Family Businesses in India
Pyramids and Cross-Holdings
How families control many companies with relatively little money through pyramid structures, and why this raises governance and risk concerns.
Families often control many companies through pyramids.
How a pyramid works
- A family controls Company A with 51 percent.
- Company A owns 51 percent of Company B.
- Company B owns 51 percent of Company C.
The family controls C while owning only about 13 percent of its economic value (0.51 × 0.51 × 0.51).
Why use pyramids
- Control many firms with limited capital.
- Raise outside money while keeping control.
Concerns
- Separation of control from ownership encourages tunnelling.
- Complexity makes groups hard to understand.
- Contagion: trouble in one company can spread through the group.
Cross-holdings
Group companies owning shares in each other can inflate apparent capital and create circular structures.
Regulation
- Indian rules limit layers of subsidiaries for some companies (Companies Act rules, 2017).
- Disclosure of group structures.
IL&FS example
The IL&FS collapse in 2018, with hundreds of subsidiaries, showed how complex group structures can hide risks.
A family owns just 13 percent of a company's profits through a three-level pyramid but appoints its entire board, controlling its decisions.
Pyramids give control with small economic stakes.
- Pyramids let families control firms with little capital.
- Control and ownership separate, encouraging tunnelling.
- Complexity and contagion are risks.
- Rules limit layers and require disclosure.
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