By Anshul Dhamija| Nov 26, 2015
GM Rao built his eponymous infrastructure conglomerate from scratch and has put in mechanisms to ensure that his family doesn't squander his legacy. Will it stand the test of time?
Despite having grown up in a small town, Grandhi Mallikarjuna Rao had big dreams: During his days in Rajam, on the border of Andhra Pradesh and Odisha, and after graduating as a mechanical engineer from Andhra University, he always wanted to make a living in the port city of Visakhapatnam and “dreamt of having a small house and a Fiat car”. At 65, the first-generation entrepreneur and founder of the GMR Group has surpassed his dream many times over.
While he may have fallen off the Forbes India Rich List of top 100 billionaires this year, Rao’s personal net worth hovers around the billion-dollar mark. His corner office in New Delhi has a sweeping view of the Indira Gandhi International Airport that, with 40 million passengers per year, is the busiest airport in India and in which GMR Group has a 54 percent stake.
But that’s just one marquee asset that Rao’s infrastructure conglomerate owns. With businesses spanning airports, roads, power plants, and special investment regions, GMR Group owns and operates infrastructure assets worth Rs 67,000 crore, including 26 in India and five overseas, with more in the pipeline. Its foreign assets include the Mactan-Cebu International Airport, the second largest airport in Philippines, and coal mines in Musi Rawas and Musi Banyuasin provinces in South Sumatra, Indonesia.
For a man who has built his fortune in the infrastructure industry, Rao says his entry into the sector was “accidental” when, on a gut feeling, he bid for a power plant in Chennai. This 200 MW plant, his first project, became operational in 1999. He has dabbled in about 28 businesses—from owning a brewery to operating a ferroalloys production unit and sugar mills; he also had a cotton bud manufacturing company and was the single largest shareholder (with over 40 percent stake) in the erstwhile Vysya Bank. (Rao sold his stake for Rs 560 crore to Dutch banking corporation ING Group. Renamed as ING Vysya, the bank was acquired by Kotak Mahindra Bank in 2014). He had started IT company Quintant in 2003, and exited a year later. Apart from a jute mill in Andhra Pradesh, which he started in 1978, Rao has exited all non-infrastructure businesses.
BUILDING A LEGACY
It’s a given that a first-generation entrepreneur wants to preserve what he has built. But, while doing so, Rao also wants to ensure that future generations of his family build on his legacy and not quarrel over the spoils. “I believe that to achieve 100 percent corporate governance, family governance is needed,” he says.
In a foreword to the book Indian Family Business Mantras, Rao has highlighted the need for Indian family businesses to draw a distinction between family and business. At the GMR Group, the lines were drawn from the early-2000s, when Rao set out to frame a family constitution and create a family council, which first met on July 27 and 28 in 2002. The broad function of the council, says Rao, is to choose the next generation of family members who would run the company, and clearly define details like their compensation, specific roles and ways to resolve conflicts. But beyond its immediate function lies a larger vision of how Rao foresees the future governance of the GMR Group.
As group chairman, Rao has the last word in the family’s business. His son-in-law Srinivas Bommidala is chairman of the airports division, older son GBS Raju is chairman of the energy business and younger son Grandhi Kiran Kumar is the corporate chairman.
“As a family, we are involved in every aspect of business, looking at strategy, public advocacy, relationships [with industry stakeholders], reviews and operations. In the next stage, the role of the family will be in strategy, timely reviews and relationship building. The last stage would be where the family remains as an investor in the company providing strategy and direction in board meetings,” says Rao.
__PAGEBREAK__His vision reflects the evolving trends of family business in India and is in tune with those in Europe and the US, which have kept their businesses and personal interests separate. Praveen Bhambani, leader, private and entrepreneurial, at consultancy firm PwC India, says, “The trend we are seeing right now is that even a lot of smaller business families, in good times, are putting together a family structure where they are separating the family’s personal assets from business assets. And on the business side they are clearly demarcating ownership and management as two distinct functions.”
Besides, adds Bhambani, first-generation promoters are not forcing their children to join the business straight away. “The children continue to remain owners. But only if they are interested do they join the business and their growth within the company is based on competence.”
A HAND TO HOLD
For Rao, GMR’s journey as a family business has just begun, and the phase where it stays merely as an investor is a long way off. “If the family moves out in one go, the spirit of entrepreneurship in the organisation will die. For growth, entrepreneurship is required,” he says.
