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Feuding families run risk of business closure

The family-run businesses get a higher priority among investors but run the risk of closure and erosion of wealth in case of prolonged feuds between the people heading the enterprise.

business Updated: Aug 05, 2008 15:52 IST

The family-run businesses get a higher priority among investors but run the risk of closure and erosion of wealth in case of prolonged feuds between the people heading the enterprise, say analysts.

However, a dispute resolution could lead to a windfall for shareholders, as was the case when the Reliance empire was divided between warring Ambani brothers, Mukesh and Anil, thus endorsing the investors' belief that these businesses have huge value unlocking potential after settlement.

Besides, such companies also find favour among investors for virtues like better checks and controls, experts believe.

A good amount of money and time is spent whenever there is a feud and the shareholders are also affected, but whenever a dispute has been resolved, the shareholders have unlocked significant value, as was the case for the Reliance group, Kejriwal Research and Investment Services (KRIS) Director Arun Kejriwal said.

But family run businesses do not necessarily enjoy a premium and at times they tend to quote at a discount, he said, adding that if a dispute gets prolonged, it could even lead to closure of the business and might affect the company's expansion and modernisation plans.

According to research and consultancy firm Grant Thornton India's National Managing Partner Vishesh Chandiok, most of the corporate family feuds in India have been because of ownership matters.

"These feuds do erode shareholder value from the respective companies. In such a scenario, the shareholders should look for certain mechanism that would ensure that they are not affected by all the altercations," he noted.

"The shareholders should look at conflict resolution mechanism and any exit route in the shareholders agreement," Chandiok said.