [Get Quote]) and Manjit Singh (Montari Industries) proves the above argument.

However, in most cases, families ignore business synergies and split the assets in a manner that only serves the family interest.

The FOBEs in India have varied business interests. This is primarily because of the managing agency system that prevailed during the British days and became a model for the Indian businessman to follow.

Also the industrial licensing system that prevailed after Independence did not allow businessmen to decide the areas of business they wanted to get into. They got into areas for which licenses were available.

Reliance Industries is also involved in a diverse set of businesses right from petroleum to power to telecom. If these businesses are split logically between the two brothers the chances are the individual companies would do much better than the single conglomerate.

One business may not have to compromise because of the other. Also the businesses will receive adequate attention of the top management.

In closing

Splits will be inevitable and preventing them forcibly will not serve FOBEs well. In most of the FOBEs, the heads never retire. Only when they die a new person takes over. This again creates a new set of problems.

In September, 1997, Vikram Lal set a precedent at the Eicher group by renouncing his post (he was chairman) at the group despite holding 60.53 per cent of its equity.

Sunil Bharti Mittal has made it very clear that his children won't succeed him at Bharti and if they want to join the company they would have to get a professional degree and prove themselves first at another company.

So one way of ensuring that a FOBE does not split is to move away from the owner-manager pattern and allow professional managers to run the business.

The FOBEs must also focus on succession planning within the ranks so as to prevent internecine wards or moral sapping struggles for power. Parvinder Singh made it very clear who the boss would be once he was not there at the helm of things at Ranbaxy (though subsequently there have been problems).

The Dabur [Get Quote] group had appointed management guru Mrityunjay B Atreya to chart out a future for its inheritors.

At Hero Honda, they have worked out a six-step module that all 21 members of the third generation have to go through, before joining the business. This includes working for a company outside the group. According to Brij Mohan Munjal, the third generation is the most important.

As he told a business magazine a few years back: "Once a family business crosses the third generation, it generally survives for many generations after that."

All this might still not ensure that FOBEs do not split. It can at best make sure that the inevitable is just postponed for the time being.

The author is Research Scholar, ICFAI University.

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