Family has been the cornerstone of the vast majority of successful businesses around the world. And nowhere is this more obvious than in India. Seventeen of the 30 companies listed on the Bombay stock exchange’s benchmark Sensex index are family-controlled. Overall, it is estimated that 90 per cent of all Indian businesses are family controlled.

But, according to a new report from Moody’s, the family-run businesses that dominate the corporate landscape in India are still dogged by governance and transparency concerns despite greater regulation within a liberalising economy.

The America-based credit ratings agency highlighted succession-planning issues and questions over the impartiality of independent directors after conducting a survey of 32 Indian companies in 16 prominent family groups. These included conglomerates run by the Tata, Birla, Godrej and Ambani families, all household names in Indian industry, with businesses ranging from steel and telecommunications to cement and finance. Eight of the companies looked at have a foreign listing.

The survey — the first by the agency — reflects the vice-like grip of several renowned dynasties over some of the biggest and most successful companies in India at a time when they are receiving an unprecedented amount of foreign investment.

The report, co-authored by Moody’s Indian associate firm ICRA, said family-run companies had capitalised on opportunities for expansion made possible by economic growth of more than 9 per cent a year.

However, the report gave warning that there was still “insufficient transparency” over ownership because of complex corporate structures, including inter-group cross-holdings.

Family-run companies tended towards higher levels of debt and were slow to adapt to emerging business challenges, which carried potentially “negative credit implications”, the report said.

Chetan Modi, Moody’s India director, said: “Many Indian family businesses have pedigree and are very well run, but investors need to be cautious.

“There is no activist shareholder culture. In the developed world, if investors feel a company is underperforming there are mechanisms to shake things up. That doesn’t really apply in India.”

Tighter regulation in recent years has improved corporate governance, as has exposure to foreign best practice. The Securities and Exchange Board of India (SEBI) has requirements for listed companies covering the number of independent non-executive directors and the composition of audit committees.

But families still retain significant board control, even with small shareholdings, and it can be difficult for independent directors to wrest influence from a coterie of long-time company confidantes, particularly over succession-planning.

Vikas Varma, chief executive of Nirvana Consulting, a Delhi-based corporate governance adviser, said: “A lot of the time, the problem is a blinkered approach and a natural tendency to resist rules shoved down their throats. The smarter ones are realising that independent directors, for example, bring value.”

Leadership uncertainty hangs over even the more progressive Indian companies.

Ratan Tata, the chairman of Tata, admitted recently that succession at the salt to software group that bought Corus was “a problem”.

The Harvard-educated businessman, who at 69 is the driving force for the group’s international expansion, is single with no children. Deferring the debate, the Tata board raised the retirement age for non-executive directors from 70 to 75.

Many family-run companies in India date back more than 100 years, springing up as a means of achieving economic freedom from the British colonial rulers.

Following independence in 1947, they flourished under four decades of socialist economic control that barred foreign competition until the Government opened large swaths of the market to overseas investment in 1991. They still dominate most sectors.

Happy families

Reliance Industries

Dhirubhai Ambani’s carefully laid succession plan for the company he founded was dashed after his death in 2002 when his two sons fell out in spectacular fashion. There was no will. The feud cut Reliance’s market capitalisation by a tenth in a fortnight and provoked intervention from India’s finance minister. The brothers finally agreed to split India’s biggest company, handing the petrochemical assets to Mukesh and the telecoms business to his younger brother, Anil. The resolution was announced by their mother, Kokilaben. The two Reliance companies have gone on to become the best stock market performers.

Modi Group

Newspapers during the 1980s contained almost daily accounts of squabbles between the third-generation descendants of Rai Bahadur Multanimal Modi, the founder, over how the 14 group companies should be run. His son, Gujarmal, had kept the family together under one roof at a 50-room mansion near Delhi, insisting everyone was served from a single kitchen, but his sons and nephews wanted to live and conduct business separately. A settlement was reached under pressure from financial institutions with large stakes in the $800 million group.

Bajaj Group

A four-year truce between estranged brothers Rahul and Shishir Bajaj has collapsed, threatening to tear apart the $1.3 billion turnover sugar to motorbikes group founded in 1926 by their grandfather, Jamnalal, a close associate of Mahatma Gandhi. The issue relates to their own sons’ proportionate shareholdings in the holding company. The Company Law Board, an independent quasi-judicial body, is this week hearing plans to separate the 27 composite companies after the family failed to reach a resolution.

Mafatlal Industries

The group founded in 1873 by Mafatlal Gagalbhai, a Gujarati cloth trader, was one of the most prominent family-run businesses in India, spanning textiles and chemicals, until the early 1990s. Internal disputes led to the company being split in 1979 in a difficult industrial climate. Its gradual decline has culminated in big losses and bad debts. The public fight for the family fortune took a bizarre turn in 2003 when Aparna, one of the daughters of Yogindra Mafatlal, the late patriarch, had a sex-change operation and was forced to deny that this was to stake a claim as the elder son.

Birla Group

The Birlas have endured several inheritance sagas but even close observers of one of India’s richest families were shocked in 2004 when the late Priyamvada Birla, the eccentric widow of MP Birla, purportedly bequeathed her £600 million estate to her chartered accountant, Rajendra Lodha. Family members are still locked in a legal battle, insisting a previous will granting her estate to three public charities should stand. Aditya Birla is one of India’s biggest companies with a £14 billion market capitalisation.

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