There is data available that suggests that a very high proportion of private sector business output of companies in India is controlled by owner/promoter families. This could be one of the largest proportions in the world where private sector businesses are allowed/incentivized for output creation.
The question is, why is this so? After more than 75 years as an independent nation, why is the output of private enterprises still dependent on hundreds of founder dynasty families?
The answer to this question is so complex that we can reveal the answer layer by layer.
- Since India has so many rules and regulations and different types of laws covering so many aspects of business administration, background knowledge on the intricacies and carrying out these permit and impediment clearances Only those with the ability can succeed in the competition. Also, the average Indian is risk-averse and wants to become an effective employee, but does not become an entrepreneur for fear of losing money, reputation, social status, etc. This limits the number of entrepreneurs.
- The role of family in Indian personal life is very strong. Over the past few decades, it has been noted that in independent India, the first generation has started businesses and the second generation has taken on the founder’s position and strengthened the business, for example in the pharmaceutical and information technology sectors. It has been. The top position remains with the family. As long as the ability and ability lasts, there is no problem. The problem arises when the successor is apathetic or uninterested.
- Financial support organizations in India like financial institutions, banks, non-banking financial institutions and even retail investors in the capital market prefer names of known business promoters. It gives them the comfort of knowing they have a given ability to manage the business.
- The promoter family organized the collection of capital market funds in such a way that it maintained complete management control of the business through a significant shareholding. Entering the capital market is solely aimed at securing additional funds for growth without releasing the levers of business management.
- India has not yet developed a culture of corporate responsibility where investors ask pointed questions about performance and the intentions behind actions. We are seeing some investor advisory firms asking minority shareholders to ask very pointed questions of company management promoters, especially when dealings with business families or related parties are involved. This is the first time it has happened recently.
- Indian law regarding liquidation, bankruptcy and change of management due to business failure is not well evolved. Despite seeing clear red flags (raised early and not addressed), our remedial actions take time and are slow due to multiple procedures (and in some cases slow judicial processes). , the losses for financial institutions and shareholders are greater than necessary. Speeding up remediation procedures could reduce financial losses and reduce pressure on the financial system by replacing management with better management, such as through management changes or divestitures.
- Indian financial institutions have an innate tendency to cover their tracks and support existing management teams by continuously offering professionally structured loans wherever possible. They dislike interfering with existing management. This is the biggest weakness of India’s financial restructuring structure/organization. Earlier, India’s finance minister had said, “There are sick and loss-making companies in India, but the people who promote these companies are always rich!” This is often due to corrective action being delayed or discussed without results.
- Indian laws and forensic audit processes need to unravel a series of corporate irregularities in the use of funds. It is necessary to clarify the flow of funds. If any fraudulent intent is discovered, strict action must be taken against the promoter, including seizure of personal property. This requires great focus. At the moment, this is severely lacking.
India has reached a stage of corporate development where companies have grown to a very large size, have very complex shareholding structures, complex commercial transactions (including foreign exchange), but the checking mechanisms are largely obsolete. After all, compliance is not considered an essential activity for Indian companies in India. In fact, compliance is often thought of as a rock or a hole in the business-speed highway. Actions from authorities and regulators are often delayed, and all actions must be reviewed by appellate or judicial authorities, resulting in inaction and delay.
Both business and politics have long been shadowed by dynasties in India. In the case of business, it is necessary to ensure that promoter dynasties in the business do not become rich at the expense of other corporate stakeholders such as employees, lenders, creditors, and unpaid taxes.
Business dynasties are not the problem. Businesses either succeed or fail. Business failures due to the wrong product and pricing strategy, marketing failures, wrong technology choices, wrong timing of decisions, etc. are well understood and can be corrected over time. Manipulative and conspiratorial business dynasties enrich themselves by placing friends and family members in senior positions (family, not business, priority) at the expense of other business stakeholders (state costs). And making controversial and honest business transactions is a problem and a solution needs to be found. to solve these problems.
Corporate dynasties must feel the force of the law when necessary and take corrective measures to prevent their enterprises from being mismanaged and resulting in national losses. Unless prompt punitive action is taken, India’s corporate culture, where promoters consider themselves lords, will not change.
You must tell them that although you can profit from business success, the business losses you cause should also affect you and the value of your holdings and personal property. It won’t. The losses require an explanation. No one else can bear the cost of your loss, but that’s the way it is.
Disclaimer
The views expressed above are the author’s own.
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