'Business family dynamics are driving the need for acquisitions'

Image: Joshua Navalkar

Q. You deal with the biggest business families in India. There was a huge acquisitive hunger in the mid-2000s among business groups and many acquired businesses abroad. Is that coming back gradually, or is it still too early?
There is a good amount of optimism and hope that many business families are sharing. Is that translating into action? We can debate that. But if you look at the large families, a large amount of the wealth lies in the business.

You go and talk to a billionaire, you will find that 90 percent of his billion comes from the valuation of his business. As most of the businesses were undervalued, so was the ability to write the cheque for any acquisition, whether in India or outside. What is happening now is, with the market improving in general, their currency, which lies in their business valuation, has already appreciated to an extent and they feel that’s likely to appreciate further. That gives them confidence. There is no uniformity of view on whether they would like to use this currency for acquisitions overseas or within India. A few years ago, people were going outside India because they were not able to do something more than what they were already doing in India.

Depending on which company and which business we’re talking about, there would always be pros and cons of going overseas, or acquiring backward- or forward-integration possibilities, or diversified businesses in India. So, I think there’s going to be a good amount of push and pull on whether to go overseas or not. At the same time, a number of opportunities in India, which have got into the trap of distress, are visible now for people who are confident of investing more. So, you may find a number of distressed assets getting into consolidation mode. That’s an equally good opportunity for Indian business groups in comparison to the opportunities they see overseas.

There’s another very important aspect. If you look at Indian business families, most, over a period of time, have got into multi-generational partnerships in the businesses. So, you will see the grandfather, the father and the children operating more or less in the same business or group of businesses. And as the business goes through a transition from one generation to another, there is the challenge of how it will be managed. There are issues around business continuity and succession planning, and all these are becoming core issues for the founders to address. But the related issue is there are more people in the family than the business [can accommodate]. So there is a sort of imbalance. I call it disguised unemployment. Either they are stepping on each others’ toes or they are stepping on the toes of the professionals in the company because they don’t have anything else to do. But remember, they are capable people. It’s not that there’s anything wrong with them. Now they have started identifying this problem of disguised unemployment, whether they admit it or not. Therefore, they have no option but to look for new businesses, whether in India or overseas.

In my interactions, whenever I sit with the patriarch and talk about it, he says, ‘Satya, we have to look for some more businesses, we have to make some more investments.’ They are clearly saying we need more businesses because we have more members in the family to manage them. So the need for diversification, growth and acquisitions is coming out of family dynamics. And that cannot be ignored. We have seen many families getting into forward- or backward-integrations because the business needs it, and also because they have got family members who can manage them well. Sometimes they are also getting into some unrelated areas because they feel the next generation is interested in some of those areas and they would like to grow there.

Q. Is this also a precursor, perhaps, to some of these family members starting out independent of the group?
In fact, to an extent, that’s the need of the hour as well. One reason, as I mentioned, is the disguised unemployment; the other is related to succession. What is coming out is that most of these next gen family members are educated at the best institutions abroad. When they come back home, they find themselves either overqualified or cultural misfits in implementing what they have learnt. Even if they don’t find themselves misfits, their parents or grandparents or uncles find them to be misfits because they are either ahead of time or culturally not relevant or not adequately trained for a market like India.

There’s a clash of styles. There’s nothing wrong about it. Sometimes it’s very difficult to get aligned to the same thought process. You will often find a disconnect between the father and the son, or between two sons if one has gone abroad and studied and the other has been in the business in India and not gone through that kind of formal education. There’s also a disconnect between cousins if they are part of the same business. This is a key challenge most Indian businesses are now grappling with. One of the ways of handling this challenge is to make them create something of their own and, in the process, learn, whether by way of failure or success. The outcome is not that important. What is important is their ability to make things happen in India with what they have learnt overseas. One of the ways of doing that is to allow them to create some ventures of their own in their areas of interest by providing them seed capital or risk capital or venture capital. In the process they learn how to manage the business the right way.
 

Q. The main business can then be managed by professionals…
Yes, they [the family members] can also be groomed for taking a larger role in the core family business in the future. By the time they come back they are far more geared to handling the business in the right manner. The style clashes will no longer take place.

