Indian School of Business Conducts a Research Study on Family Business

• Provides insights into the ownership pattern of family firms in comparison to the non-family firms

August 07, 2018, Hyderabad : Indian School of Business (ISB)’s Thomas Schmidheiny Centre for Family Enterprise conducted a research study “Family Businesses: Promoters’ Skin in the Game 2001-2017”, which reveals the pattern of increasing stake of promoters in NSE and BSE listed family firms. The research study, conducted by Dr. Nupur Pavan Bang, Professor Kavil Ramachandran and Anierudh Vishwanathan of the Thomas Schmidheiny Centre for Family Enterprise at ISB and Professor Sougata Ray of IIM Calcutta, provides insights into the ownership pattern of family firms in comparison to the non-family firms and also explores the heterogeneity within family firms.

It is a first- of- its kind research study that presents and analyses the trends in equity ownership by various classes of shareholders for 4,615 firms listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) of India, across different ownership categories, for the period 2001- 2017.

The research study attempted to give a bird’s eye view of the shareholding pattern of listed Indian firms. Dr Nupur Bang says : “We found that promoters of family firms have increased their stake in their companies over the last decade, while State owned Enterprises (SOEs), Other Business Group Firms (OBGFs) and Standalone Non-family Firms (NFs) have witnessed a decline in promoter shareholding. This reinforces the preeminent role of family-controlled businesses in India. It seems to imply that the engine of growth of Indian businesses will not be dependent on overseas or other promoter categories. Instead, promoters of family firms will continue to play a major role”.

Professor Kavil Ramachandran, Executive Director, Thomas Schmidheiny Centre for Family Enterprise says : “The ownership pattern of listed businesses in India is fairly concentrated, especially in the case of family firms, SOEs and MNCs. While this has significant positive effects, there is also a need to keep close vigil on their governance practices”.

Some of the key findings of the study are :

• Rising Promoters’ stake :  The research study finds that while the concentration of promoters’ shareholding is decreasing in non-family firms, it is increasing in the family firms.  By steadily increasing their shareholding in the firm, the promoters of family firms, both family business group firms (FBGFs) and standalone family firms (SFFs), were signaling their growing confidence in the potential of their company, thereby instilling confidence among the investors. Promoters of MNCs have also increased their stake in their Indian subsidiary, probably indicating their belief in the ‘India story’. The promoter stake in State Owned Enterprises (SOEs) has been steadily falling over the past decade. This is in line with the policies of the successive governments in India to divest their holding in the SOEs. Other business group firms (OBGFs) and standalone non-family firms (NFs) have also witnessed a decrease in promoter shareholding.

• Rising Trend of Holding Shares Through Companies: In FBGFs, the preferred mode to hold shares is through holding companies, while in SFFs the family members prefer to hold shares directly as individuals or Hindu Undivided Family (HUF). In FBGFs, holding companies or trusts that hold shares of all companies on behalf of the family members enable better resource allocation, control, realisation of synergies and tax planning within all group level firms and better management of ownership, inheritance and payouts at the family level. It also enables the family to professionalize each of the firm while the family maintains a bird’s eye view at the group level. SFFs are younger with less complex structures both at the family and the business front. As they grow the complexities of inheritance, succession and growth would force them too to adopt better structures of ownership.  Entry of the next generation into the business and more interest in the business by the extended family with better performance and increased scale would point towards a need to streamline ownership and be prepared for future structure, governance and professionalization needs of the firm. Therefore, we see a gradual increase in shareholding through companies even in the case of SFFs.

• Declining Institutional Shareholding in Family Firms: Non-promoter institutional shareholding is lower in family firms when compared with non-family firms and it has decreased further between 2007 to 2017. As a block holder, institutional shareholders influence the governance and strategy of the firm; if they refrain from investing in family firms, the pursuit of governance will take longer. Institutional investment is inversely proportional to promoter’s shareholding, especially in the case of family firms, higher preference is given to the firm where family ownership is lower. Non-family firms in general have strong formal internal control mechanisms to keep the personal interests of managers out of the company’s functioning. Consequently, the probability of a strong and independent corporate governance mechanism is greater for a non-family firm. Institutional investors have a strong preference for firms with good governance. Thus, we see higher institutional shareholding in NFs and OBGFs.

• Reluctant Non-Institutional Shareholders: Except NFs, our study shows a decline in the shareholding of non-promoter non-institutional shareholders. It suggests that investors’ preferences might have further shifted to alternative asset classes like real estate, gold, and fixed deposits or they might be investing through institutional investors like the mutual funds. Most of the decline is due to small investors with upto than INR One Lakh worth of shares. These small investors have reduced their holdings across all ownership categories. This may be due to the lack of disposable income in the hands of small investors. Also, such investors are typically the last-in in a bull market and end up buying at a very high price and selling cheap when the market starts to stumble. Repeated such experiences make them wary of the market. FBGFs and SFFs have fairly large non-institutional shareholdings, even though it’s been on a decline. On deep diving, we find that the average shareholding may be skewed due to outliers. In the case of family firms, more so in SFFs, we find a large number of firms that report a very large percentage of shares being held by non-promoter non-institutional shareholders. On checking the websites of some of these companies, it is clear that these are family owned and controlled firms. Moreover, for many of them, the number of such investors remains constant quarter after quarter. That is a very unlikely scenario in the case of small investors and leaves a lot to speculation. In a few cases, we find that the names of shareholders disclosed by the company under the category of non-institutional shareholders with shares in excess of INR one lakh, have the same surname as the promoters or surnames from the same community. This calls for the regulator to closely scrutinize the shareholders in this category to ensure that the law is obeyed in spirit and not just in letter.

 The Thomas Schmidheiny Centre for Family Enterprise was launched on February 7, 2015 with an aim to advance real-world and academic knowledge of family business. Since its inception, the Centre has been bringing together faculty and practitioners from India and abroad with the broad aim of combining theory and practice to enhance research and innovation in the field. Family businesses make a major contribution towards wealth creation, job generation, and increasing competitiveness in countries around the world. As such, the unique challenges and opportunities faced by them are rapidly becoming an important subject of management research. Cognizant of these developments, a Chair was set up in 2006 at ISB, which later developed into a full-fledged Centre. It has been generously funded with support from Thomas Schmidheiny, Founder and Chairman of Spectrum Value Management, Ltd, Switzerland. In its mandate to continually create platforms for the exchange of insights and knowledge among diverse stakeholders, the Centre has been engaging closely with leading family businesses in India and Asia, through conferences, workshops and forums. The bi-annual Asian Family Business Conference hosted by the Centre is one such initiative that has gained immense popularity over the years. The Centre has forged several collaborations with academic institutions and professional organizations at both the national as well as international level. These engagements have helped the Centre to contribute significantly to the growing body of research on various aspects of family business.