Indian Multinationals This page intentionally left blank Indian Multinationals The Dynamics of Explosive Growth in a Developing Country Context

Amar K.J.R. Nayak

Palgrave macmillan © Amar K.J.R. Nayak 2011 Softcover reprint of the hardcover 1st edition 2011 978-0-230-29860-6 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978-1-349-33480-3 ISBN 978-0-230-30871-8 (eBook) DOI 10.1057/9780230308718

A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 20 19 18 17 16 15 14 13 12 11 Contents

List of Figures viii List of Tables ix Preface xii Acknowledgements xv

1 Introduction 1 Premises 1 Analytical framework 3 Structure of analysis 5 2 Logic and Dynamics of Firm Growth 7 Theories of firm growth 7 Control and efficiency 10 Global structure for industrial growth and regulation 12 Country-specific characteristics and advantages 17 Rapid changes in regulations 20 Network dynamics of growth 22 3 Globalization: Asymmetry Perpetuation and Growth 27 Introduction 27 General perspectives of globalization 29 Globalization and the role of the state 31 Globalization in a developing country context 33 Globalization in and of 36 Precursors to globalization 40 Perpetuation of asymmetric positions of firms under LPG 43 Globalization: the struggle between firm and society 47 4 Growth of Indian Multinationals 49 Growth patterns of traditional and emerging multinationals 49 Evolution of Indian business houses 53

v vi Contents

National development-oriented growth: 1947–77 55 Precursor to explosive growth: 1977–91 60 Explosive growth phase: 1991–2010 62

5 A.V. Birla Group 92 Introduction 92 Genesis of the Birla group and generations of diversifications 100 G.D. Birla phenomenon 116 Managerial processes and methods of growth 125 Project execution 128 Leveraging the industrial policy changes since 1991 132

6 Tata Sons 150 Introduction 150 Trusts and development activities of the Tatas 158 Industrial pioneers and building of goodwill 169 Tata Sons shaping industrial policies in India 176 Building the Tata brand 185 Corporate and management restructuring 186 Financial restructuring and resource reallocation 188 Raising capital, resources and capabilities 189 Has growth been at the cost of principles? 198

7 Limited 206 Introduction 206 Dhirajlal Hirachand Ambani 210 Building manufacturing plant capacity 211 Growth through acquisitions and mergers 223 Growth through international acquisitions 227 Firm–industry–government network 235 Ambani business strategies 241 Contents vii

8 Asymmetries and Firm Growth 246 Sources of asymmetries 246 Perpetuation of asymmetries 248 Asymmetric growth factors and sustainability 250

Notes 255 Bibliography 259 Subject Index 266 Author Index 272 List of Figures

2.1 Network dynamics of firm growth 25 3.1 Sector-wise percentage share of FDI, 1921–2000 36 4.1 Growth in assets of the top 15 Indian private companies 88 4.2 Growth in revenue of the top 15 Indian private companies 89 4.3 Growth in PBDITA of the top 15 Indian private companies 90 5.1 tree 114 5.2 J.R.D. Tata’s letter to G.D. Birla regarding business delegation to England and the US 121 5.3 The Birlas’ present network within government, industry and regulatory bodies 130 6.1 Tata trusts 172 6.2 A section of the Tata family tree 174 6.3 Timeline of the 177 6.4 Letter from J.R.D Tata to G.D. Birla regarding shaping government of India policy 181 6.5 Network of Tata Sons and directors of Tata group 182 6.6 Branding strategy of Tata group of companies 185 6.7 Cross-holdings of Tata group listed firms during the financial year 2000 190 6.8 Cross-holdings of Tata group listed firms during the financial year 2005 191 7.1 Vertical integration of Reliance Industries Ltd 222 7.2 Reliance’s financial engine 244

viii List of Tables

2.1 Comparative socio-economic-geographic and infrastructure position of the BRIC countries 18 3.1 History of FDI in India: 1882–2005 37 3.2 Privatization in Europe, 1981–2008 42 3.3 Privatization in BRIC nations, 2000–8 43 3.4 Disinvestment of PSUs in India, 1991–2009 45 3.5 Gini index of a few industrially advanced countries and BRIC countries, 1975–2007 46 4.1 Private business group buyers of some key state-owned enterprises through the disinvestment policy of the government of India 66 4.2 Mergers, takeover of equity stakes, purchase of assets by top 20 Indian private firms, 1991–2010 68 4.3 Growth in size and profits of the top 100 Indian private and state-owned companies 80 4.4 Exports of the top 50 Indian private companies, 2010 91 5.1 Major companies of the Birla group 93 5.2 Key financial indicators, Hindalco Ltd 95 5.3 Major milestones of Hindalco Ltd 96 5.4 Key financial indicators, Grasim Ltd 98 5.5 Major milestones of Grasim Industries 99 5.6 Financial history of Aditya Birla Nuvo Ltd 101 5.7 Major milestones of AB Nuvo Ltd 102 5.8 Financial history of Ltd 103 5.9 Major milestones of Idea Cellular Ltd 104 5.10 International companies of A.V. Birla group 105 5.11 Major companies of the Birla brothers and their key financial indicators 108 5.12 Trusts and foundations of the Birlas 129

