The reality of Promoter driven Business Group concept as operative in India is that the ownership shares of companies that are managed by the Group within it’s Corporate umbrella will finally report to the Holding Company.  There can be step down subsidiaries but finally there is enough shareholding % in any entity to qualify that company as belonging to that specific promoter group.

India private sector business groups manage businesses through what is called ‘conglomerate business’ concept.  The businesses looked after by the Business Group can be varied and very distinct with very little commonality of business.

This concept of ‘conglomerate business’ has advantages and disadvantages. The main advantage is that the Business Group has experience of setting up and managing business.  The term ‘ease of business’ is not really as alive as one would like it to be.  However, the major dis-advantage of managing conglomerates is the inadequate Central Group management attention to the Businesses.  Often, the multiple conglomerate businesses are run by individuals who are members of different family branches.  This leads to shortfall in management performance and the dangers of ‘related party’ transactions.

One of the key issues that emerges in all Holding companies of Business Groups is that the performance of entities under the Group umbrella is varied.  There are some star companies performing exceedingly well and there are laggards who weigh down the performance of the Holding Company when consolidated financial statements are prepared.  It is due to this reason of varied performance achievement that most Business Group Promoters are not happy getting the Holding Company shares listed on the Financial / Capital markets (NSE / BSE, etc).  

For those Business Groups whose Holding Company is listed, the share price gets weighed down by what is called ‘conglomerate discount’ or ‘holding company discount’.  The perception of the Promoter Group Family Office and the market pricing given to the holding company shares can be very significant.  Also, the market can be harsh on substantial ‘related party’ transactions valuations.

The Promoter Business Group office often takes a view that the capital markets are taking an excessively cautious view on Business Risks that the Businesses carry while the Capital market takes a view that the Business promoter Group is unwilling to face the harsh business environment reality and is having a ‘head in the sand’ business approach.  This is the reason why many business groups don’t like the Holding company shares being listed.  Capital markets can shatter illusions of grandeur.

In my view, if the holding company has a listed subsidiary company, the Holding Company must also be a listed entity.  One cannot have the child being subject to the rigours of the Capital market regulator (SEBI) and Company Law in terms of disclosures and compliance requirements, while the parent (holding company) has no such restrictions / expectations.  In fact, many Holding companies of listed subsidiaries are private limited entities. There is somewhere in this balance of expectations a great mismatch, needing rectification.  An investor must have adequate knowledge of subsidiary and holding company financials because each affects the other – positively or negatively.

Sometimes, the Holding Company has to take a decision on whether it would like to continue to have it’s commercial presence in a business, that it believes is stagnating or it feels there is no real long term business viability.  The promoter holding company has to make the requisite moves towards exit by the process of finding a buyer and at an agreed valuation hand over control.  If the business is run by a subsidiary that is a listed company, the Capital market regulator requirements need to be fulfilled – by both the seller and buyer entities.

Sometimes, the Promoter Group wishes to move into a new business direction which may require significant funding as promoter.  The funding can come only from selling / disposal of an existing business.  This is where a ‘catch 22’ situation arises. Sale of a floundering business may not realize much value.  If you sell off a reasonably successful business, you could get decent valuation but there is a risk of investment into a new business idea with no accumulated management expertise.  There is a chance of a wrong investment and a loss of a fairly successful business which the Holding company let off for funding purposes.

Any Holding Company should actually be performing these 3 Roles:

1. It has to ensure that all it’s business have adequate management depth and are ‘well managed’.  There must be some performance parameters for evaluation.  A very strong attention must be given that the business is among the Top performers in the Industry and it’s performance is not slipping.  Also, is the business achieving the plans formalized and agreed in market presence and financial parameters?
2. Constantly review new business opportunities so that the Business Group has the ‘first mover’ advantage.
3. Exit businesses which are not delivering the requisite results – market presence, reputation and financial numbers.

In India, it has been found that Holding Companies are not adequately performing Role 1 above, resulting in the business / subsidiary dropping into need to perform Role 3.  Clearly, business valuation will be weakened and maybe greatly destroyed.  It requires a kind of expertise to get proper business valuation once the decision to exit is taken.  

Role 1 above is also important from a Business Promoter Group reputation.  There are be minority shareholders if the business is conducted by a listed entity.  Nowadays, Business Groups are getting a reputation of inefficiency and management shortfall, if performance is not as per market expectations.  In my view, one of the biggest advantages of a listed Holding company is the way the capital market is reacting to the management moves.  Feedback and response to proposed actions are valuable tools of business.  

The concept and value of Holding Company and it’s responsibility (including to minority shareholders of it’s entities) is still developing.  As the capital market matures, Holding Companies will have to up the level of their Actions.

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