Cover Feature

Nepali Business Houses

Economic growth in South East Asia, Japan, Korea and India has been through family businesses, point out analysts, and thus has emerged a separate discipline in management theories to deal with management of family businesses. In Nepal too, the business sector is dominated by family businesses, but the success achieved elsewhere is not being experienced here. Why? Business Age tries to find out.

Study about how the business houses in Nepal are going about provides several case studies in the management of family businesses. One such principle in management of family business says, "The older and bigger the family, more complicated are the management problems in its businesses". These chaebols in Nepal are not so old as yet and in some old ones the family, by chance, is still not so extended. However, they have already shown some problems. Consequently, some of such business houses have gone for separation, while some others are leaving the fields of their earlier involvement, thus shrinking the size of their family business. It can be seen that the total turnover of some individual companies founded recently exceeds that of some old and established business houses.

Position of Some Companies

Analysing the phenomenon, some analysts point out that it is because of the lack of professionalism among the business houses. These houses have either not recognized the need for keeping ownership and management separate, or, even those which have recognized it, have failed to practice the dictum.

Under such circumstances, the prevailing business principle among the Nepali business houses seems to say - "You must manage yourself all the businesses that you own". As a result, all the businesses under these houses, barring some rare exceptions, are managed by one or the other of the family members as the CEO.

Such a failure to separate the ownership and management and thus keeping the business excessively under the control of the family is cited as the main reason why in India the Birlas are presently far behind the Tatas. Now the Birla family has been separated and the new families so formed have realized the need for keeping the business ownership and management separate. Similar was the experience with one of the old business houses in Nepal – the Dugars, who are now three separate groups – HC Dugar, KL Dugar and TM Dugar.

However, it is not always necessary for the families to be separated to continue the family business, as some Nepali business houses provide the illustration. Some groups are still together; despite the fact that the businesses under the group are already separated in effect. Let’s take the example of Chaudhary Group. Each of the three Chaudhary brothers (Binod, Basanta and Arun) looks after a number of the businesses independently of the other two brothers. So much so that the corporate offices of these different sub-groups under the Chaudhary Group are at different locations, thus ensuring more freedom to each of the Chaudhary brothers who acts as the CEO of respective fields. However, they have remained under the same umbrella of the main Group. And confusion has also been created by this practice, as each of the Chaudhary brothers holds the same designation – Managing Director of Chaudhary Group.

Explaining the need for remaining under the same umbrella, one analyst says, it is for the sake of the brand. Though remaining separate and doing the business independently of each other, the Chaudharies are building the brand of Chaudhary Group and are also benefiting from the brand at the same time. To tie the three groups together, the Chaudharies have followed a practice of cross shareholding – each of the Chaudhary brothers has some shares in major companies being managed by the other two brothers.

Similar independence to family members in management of the businesses is being provided also in other groups – Jyoti, Golchha, Khetan etc. But the degree of independence may vary from one group to the other depending on the attitude of the family members.

But in case of most of the groups, there seems to be a confusion persisting about how much importance can be given for building the image of the group, the company or the product. Such confusion can be seen in the way the groups are advertising about their group or products. Very seldom are they found focusing on the corporate promotion. Though there again are some exceptions, groups like ICTC seem compelled to do corporate advertisement because they do not have any FMCG to advertise about. ICTC is primarily a holding company, while other Groups are simultaneously business operators as well as investors.

Historical Trend

A look into the history of business houses provides the outline of how the Nepali economy and the businesses in it have moved along. The chairman of one of the smaller business houses that has chosen to remain small and is concentrating on trading after a number of failures in manufacturing, says that business houses here have only followed the direction provided by the economic policy of the government. That means, they have not tried to influence the government policy. Initially they were importers, sourcing their supplies from India. Later the government started providing foreign currency to import from Hong Kong and Singapore, and the business houses obliged by turning to those countries. They did not explore new sources of supplies on their own, rather followed where the government directed.

Then came the period of manufacturing. Those that had originally started their business as traders in agricultural products turned to the processing of agricultural products. As these houses were in close contact with the rural areas of Nepal, they found that production of corrugated sheets iron (CGI) is profitable because such sheets are in good demand in the rural areas for roofing purposes.

