Indian Business Groups and Other Corporations

Scholarly interest in business groups has intensified in recent years, perhaps because of the long history of persistence and resilience of business groups in spite of highly diverse and occasionally changing institutional contexts in which they thrive in different countries.

The chapter addresses the issue of capital accumulation in the Hindu Undivided Family (HUF) and the business groups in India since independence. The organization of the ‘business house’ found legal sanction through multiple legislations spanning corporate and tax laws and forms the object of studies in ‘corporate governance’. The chapter argues that, it is the dual existence of the HUF as both a family and a firm that makes it distinct from all other institutional categories. It discusses the channels through which family control over the organizational structure of business groups and the ownership of wealth by the family generated through these structures are maintained. The interlocking of the caste Hindu patriarchal family with corporate governance institutions is formally embedded in law in India. It is the materiality of capital that forges the social entity of the family owned business group. This materiality is formally legally embedded in the seamless interlock of the firm and the family where the firm becomes the family in the case of the HUF. This spans state codification of Hindu family law, corporate governance laws and taxation laws. The chapter further argues that, it is capital in its material social role in the circuit of financial and capital flows, which drives the network of institutions that constitutes the ‘family owned business group’ in India legally. This is formally undergirded by caste, patriarchy and religion. Moreover, it shows that, this unique legal family/firm interlock is not available to Muslims, Christians, Parsis or Jews and hence constitutes a perverse legal privilege to the Hindu family.

This chapter analyzes corporate responses to public policy changes. Using data from National Accounts Statistics and Reserve Bank of India’s Studies of Company Finances, it shows that the response of the private corporate sector to the public policy changes has been in line with the expected outcomes of increasing the sector’s contribution to the growth process. Not only that the sector’s share of capital formation and savings in country’s NDP increased, but the sector aided their growth as well. However, the way corporate sector responded brought about a shift in the composition of corporate income with profit share rising considerably. This was largely attributable to the sector’s increased reliance on shareholders’ fund. With reductions in direct corporate tax rate, the incidence of corporation tax showed an upward trend. Although the sector’s engagement with the rest of the world was facilitated by trade and foreign investment related policies, the sector continued to have lower earnings than their expenditure in foreign currencies. The chapter also reports that market valuation remained higher relative to the replacement cost (that is, Tobin’s Q exceeding unity), implying that corporate investment decisions were driven by market sentiments. This changing character of the private corporate sector has implications for income distribution as well as for achieving stability in growth.

This chapter analyzes how the ownership, control, and board governance of Indian business groups have evolved over time against the backdrop of evolving laws and regulations in India. The analysis is based on a panel data of group affiliated and unaffiliated firms for the period 2005–2018 during which the governance reforms that were initiated in the earlier years took root, and several new ones were introduced through revisions of existing regulations and laws. The chapter seeks to answer mainly two questions. First, have the nature of the agency problems pertinent to business groups as manifested in their ownership and control structures fundamentally changed in response to dynamic changes in their institutional environment? Second, have reforms introduced to change the ways in which groups are governed by the board of directors made any impact on the way these groups are actually governed? Contrary to the expectations drawn from the institutionalist perspective that the relevance of business groups that fill institutional voids will wane as markets develop, the analysis in this chapter points to the continued predominance and persistence of Indian business groups within the corporate sector. Several of the groups, such as the Tatas and Birlas, which were established in the pre-independence era, have continued to remain in leadership positions with a handful of large business groups continuing to dominate the sector, irrespective of the changes in the institutional environment. Big groups have become even bigger in terms of their asset base, and changes in the relative positions of groups at the top end of the distribution have been sticky at best even after more than hundred years of their existence and continued entry of new groups from time to time. Within groups, ownership structures have become more concentrated over time, with promoters of almost all groups now having majority control in all the listed firms of the groups. The pervasiveness, persistence, and dominance of promoters in Indian business imply that there is little scope for monitoring internal management by other large block holders.

This study explores the role of business group affiliation and financial distress on determination of corporate investment policy of the manufacturing companies in India. We find that the firm specific variables like cash flow, Tobin’s Q ratio, sales income, age of the company, financial leverage are the major determinants of corporate fixed investments. Companies affiliated to a business group invest more in the fixed assets than the standalone companies. Group affiliation reduces the impact of cash flow in determining corporate fixed investment. The results indicate that financial distress plays a negative role in the determination of corporate investment. We also find that financial distress does not affect the investment-cash flow sensitivity of the affiliated firms in India. The results are robust across the periods and different types of companies.

In this study, we try to find out whether group-affiliated firms perform better than the stand-alone firms in the post-reform period. Our study is based on the 14,274 numbers of BSE-listed manufacturing firms. Using dynamic panel data regression technique, we find that group-affiliated firms outperform the stand-alone firms. In order to find the factors responsible for better performance of affiliated firms, we again apply dynamic panel data regression technique. But more importantly, since we are interested to examine whether the impact of explanatory variables on firm performance differs between top performing and bottom-performing firms, we apply panel quantile regression method. However, the study finds that ownership opacity as well as internal financial capital, both are responsible for improved performance of group-affiliated firms. This refutes institutional void theory. The findings are analyzed from the perspectives of Resource-Based View, Resource Dependency theory and agency theory.

Related Party Transactions disclosures in Annual Reports have recently gained more attention of the Indian policymakers. This paper aims at finding out the effect of related party transactions disclosure on the stock price crash risk faced by the firms. Using a large sample of all the NSE listed firms for the period 2005–2012 this study provides evidence that related party disclosure is associated with a decrease in the stock price crash risk faced by the firms. This finding is consistent with the view that information asymmetry increases crash risk. In addition to this, the study finds that such decrease is observed more in the firms with higher risk.

This chapter looks at a macro picture of the corporate investment and the role of finance from the lens of Hyman Minsky. India experienced its best ever growth performance during the 2000s but it also ended up with highly leveraged large corporate firms. These firms essentially financed their investment through the commercial banks. As a result, the high growth phase ended with a banking sector stressed by non-performing assets. On the face of it, this looks like what Minsky had said about the booms ending with a financially fragile system but can the Indian case fit that description? Serious macro-theoretical objections have been raised about Minsky’s financial instability hypothesis because it conflates the micro with the macro. While this criticism is valid, I argue that if investment is concentrated in the hands of a few business houses and the credit side of it in a few large banks, a leverage crisis at a micro level can have systemic issues, which is what seems to have happened in the case of India. It is in exploring the role of this concentration, both on the lenders and the borrowers’ side, that this chapter fits the overarching theme of this volume—to explore the role of concentration in business, corporate governance and their relationship with the political class in India.