The Marwaris Read online

  Business groups are found in many developing countries and management experts attribute their success to the groups’ ability to mobilize capital and management resources despite the lack of well-organized markets as also to their competence in managing complex interactions with the government and other partners.

  Professors from Harvard Business School, like Khanna and Palepu, and the handbook of practical businessmen, the Economist of London, speak in favour of highly diversified conglomerates:

  Most emerging countries have a penchant for highly diversified conglomerates. India’s Tata Group, which accounts for almost 6% of the country’s G.D.P., has subsidiaries in carmaking, agricultural chemicals, hotels, telecommunications and consulting . . . such diversification is not confined to giant organizations. China is full of small and medium-sized companies that have fingers in many pies . . .

  . . . In their different ways . . . these corporate forms are creative responses to their circumstances . . . Diversified conglomerates can adapt to environments rife with political and financial risks.50

  The article goes on to quote Khanna on business group advantages in accessing capital and managerial talent.

  The Tata Group can use capital from established businesses to support growth in new ones, and has the resources to attract and train the best people. It can also use its brand name to sell all sorts of products. Indians who have grown up enjoying Tata tea might be more inclined to buy the latest Tata electric car.

  . . . The Tata Group reckons that its brand is worth about 100 billion rupees ($2.2 billion).51

  More generally, business groups and communities can generate substitutes for a number of missing elements including capital and management markets, and also legal systems. To quote an account of contemporary developments in China:

  The networks and institutions that develop around informal economy clusters may be based on ties of kinship, community or geography. Their social function is to provide information about opportunities, start-up support and a network of trust that ensures sanctity of contract. Promotional organizations run by the state and the norms set by formal laws are but a poor substitute for these institutions, particularly in countries where enforcement of norms is weakened by widespread corruption and judicial tardiness.52

  Business groups are a universal phenomenon, but especially prominent in India. The positives are that they are able to make up for missing markets by putting together capital and managerial ability where others cannot. In Korea, the Economist of 11 February 2012 reported that there was a ‘Korean discount’ on company value which it attributed to the bad reputation of the Korean chaebol, family business groups, on account of the same things discussed in the Indian case—propping, tunnelling, political influence, etc.53

  But others argue that the negatives are that Indian businesses are poorly managed and attribute this to several factors, all connected with their being family business groups. One is the lack of competition in the markets they face. A second difficulty is the limited delegation of authority. A third criticism has to do with their lack of industrial focus. The best groups are, however, as well managed as any firm in the world.54 Whether there really is a generally lower level of productivity in Indian industry is actually hard to say. Some studies have shown that multinational corporations in India are not necessarily more efficient than Indian family businesses. But the larger problem is that Indian wages and markets are still so poorly aligned with international ones that relative productivity is hard to compute.

  Other Complaints about Business Groups

  Another claim is that business groups may enjoy corrupt access to political influence and abuse the enterprises they control for the interest of their controlling group rather than their shareholders. Indian business groups are alleged to ‘tunnel’ assets out of one firm they control and use them to ‘prop up’ others. This might not be in the interest of minority shareholders but the level of dissatisfaction is not high enough to deter them from investing in these firms. This conflicting set of approaches has produced an entire cottage industry, in Cambridge, Massachusetts, which is trying to use empirical data to resolve the question on the prevalence of tunnelling and propping. The volume of academic output is impressive, the pyrotechnics with which data is manipulated reasonably sophisticated, and the results not so conclusive that any of the contestants have retreated.55

  For those less interested in the techniques of data manipulation—no one can deny that successful business groups often have been able to launch successful enterprises where others could not, sometimes almost certainly because of their market credibility and access to capital, as also because they were good entrepreneurs and managers. On the flip side, large businesses often benefit (and sometimes suffer) because of their political connections, and controlling shareholders and managers frequently run the business to benefit themselves, rather than for the benefit of the other stakeholders in their enterprise.

  One of the most difficult legal conundrums is defending the interests of shareholders, especially minority ones, without depriving the management of its inherent autonomy and responsibility. The problem is that there are no really good ways to do this. I recollect being summoned late one night to meet a group of the informal ‘nomenklatura’ (originally a list of strategic party and state officers with certain privileges) who typically controlled ex-Soviet ‘oblasts’ (districts), and were trying to devise methods to protect minority shareholders in the newly privatized factories in their district. I quickly photocopied some pages from Company Law in a Nutshell (a simplified text for US law students) which outlined how weak the best protections were.