Thus they had to go for imports of raw material for producing CGI sheets. But the government would want every importer to import a number of other things as well, because the import license was issued, or auctioned, in lots. As each lot included a number of items, the would-be importer had to import everything included in the lot. Thus they had to import even umbrellas, torches and watches while importing iron sheets. That largely explains how all the existing business houses are simultaneously in trading and manufacturing.

Growing Horizontal

This also gives an explanation of why Nepali business houses are growing along the horizontal line, not vertically. They are in such a wide range of businesses that nobody seems to be specialized in one particular sector. In view of Rajendra Kumar Khetan, the Managing Director of Khetan Group, it is because of the limited market within Nepal. Therefore, though some business houses that had started as grain merchants have become millers and gone on to produce processed foods, they have not been able to go further than that. Thus there are compulsions to go horizontal, i.e. expanding into some other business while maintaining involvement in the existing one.

Those business houses that either turned back to trading or went into service sector, such as banking or aviation, have been still in prominence. Those that dithered have stagnated and ultimately went on shrinking. Thus some prominent business houses of the past are not remembered by the people now. Analysing why some business houses did not venture into service sector, one observer points out that it was because the new generation in those business houses lacked initiatives and vision, which may in turn be caused by lack of sufficient education among the new generation people.

Simply because a business house of the past is not remembered now by the common people may not be a sufficient condition to conclude that that house has become extinct. It seems that the people remember the house that is in some consumer goods. Those that have tried to specialize in providing inputs or services to other industries are not remembered. The case in point may be provided by MC Group, which is now more in the business of providing inputs to other industries than in producing FMCG. It first left the beer industry (Star Beer) and recently soft drink industry (Pepsi). But some other houses are dragging along with some FMCG product – just to remain in the picture.

Ethnicity

The trend of forming business houses is believed to be started by some Chinese and Indian communities. In Nepal also the majority of the major business houses belong to either the Marwaris (migrants from India), the Newars or migrants from Tibet.

Though there also are some groups belonging to the former ruling elite such as Ranas, they are more recent entrants to the field. There also is an example of public sector business house – Salt Trading Corporation Group (STC) – that has interests in as diverse fields as vegetable ghee, tyres, pharmaceuticals and foods. Interestingly, STC has major participation from Thakali community as its private sector shareholders.

However, the practice of family business is somewhat universal in character. Internationally famous companies like Wal-Mart, Gucci, Cargill are all family businesses. Similarly most of Germany’s Mittelstand and Latin America’s Grupos are other examples of family involvement in business.

Changing Businesses

The search for a business to concentrate on has been sending Nepali business houses from pillar to post. The Khetans were once vehicle dealers and airline operators. But they have now settled in banking and financial services, and in production of beer and noodles. Recently they are preparing for providing cellphone services. One of the Khetans informs that they are also preparing to go for another FMCG product.

"We were first in exports then turned to the basic industry", says Pradeep K Shrestha, Managing Director of Panchakanya Group. "And now we are again focusing on exports", he says recalling that the Group had first started with rice milling for exports and timber business for construction material. Later, the Group focused on steel and plastics as the country was experiencing a shortage of forest-based construction material. Recently it converted the old rice mill premises for wool carding and carpet weaving.

Similar changes can be seen in Jyoti Group, Vaidya’s Organisation and Amatya Group. All were mainly dealing in imported products (e.g. vehicles) in the past, but while the first two have expanded now into agriculture, the Amatyas later went into brewery, manufacture of electricity transformers and iron rerolling and now in tourism. While the Jyotis are farming herbs and vegetables, the Vaidyas own an expansive tea garden in eastern Nepal. This means agriculture seems to re-attract the business houses. MC Group that has withdrawn from this sector, is thinking to go into it again (see box interview). Recently some of the business houses have also entered newspaper publication field.

In the process of expanding their businesses and in adapting themselves with the changing times, some business houses now find themselves with a very large number of units. Chaudhary Group has the distinction of owning over 40 units, while the number is less than half of that in other business houses. And interestingly, the Chaudhary's as well as some others have more than one unit in the same line of business.

