In between, many Indian businessmen had started their own agencies. Tata Sons
created Tata Industries
as a managing agency; Birla Brothers
was another agency. JRD Tata
complained at the time of abolition that the government was not distinguishing between good and bad agencies, but of course it would be hard to find legal definitions for such distinctions. It didn’t matter, because the French have a saying for what happens so often in India: the more things change, the more they stay the same. Out went the managing agencies, in came the business houses and the concept of the “promoter”.
The House of Tata is now a promoter group—with a managing agency-style charge on group companies for using the Tata brand. It has minority stakes in most group companies, the notable exception being Tata Consultancy Services
(TCS) where it owns about three-quarters of the stock. But it controls the operating companies and, as recent disclosures have shown, many key decisions are taken at group level. It is not enough that an operating company’s management should be of a certain view, Tata Sons
has to agree.
There are advantages in belonging to a group—a small group company would be able to command better financial terms, and hire better talent, than if it were a stand-alone venture. Even a large company like Tata Motors
would enjoy group advantages when it acquires something like Jaguar-Land Rover.
But this can be a mixed blessing; Tata Steel
would have been saved from buying the much bigger Corus
if it did not have the financial backing of the group, since most of the acquisition price was debt-financed.
On balance, how has it worked? Not very well, as made clear by an excellent report in the Economist
(“Mistry’s elephant”, September 24, 2016). This said that seven of the nine largest listed companies in the group earn a return on capital that is less than the cost of capital—in other words, they are destroying economic value. This spectacular under-performance has been masked by the stellar performance of one company, TCS, whose sales revenue, profits and market value account for the bulk of group numbers. Jaguar-Land Rover
contributes most of the rest.
Would individual companies, freed from group control, have done better? They would certainly have faced greater pressure to perform. Some would have responded well to pressure, others would have gone under or been sold—the creative destruction that is at the heart of capitalism. If you look around it is evident that conglomerates have not done as well in recent times as stand-alone enterprises. It is the old comparison, between the banyan tree that has multiple roots and gives cover to a wide area, and the sequoia which stands alone—with some sub-species usually taller than the Qutb Minar.