  The exact empirical balance of what Indian business group managements do is complex. A reputation for treating shareholders poorly would eventually come back to haunt a business group, a consideration probably exacerbated when we are dealing with a family group where descendants are likely to be doing business for several generations and be concerned about their ‘brand’. There is no question that business families themselves take some pride in the manner they treat their shareholders. One of the unpleasant techniques employed in bargaining with a family firm is always to say something like ‘I know some people do things like this, but I am sure that a family firm with your reputation would not think of doing this’, or even stronger reprimands like ‘Would your late father/grandfather have done anything like this?’

  Almost fifty years ago, I had used this very technique successfully in getting back a rental deposit on a bicycle in Varanasi.

  Further, staying with the specifics, one of the counter studies puts the following forward:

  We find that business group affiliation continues to generate higher market valuation vis-à-vis stand-alone firms ten years into the transition (Post 1991 reformed, ‘shining’ India), but diversification is not the source of these benefits. Instead, we find that propping through profit transfers among firms within a group (including ‘tunneling’) and better monitoring through group level directorial interlocks explains the higher market valuation of business group affiliated firms.56

  There is no question that ‘propping’ should positively affect some group firms and negatively affect others, and consequently affect the interests of shareholders in the propped and tunnelled firms. But the effect on the group’s firms as a whole should be positive. Exactly how directorial interlocks will cause higher market valuation independently is not quite clear. One would have thought the fact that the groups are providing good managers to be a virtue rather than a fault.

  Is Community Still an Important Factor?

  The Shining India of the last few years, after the end of the 2 per cent per capita Hindu rate of growth, has not been a product solely of the ‘business communities’ but has witnessed the flowering of educated young entrepreneurs who come from varied backgrounds, probably and most commonly what would have been described as ‘service’ or ‘warrior’ or ‘cultivator’ communi
ties. The business communities are still among the leading firms, often doing well, but the service communities are right there with them. Nonetheless, not surprisingly, the business community members still dominate the scene. Business success is ultimately determined case by case; individual firms are competitive and do well. The matter becomes more difficult when we try to explain why certain categories of firms, business groups, business communities, industries and even countries do well by providing the best environment for firms.

  There have been discussions on the phenomenon of emerging entrepreneurs and many works documenting the variety of communities from which successful businessmen come. Harish Damodaran’s India’s New Capitalists: Case, Business, and Industry in a Modern Nation has an introduction from Nandan Nilekani of Infosys who himself is certainly a poster child for successful entrepreneurs from non-business communities.57 This lively and well-researched volume by an accomplished economic journalist documents the extent to which entrepreneurs in the last two decades have come from non-commercial communities. The volume does not purport to be comprehensive nor does it assert that non-commercial communities were absent from enterprise earlier. In fact, it makes the point that non-business communities have always been more prominent in the south of India, and attributes this to several factors including the relative weakness of business communities in the areas concerned. For instance, Damodaran argues that in the Coimbatore region ‘peasant’ communities were able to emerge in textiles and engineering but did not emerge in the southern area of Tamil Nadu where foreign and business communities dominated the cotton trade, the major industry in the area. Damodaran’s statement that the princely Rajputs are not prominent as entrepreneurs is surprising, since with their resources and education the more aristocratic Rajputs are major players in a variety of sectors, especially in hotels. As one former maharaja is reputed to have quipped, ‘We’ve been entertaining people for free all our lives, we might as well be paid for it.’ It is true that Rajputs have also been closely associated with other entrepreneurs. The tie-up between the Jaipur royal house and the Tata-owned Taj Hotel group included the royals handing over the management of some of their palaces; also, at one point, many of their relatives and more particularly their sub-feudatories worked in the Taj Hotel chain. Other Rajputs have enterprises in different areas.

  The success of the Rajputs in the emerging tourist industry of Rajasthan is documented in a study by Lloyd and Susanne Rudolph, ‘From Landed Class to Middle Class: Rajput Adaptation in Rajasthan’. To borrow a quote from the study, ‘A credible heritage-hotel Rajput identity combines being a believable lord of the manor with being a successful businessman.’

  In present times, we recognize that often in the world economy leading industries fall under the service sector—television and radio, health and education, research, legal services, outsourcing. It is therefore not surprising that the groups that are in this sector have hugely benefited. The lines differentiating services, trade, industry and even cultivation have become blurred in the modern economy and it should not be surprising that those involved in entrepreneurship in these different sectors of the economy interact with each other as well. Not only Rajput princes but also leading sportsmen and film actors have emerged as entrepreneurs.

  Non-commercial groups have never been absent from the ranks of Indian entrepreneurs. Dwijendra Tripathi’s The Concise Oxford History of Indian Business records a number of different origins for entrepreneurs over the last several hundred years, such as the Sikhs (Indra Singh from Jamshedpur in engineering), and the Kayastha Srivastava Group in Kanpur, not forgetting the Brahmins and Nadars of south India.