Q. In tier II and tier III cities, there’s a huge spurt in entrepreneurship. Are you seeing that as a major business opportunity for your line of business?
There’s a higher level of democratisation now; there’s a diversified pool of wealth coming from various regions. It’s no longer confined to Mumbai and Delhi and the neo-wealthy in Bangalore. We have to respect Aurangabad, Nashik, Jodhpur, Indore, Bhopal equally. Why only them? We can go to tier III towns and see it happening, whether Tiruppur in Tamil Nadu, or Dhulia or Jalgaon in Maharashtra, or Rajkot and Bhavnagar in Gujarat. There’s a large presence of wealthy business families all over the country. That has happened to a large extent because of agriculture and agri-businesses getting a boost. They have wealth, but most of the wealth is being misdirected towards consumption or building social status. They buy luxury cars, build large residences, spend lavishly on overseas holidays, and buying private aircraft, [things] that may not be needed, perhaps, given the size of the family or the business.

They are now realising that they need to get into real businesses and creation of wealth. They cannot just keep enjoying the wealth they created because they sold their farmland or factory, or their business was acquired. They are going through a kind of identity crisis. Let’s think of a family in a smaller city that has sold its business and got Rs 500 crore. The founder there is coming and saying, “Give me something I can identify with: I cannot write on my visiting card ‘Mr Gupta, Rs 500 crore’!”

In a culture like India’s we are still identified with the business we are in rather than the size of the wealth. So, while they got the money, they are not getting social acceptance. People are facing challenges getting their sons and daughters married despite their wealth. You are not going to get your daughter married to someone who has Rs 500 crore but no business. That’s hitting them very badly; the social identity related to the business is now hitting them in the face. That’s why the need for them to go and create more businesses or to diversify from the small business they had and sold.

Q. With some stability on the political front, what is the difference between your interactions with overseas investors last year and now?
Yes, at that time our investors in Singapore, the UK and other countries would say, ‘Look here guys, we’re Indians and we believe in India but what if I send money now and the rupee falls to 100 to the dollar?’ The rupee was somewhere in the mid-60s at the time. Whether the rupee would become 100 was debatable, but that fear was preventing them from putting any more money in India. Today, no one is talking about the rupee touching 100. I am not saying it will go to 50, but the rupee is considered to be a stable currency now. And even if there’s a bit of depreciation, I don’t think people are so worried that they wouldn’t put money in India. This means India will attract a lot many investors, both in debt and equity, because currency depreciation is not being seen as that big a challenge.

The government is also sending out a clear signal that they are going to take full accountability of where they spend money. While we can still debate whether the economy will grow at 5 percent, 5.5 percent or 7 percent, what is important is, are we laying the foundation for higher growth? I think that’s where a lot of people are getting confident.

The debate should be about whether we have taken a directional tilt towards future growth. If we have, then we can debate the velocity of that tilt rather than whether we have taken the tilt.
 

Q. Are you spotting some clear trends in the economy now that there is some stability on the political front?
I think with the new government taking charge, what is coming out as a message is that they will be quick in decision-making. Sometimes you may not agree with their decisions but the very fact that they are going to take decisions faster than the previous government is sending a positive message to Corporate India and investors overseas. The other message is that they are going to boost the investment cycle in the economy. For this, not only will they bring a fresh set of initiatives, but will also revive what is stuck. That has, to an extent, helped investors both in India and overseas to fast-track their investment decisions. This is going to bring in buoyancy to the capital goods industry and a number of affiliated industries which support it.

In our interactions with business families in India, and some of the large NRI families, we have seen that they have started making fresh sets of investments or rebooting investments they had stalled a few years ago. So, hopefully, that should lead to some amount of economic activity in the form of higher growth in the capital goods sector and benefits flowing to related industries.

I also think India as an economy and the rupee as a currency are no longer looked at negatively. I don’t want to say they are being looked at positively, but the very fact that there isn’t much negativity associated with us, either among the emerging markets or the rest of the global economies, is giving confidence to bring in money—whether it is debt, equity or NRI flows— in a market like India.