Management Change

Changes are noticeable not only in the line of business of the groups. They are also bringing about changes in the way they are managed. One aspect is the growing participation of the younger generation people who are in full control of the family business in most of the cases. In some cases the change in the guard came about after the demise of the patriarch. But in the majority of the business houses, the founders or old leaders are still there but they have chosen to remain only advisors, leaving the day-to-day business to be managed by the sons or younger brothers. But sometimes, the young generation complains that it becomes tired of over interference from the old man. Whether it is a sheer coincidence or not, the participation of younger generation has also been accompanied by setting up of joint ventures with foreign companies.

In this case, those groups endowed with larger number of such young generation people seem to be in better position. "Unfortunately I was not so endowed with a number of brothers and uncles when I took over the business 20 years ago", says Binod Chaudhary, president of Chaudhary Group and the eldest of the three sons of Lun Karan Das Chaudhary, recalling the challenge he had to face then as both of his younger brothers were too young. Now his group is a conglomerate of three groups, the two other groups being looked after by his younger brothers.

The thesis that larger the family size, easier to do business is also supported by examples from other business houses. Golchha Organisation, founded by Late Ram Lal Golchha, is now being managed by his one son and several grandsons (Hulas Chand, Lok Manya, Diwakar, Mahendra, Surendra etc). Similar is the case with Khetan Group – all the three sons of MG Khetan (Rajendra, CP and PP) are looking after one or the other of the companies under the group, while senior Khetan limits himself to an advisory role. All these three groups are expanding their businesses, but the expansion seems to be faster and wider in Chaudhary, at least in terms of the number of business units under the group (over 40, though not all of them are equally successful). "We are the leaders in processed foods industry", claims an executive in Chaudhary Group, indicating to the standing of the group in the instant noodles market. The number of units under the Golchhas is almost half of what Chaudhary can boast of, but some of them are the largest of Nepal in their respective sectors. For example, Shree Raghupati Jute Mills, Bhrikuti Pulp and Paper (Nepal) Pvt. Ltd. Similar is the case with the Khetans – though they have only 13 units under them, they are the rulers in the beer market, with almost 60% market share controlled by them.

The advantage of number is also helpful to put the members of the group in leadership position of the business community, it seems. Pradeep K Shrestha (President, FNCCI), Diwakar Golchha (Vice President, FNCCI) and Rajendra Khetan (President, Employers’ Council, FNCCI) seem to be able to manage time because their brothers or uncles are there to manage their businesses.

This practice of making one member fully responsible of certain of the group’s companies has also brought about an in-house competition among the family members. The prestige of the person in charge of the most successful unit will automatically get boosted both within the house and outside.

Another aspect of this change in the guard has been the growing adoption of modern management techniques. If the new generation people have come from good educational institutions, they are also bringing in new ideas. This may also be due to the setting up of joint ventures with foreign investment. Thus compared to old days when loyalty was the sole criteria for selection of employees, competency in modern management technique is becoming equally important. As a result, good quality people are being retained in the country providing good working environment and attractive salaries. This is remarkable, though not yet sufficient, as people with managerial capabilities are still going abroad in search of better opportunities. Some business houses are also blamed of preferring foreign employees while good personnel are available within the country.

Inward Looking

It may also be true that being family business, the Nepali business houses also face problems in hiring good professionals, who may be wary of their career’s future. Though they are introducing modern management, their groups still prefer to remain closed to outside participation. The companies are all private limited ones or, even when they are public limited, the shares are not floated to the general public. Even in case of going public to raise the capital, the groups prefer to keep a very good majority of the holding in their own hands, possibly to avoid any takeover bids. Suggesting revision in the existing Companies Act, FNCCI, the apex body of the country’s business associations, has demanded for such provisions in it that guarantee perpetual control of the promoter group in the company as long as it does not reduce the original shareholding though the holding structure may change later as a result of shares offered to the public. The suggestion reflects that the FNCCI itself is composed of members who are running family businesses. Such a legal provision may seem to be in the interest of the promoting group, though in the long run the advantages of such a provision would be outweighed by the disadvantages.