ix x List of Tables

5.13 Grasim Industries: acquisitions, mergers and restructuring 133 5.14 Hindalco: acquisitions, mergers and restructuring 134 5.15 AB Nuvo: acquisitions, mergers and restructuring 135 5.16 Hindalco: mode of raising capital and restructuring 136 5.17 Group companies of Ltd, 2007–8 137 5.18 Grasim Industries Ltd: modes of raising capital and restructuring 139 5.19 Group companies of Grasim Industries Ltd, 2007–8 139 5.20 AB Nuvo: modes of raising capital and restructuring 140 5.21 Subsidiaries of AB Nuvo 141 5.22 Equity base of Hindalco 142 5.23 Equity base of Grasim Ltd 144 5.24 Equity base of AB Nuvo Ltd 145 5.25 Shareholding structure of Birla group companies 147 6.1 Financial history of Tata Sons Ltd 151 6.2 Subsidiary companies of Tata Sons Ltd 152 6.3 Comparative study of key financial figures of the Tata firms 154 6.4 Financial: 1931–2008 159 6.5 Financial history of Tata Steel Ltd 160 6.6 Financial history of Ltd 161 6.7 Financial history of Tata Consultancy Services Ltd 162 6.8 Financial history of Ltd 163 6.9 Financial history of Tata Communications Ltd 164 6.10 Financial history of Ltd 165 6.11 Financial history of Tata Tea Ltd 166 6.12 Financial history of Tata Investment Corp. Ltd 167 6.13 Financial history of Indian Hotels Ltd 168 6.14 Financial history of Tata Teleservices Ltd 169 6.15 Sir Dorabji Tata Trust 170 6.16 Shareholders of Tata Sons 173 6.17 Fostering the brand Tata: heights attained by Tata chairmen 175 List of Tables xi

6.18 Tata group initiatives in labour welfare 176 6.19 Milestones of the Tata group 178 6.20 Business policies that regulated the iron and steel industry of India 183 6.21 Extent of Tata Sons Ltd’s interest in subsidiaries 192 6.22 Book values of Tata Sons Ltd: quoted and unquoted investment 194 6.23 Merger and acquisition activities considered by the Tata group 199 6.24 International projects by the Tata group 202 7.1 Financial performance of Reliance Industries Ltd 208 7.2 Growth milestones, RIL 213 7.3 Reliance manufacturing facilities 217 7.4 Business division and growth of Reliance 219 7.5 Asset base of RIL through control of IPCL 225 7.6 Mergers and acquisition direct deals of RIL 226 7.7 Various group companies of Reliance, 2008 228 7.8 Major subsidiaries and associate companies of RIL 231 7.9 Brief description about GAPCO 233 7.10 Brief description about Trevira 234 7.11 Textile policy in India 237 7.12 Oil and Gas Policy, 1991–2008, government of India and Reliance Industries 238 7.13 Telecom Policy and Regulations 239 7.14 Telecom circles and growth of Reliance Telecom business 240 7.15 RIL financial milestones 242 Preface

Several Indian firms have grown explosively for about two decades, after India adopted wholesale neo-liberal policies in 1991. This amazing growth made me wonder what was unique to them. Was there some- thing special to their country of origin, the capacity of the people, the management practices, the history, values or ethics? Having completed some research on the strategy of multinationals in India by 2005, I was curious to know about the strategies of Indian multinationals that led to their high growth in size and profit. Indian entrepreneurs were beginning to enter the Forbes list of the richest people in the world. Also, scholars across the world were taking an increasing interest in multinationals from developing countries, studying these countries from the perspective either of emerging or of transforming economies. Meanwhile, I was involved in an international joint research to study the emerging multinationals from India, China and Russia. Based on mini-case studies of 18 companies from these countries, the study tried to explain the success of the internationalization of these multination- als from a five-M approach, viz. motivation, market, mode, method and management. While several of the observations of the performance and methods of foreign market entry fairly represented Indian multinationals, the results of the research did not convince me fully about how they actually grew: what had been the sources of their strength and how they had developed the capacity in a short span of time to compete with the best in the world. While there was some empirical evidence on the abnormal growth of companies like Reliance Industries, this did not seem to be true of reputed companies like that of the Tatas. It was indeed difficult to see any common root to the explosive growth of both old and new companies across industries and sectors. Applying the resource-based view and technology-based dynamic capabilities apparently did not seem to capture the trajectory of growth of several companies in India. All these developments made me wonder if there was at all a common strategy and process of growth. After about three years of my engagement in these issues of Indian multinationals, the story of Satyam Computers, one of the most valued IT companies, broke out. While some analysed the story of Satyam as an