  Sometimes these entrepreneurs were restricted to certain industries—the Jatavs and Muslim Quraishis to leather, castes traditionally connected with toddy tapping like the Nadars, Shahas and Kalols to alcoholic beverages, and Mahishya to engineering shops in eastern India. In other instances, Khatris from the Punjab and even Brahmins in Tamil Nadu and Bengal, despite being ‘service’ castes, have been prominent entrepreneurs in their respective regions for centuries. Incidentally, Muslims from Shekhawati have also been active in the construction business in Bombay and the Middle East.

  Michael Porter in his classic book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, on competitive advantage describes a ‘hexagon’ of factors that facilitate competitiveness, not only for firms but also for industries, countries and, by extension, business groups and communities. Different elements in the social infrastructure empower different entrepreneurs.

  Today many of the cogs of infrastructure that traditional Marwari businessmen had to painstakingly create are available to everyone—off the shelf. Those daily accounting systems permitting real-time control and response, once an item of Marwari pride, have now been replaced by continuous online accounts using off-the-shelf softwares. The rapid communication of business news which necessitated carrier pigeons for the Rothschilds or mirror signals for the Birlas is now facilitated by the use of Bloomberg and cellular phones. The Marwari basa in which Marwaris could sleep and eat has been replaced by hotels and restaurants. However, the traditional factors still seem to work.

  Sometimes what is important for contemporary entrepreneurship are connections in academia and in the technology community, with the bureaucracy, and links to the financial markets or even access to market chains. Though the Marwaris still have many of these resources, others have acquired them as well.

  Now there are the new castes like the old-boy network of elite schools and colleges, the children of elite civil servants and corporate managers, and the armies of MBAs which also provide supporting networks for business opportunities.

  The categorization of successful business groups in terms of their community affiliation is only one approach to studying them. A great deal has been written on this approach by me in my 1978 book, The Marwaris. Other approaches have included regional observations such as those around Calcutta or Bombay. To reiterate, Damodaran reports different paths to entrepreneurship—from the market for business communities, from the office for service communities and from the field for peasant communities. He even expects powerful surges from among the Dalit communities.

  There are rebuttals to the community argument. There are those who attribute Marwaris success in eastern India, and in particular Kolkata, to a strong disinclination towards entrepreneurship among the Bengali elite. However, in places such as Chennai and Mumbai, despite a Marwari presence local business groups have been dominant.

  7. Conclusion: What are the Marwaris left with?

  At one level nothing has changed. The heirs to the quintessential great Marwari firm of Tarachand Ghanshyamdas are the Poddars and Neotias, leading contemporary entrepreneurs; the heirs of Sir Hari Ram and his son Sir Badridas Goenka, leading banians of yesteryear, have engendered the very successful RPG Group; and the Birlas, the largest group of Marwari speculators to emerge after the First World War, are still among the largest industrialists in India. Two of these three feature in the Forbes billionaire list. And the enterprises from which they now draw their prime economic sustenance are not those of the old economy.

  Even the new Marwari groups and billionaires evolved in a somewhat comparable fashion. Perhaps large-scale commodity-trading firms are now less prominent (though ethnic Indian firms are prominent among the world’s leading commodity traders), and the banian relationships of the colonial days are history, when the foreign partner had direct access to the autocratic government.

  Nonetheless, there are business lessons embodied by earlier Marwari businessmen which are still valid and perhaps will remain so.

  Watch the Money

  There are two key functions performed by the Marwari business firms and business groups—strategic management of investment funds by moving them to where they are most productive in the long term and close financial monitoring of the enterprises in which they have a share. It is perhaps the cha
nges in Harsh Goenka and Kumar Mangalam Birla’s business styles that point to a dilution of finance-centric strategies in present times.

  Delegate but Monitor

  Successful businessmen have to learn how to delegate, otherwise the span of economic activity they can engage in will be limited. They also have to know when to intervene, fully aware that a decision to intervene is costly. Usually it is easier to replace an unsatisfactory executive rather than turn him around. Ineffectual executives and family members are gently moved out to cushy and uncritical positions.

  Plan but Have a Style and a System

  This is somewhat ambiguous as we clearly see a transition from an intuitive style to a more systematic one. However, this may be, as some suggest, a product of the transition from business founders to inheritors.

  Lead to Expand and Do Not Let the System Inhibit Growth

  A key characteristic of successful businessmen, as Aditya Birla said in his perhaps inappropriate criticism of Ratan Tata, is a drive to expand. Many firms have expansion in their mission statements but few implement it.