Such inward looking nature of the business houses has put a severe limitation in the capacity to expand the businesses because the means to raise the capital from the general public is blocked. And all the money required to finance the business is not possible to be mobilized from the banking sector alone.

The draft report (Private Sector Support Survey) prepared for the World Bank’s Regional Program Enterprise Development (September, 2000), shows that some good large companies in Nepal cannot borrow from the banking sector because of the single group limit on credit fixed by Nepal Rastra Bank. Borrowing for other companies under the group, the limit becomes exhausted, and thus other companies forego the opportunity of bank credit though the banks may find them to be good businesses to finance. Banks generally make lending decisions based solely on available collateral and personal guarantee of the owners (e.g. CEO) of the company. But the bank’s demand for personal guarantee does not look unreasonable given that many people in Nepal do not make clear distinctions between a firm’s assets and the director’s personal wealth.

Bank & Business House

To overcome this limitation, the business houses are entering the financial services sector. They hold substantial shares in many of the existing finance companies, insurance companies and commercial banks. Some of them have controlling stakes in more than one commercial bank, about which objections are being raised. And recently, Nepal Rastra Bank has also announced its policy of not allowing a single group to have big shareholding in more than one bank. Attraction to the financial services can be seen also from a few recent trends. Sunrise Group is about to bring out Laxmi Bank and Kathmandu Insurance. Vishal Group is about to set up Life Insurance Corporation of Nepal in joint venture with LIC of India. The house that owns entirely or partially the Cosmic Air, AVCO International and Jomsom Mountain Resort has gone to set up Cosmic Merchant Bank.

Another practice developing slowly is the co-participation of the groups in big ventures. Eastern Sugar Mills (Golchha, Triveni, Sharda etc.), Taragaon Regency Hotels (ICTC & Saraf) and Nepal Industrial and Commercial Bank (Vishal, Golyan, Golchha etc.) are some such examples. While such co-participation seems to be working nicely in banking and financial services sectors, the case is reported to be not so hopeful in others.

Forming a group seems to have become a fad across Nepali business sector, as examples of newly emerging business groups are there to indicate.

A major issue confronting the Nepali business houses now is that of succession. Quoting Sir Adrian Cadbury (author of British report on corporate governance and who has written a guide to the proper way to run a family business), the Economist magazine reports that "Crunch time is when the patriarch hands over to the second generation. At that time the failure rate (among the family businesses) is the highest".

According to the generally accepted practice of succession in Nepali business houses, the eldest son is the heir. That might have worked well till now, but cannot be expected to be as effective in the future. It is not always necessary that the eldest son will also be the most capable one. It is not known whether the existing patriarchs of Nepali business houses have chosen their business successor, but some of them are said to be preparing for retirement and some others have already reached ripe old age. So it would be better for them to start formulating the succession plan right now. This is more important for those who have more than one offspring.

Participation of the second generation in the family business means the family has got extended enough and thus there are now many stakeholders to the business. Not all of them are employees in the business but have interest in the business. This indicates towards the need for revision in the composition of the board that governs the family business.

Experts suggest two or even three boards (see box). That is a must when the family business reaches the dynasty stage. Though not all the Nepali business houses have reached that point, the old ones may do better by preparing now for that point. For the emerging ones, it may be better to start corporatization right now.

By Madan Lamsal

Hulas Steel Industries (P) Ltd. Hulas Wire Industries (P) Ltd. Arihant Multi-Fibres Ltd. Sri Ram Sugar Mills Ltd. Eastern Sugar Mills Ltd. Sri Bhrikuti Pulp & Paper Nepal Ltd. Nepal Boards Ltd. Hulas Metal Crafts (P) Ltd. Sri Hanuman Industries (P) Ltd. Hulas Engineering Works Bhudeo Khadya Udyog Hitesh Dal Udyog Arun Vanaspati Udyog Ltd. Hanuman Polypack Industries Himanshu Khadya Udyog Agrani Aluminum (P) Ltd. Koshi Metal Crafts Co. (P) Ltd. Dhiraj Chamal Udyog Hans Pulses (P) Ltd. Novaknit Nepal (P) Ltd. Bhudeo Maida Mills Hulas Biscuit & Confectionery Hulas Motors (P) Ltd. Sri Raghupati Jute Mills Ltd.
	Golchas: Hulas Chand, Lok manya, Diwakar, Surendra, Mahendra & Shekhar