xii Preface xiii accounting scandal, others argued that it was an issue of corporate governance; yet others argued that it was much more complex and deeply rooted in corporate growth objectives. While some believed that Satyam was a rare case, a few like me were of the view that the gripping phenomenon of Satyam was probably representative of several swiftly growing companies in India. The Satyam story also brought up the issue of whether internal mana- gerial practices were solely responsible for the growth and decline of the company or were the external actors – lawmakers, bureaucrats, regulators, advisors, consultants and opinion leaders – all party to the phenomenon. How significant were the external actors to the growth of the firms? It appeared that the external factors contributed more significantly to the high growth of the firm than internal managerial processes. The hypothesis for the explosive growth of Indian multinationals got some direction from these developments. I began to look at the top 20 Indian companies with the highest export volumes using the above sceptical lens. I began to wonder if the explosive growth of Indian multi- nationals has been largely through their tactful and strategic nexus with external actors in a rapidly changing developing country context than merely from the traditionally explained internal managerial processes within the firm. This book is an outcome of the above dilemmas and hypothesis testing. Although I began to scan about 20 Indian companies with the highest exports, I gradually focused my attention on the leading Indian business houses or companies from different industries, viz. , , Satyam, ICICI Bank, SBI, NALCO, Tata Steel, Vedanta, Tata Motors, VSNL, Bharti Enterprises, UB Group, DLF, Birla Group, Tata Sons, Ranbaxy, Dr. Reddy’s and Reliance Industries. As I undertook detailed case studies of these groups/companies, I found several common patterns in their growth strategies. Finally, I decided to discuss only three representa- tive cases of Indian business houses, viz. A.V. Birla Group, Tata Sons and Reliance Industries, in this book. Indeed, these three cases represent the overall dynamics of explosive growth of companies in the developing country context of India. The three representative cases discussed in the book, being the largest and the leading business houses in the history of Indian business, best describe the dynamics of explosive growth in the Indian context. Please note that the usual disclaimer of case studies applies. The intention is to better understand the growth dynamics in a developing country context rather than to illustrate either effective or ineffective practices. It is intended neither to glorify nor to criticize an individual or an organization. xiv Preface

As I completed my research for this book and prepared the chapters for publication, the ‘2G Spectrum Allocation Scam’ case broke out in November 2010 to the surprise of many. The reports in Outlook maga- zine, the Niira Radia tapes and other media reports revealed more facts and dimensions of how the closed network among the large business houses, senior bureaucrats, politicians, media barons, legal experts and others has been involved in the explosive growth process in India. The story of this enormous scam can help the reader to relate how well- networked individuals or companies have grown explosively in a large developing country context like India. The research and subsequent analysis led me to understand a little more of the basic design of the traditional firm that helps in its continuous growth in size and profit. It also helped me to understand the asymmetry-generating and control processes that support the individual efficiency-seeking character of the firm. Further, the perpetual asymmetry-generating processes of the traditional firm that keep it efficient under external competition led me to ponder on the sustain- ability of a system and society in which such asymmetry-generating entities are celebrated. Through this inquiry process, I entered into two basic logics of industrial organizations in a capitalistic system. First, the logic of efficiency for industrial organizations and second, the logic of monetization or quantification of all human activities in terms of capital/currency to facilitate smoother transactions in the market-based economy of indus- trial society. As I review the various dynamics of explosive growth of large business houses in India, I wonder whether the weak foundations of the traditional growth model based on industrialization, industrial organization and capitalism in vogue are at the core of increasing unsus- tainability of the society, culture, economics and environment of a large developing country like India. Acknowledgements

After completing my doctoral thesis on multinationals in India, I began to work on Indian multinationals. During the last five years of research endeavour to understand the growth dynamics of Indian companies, many people and institutions have contributed to the shaping of this book. At the outset, I would like to thank the Xavier Institute of Management, Bhubaneswar (XIMB), which readily approved my proposal to under- take detailed case studies on Indian companies. XIMB also provided research assistance to carry out the series of case studies. Both Fr. P. T. Joseph and Fr. E. Abraham as directors of XIMB have actively supported the project. I wish to express my sincere gratitude for their support and encouragement. I would also like to thank my colleagues in India, Europe, USA and Japan as well as my students at XIMB who form an important ecology that has stimulated me to think in multiple ways to resolve the paradoxes of economic growth, growth of industrial enterprises, development and sustainability. I also thank Pratyush Srichandan, for his research assist- ance in collecting data and in compiling them systematically. Without the diligent English editing of the typescript by Arthur Monteiro, this work would have remained incomplete. I deeply appreciate the work of Arthur. Sashmi, my wife, has been a constant sounding board for my reflections and discernment. Her critical observations on my work greatly lift the quality of my work and writing. I also thank my children, Amarissa and Samuel, for their love. I would like to thank the commissioning team at Palgrave Macmillan, especially Virginia Thorp, for her eagerness to publish this work and Paul Milner and Philip Tye for editorial support. Lastly, it would only be fair to say that the mistakes and shortcomings of this book, if any, are all mine.

Amar K.J.R. Nayak Bhubaneswar

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