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Challenges for family-owned firms

business Updated: Oct 22, 2007 21:44 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times

Corporate governance issues including succession, board independence and transparency continue to remain the major challenges for India’s family run firms that dominate the country’s business landscape, ratings agency Moody’s said in a report released on Monday.

The survey, brought out jointly by Moody’s and its domestic associate ICRA, however, acknowledged that these companies have responded well to the opportunities available in the fast-growing and liberalising economy of modern India.

"The lack of board nomination sub-committees in many companies suggests that succession planning is not fully deliberated with independent directors. There is often insufficient transparency on ownership/control, related-party transactions and the group's financial position," Anjan Ghosh, ICRA's General Manager and a co-author of the report, said.

The survey said that many Indian family-controlled groups have complex corporate structures. “It is common to see inter-group cross-holdings of shares. In such cases and despite regulatory requirements to disclose promoter shareholding, it can be difficult to assess ownership and control on the basis of public information”, it said.

The survey covered 32 companies in 16 prominent family groups, covering a broad cross-section of Indian industry. The survey included companies belonging to the Tatas, the Ambanis, Godrej, Vedanta, Wipro, Essar, Bharti, TVS and the Muruguppa Group among others.

Moody's also said there were material residual issues regarding checks and balances, but these were generic to corporate India and not isolated to family companies.

For example, the lack of activist shareholders and a business and cultural environment does not permit hostile mergers and acquisitions. Further, important governance issues persist in areas not covered by regulation.

The report also noted that despite regulations regarding independent board directors, families retain significant control over listed companies. As such, the difficulty in ascertaining the true independence of directors is a big corporate governance challenge.

Family-owned companies comprise 17 of the 30 Sensex stocks and have specific characteristics compared to other firms.