Golyan Group
Shah Udhyog Pvt. Ltd. Shah Fashion Pvt. Ltd. Reliance Spinning Mills Ltd. Reliable Yarn Industries Ltd. Atlanta Trading Co. Ltd. Shivam Plastic Industries (P) Ltd. Himal Pasmina Udhyog Manakamana Pasmina Udhyog	Golyans: Basudev & Pawan

HC Dugar Group
1. Hukamchand and Sons 2. Hukam Foods Nepal Pvt. Ltd. 3. Hukam Pharmaceuticals Pvt. Ltd.. 4. Aqua Minerals Nepal Pvt. Ltd. 5. Gyan Industries Pvt. Ltd. 6. Vijay Industries 7. Nepal Food Products 8. Rishab Med Pvt. Ltd.	Dugars: Hukumchand & Vijay

HOUSE OF SAAKHA
1. Saakha & Co. Pvt. Ltd. 2. Unisa Polychem Industries Pvt.Ltd. 3. Ganesh Fashion Garment Industries 4. Saakha Metal Industries Pvt. Ltd. 5. Nepal Paint Industries Pvt. Ltd. 6. Nepal Trade Temple Public Ltd. 7. Saakha Steel Ind. (P) Ltd.	Saakhas: Kiran & G.B Saakha

Jyoti Group
1. Himal Iron & Steel (P) Ltd. 2. Himal Wires Ltd. 3. Himal Oxygen (P) Ltd. 4. Jyoti Spinning Mills Ltd. 5. Syakar Company Ltd. 6. Jyoti Ceramics (P) Ltd. 7. Jyoti Farms (P) Ltd. 8. Jyoti Nursery 9. Management Services (P) Ltd. 10. Syamukapu International
11. Bhajuratna Pharma 12. Bhajuratna Bikri Kendra 13. Himal Agencies14. Suruchi Travel & Tours (P) Ltd. 15. Bhajuratna Engineering & Sales (P) Ltd. 16. Bhajuratna Finance and Saving Company Ltd. 17. Jyoti Yarn Processing Co. (P) Ltd. 18. The Roof of the World Wool Manufacture Co. Ltd.
	Jyotis: Padma, Roop and Saurav

Khetan Group
1. Mutual Trading Co. 2. Gorkha Brewery Limited 3. Himalayan Petrochemicals 4. Everest Insurance Co. 5. Himalayan Securities & Finance 6. Himalayan Bank Ltd. 7. Shiva Shakti Ghee 8. Nepal Orind Magnesite 9. Himalayan Exim P. Ltd. 10. Nepal Metal Co. 11. Everest Air Ltd. 12. National Boring Co. 13. Himalayan Hygienic Snax & Noodles (P) Ltd. Khetans: MG, RK, CP & PP

Sunrise Group
1. SB Trading 2. Pacific Office Automation 3. HISEF Ltd. 4. Shivabhagwan Industries 5. Tulsi Spices 6. Himalayan Petrochemicals 7. Laxmi Bank 8. Kathmandu Insurance	Madhusudan Agrawal

Some High Debt Business groups
( In million rupees)

Entrepreneurial Stage

Business needs come before family needs Personal emotional needs and relationships are neglected Resentment & "entitlement" develop

Professionally Managed Stage

Ownership and management concerns diverge Business requires outsiders Pressure for more Professional management Issues of unfairness emerge in younger generation

Dynasty Stage

More people with diverging interests Family, management and ownership issues continue to diverge Loss of original vision & purpose "Affluenza"

Source: Material presented by Leslie Dashew & Joe Paul, The Aspen Family Business Group, at a program held in Kathmandu recently.