According to GMR’s family constitution, there is no election to the council. All family members of the first and second generations and their lineal descendants from the third generation onwards become members once they are 21 years old.
Kiran Kumar says the council has been a very constructive forum, giving members a chance to voice their concerns. “I would say 80 to 90 percent of problems get solved because we are just communicating to each other on a regular basis,” he says. “More importantly, this kind of a mechanism has been very helpful in challenging times and has allowed us to handhold each other and handle crises much better.”
Analysts feel the constitution, which took almost nine years to frame, had a provision for Rao to step down from his executive role and pave the way for a successor. But that hasn’t happened. “By personality, it is not easy for him to step down. Besides, the group has been financially stressed for the last four to five years. As a result they haven’t been able to execute the main part of their family constitution, which is the aspect of succession,” says an analyst, declining to be named.
The group’s listed entity, GMR Infrastructure Ltd has seen its revenue grow from Rs 6,465 crore in FY11 to Rs 11,088 crore in FY15. Its Ebitda (earnings before interest, tax, depreciation, amortisation) in the same period has risen from Rs 1,555 crore to Rs 2,555 crore. But it has accumulated a debt of around Rs 39,500 crore, a reason compelling enough for Rao to stay on at the helm.
Besides, Rao is unlikely to choose his successor. According to him, “There is a well laid out procedure in the family constitution, adopted unanimously by all family members, for selection of a successor by the second generation at an appropriate time.”
But despite that, Rao is considered a pioneer in the business fraternity for setting up the family constitution. “Everybody looks to learn from the GMR Group,” says Sunil Shah, founder of consultancy firm Evergreen Family Business Advisors. “They probably have the most exhaustive constitution, which tries to deal with every eventuality that one could imagine. And they have put processes in place, which they hope are timeless.”
Despite sounding stodgy and stiff, this constitution is considered “forward-looking” for an Indian family. “For example, all their women family members have equal rights in every matter. The constitution also gave a voice to everybody in the next generation,” says Shah.
Rao’s efforts in setting up the constitution also gave birth to the Parampara Family Business Institute in January 2014. This not-for-profit organisation, run by the GMR Group, works towards inspiring emerging family businesses to focus on development through strong governance and entrepreneurship.
For Rao, who started his professional career in 1972 as a shift engineer at a paper mill in Andhra Pradesh’s Rajahmundry, the process of setting up the family constitution was fraught with difficulties. His father had taken a more straightforward approach to inheritance by dividing his assets equally between his four sons. Rao got Rs 3 lakh in cash, five acres of land and a truck.
“Before setting up any family constitution, you have to create an alignment [of thought] among all family members,” says Rao. It took him two years to do just that. “There were differences between me and my sons, son-in-law and the women of the house. After all, we are human beings.” As part of the broader alignment strategy, Rao takes his entire family on an annual holiday to enhance camaraderie. Last year, they went to the US.
Incidentally, when Rao was overlooking the operations of Vysya Bank, he witnessed first-hand how disputes can ruin family businesses. About 15 percent of the bank’s loans had gone bad and Rao had taken up the challenge of bringing down the bank’s exposure to bad loans to around 5 percent. “When I met the defaulters [small traders, businessmen], I figured that around 60 to 70 percent of the defaults arose because of family disputes,” says Rao.
While Rao could have adopted his father’s approach and divided his assets equally among his two sons and daughter, he saw merit in letting the business grow under the watch of a family council. “This shows clearly that this group, which has built national assets brick-by brick, should continue to manage and develop them further,” says G Subba Rao, CEO, corporate affairs at the GMR Group, and GM Rao’s first cousin.
Subba Rao, who has worked alongside his cousin for 22 years, regards him as a true entrepreneur, “one who can identify an opportunity, analyse it, take risks and mitigate them”. “He believes that challenges are an opportunity to review and improve his systems and processes,” says Subba Rao. And that’s precisely what GM Rao has been doing with the group’s assets.
Over the last three years, he has sold the group’s stake in multiple infrastructure projects and has undertaken a rights issue and a Qualified Institutional Placement (QIP) to shore up Rs 8,000 crore to pare debt. In December 2013, GMR Infrastructure Ltd sold its 40 percent stake in Istanbul’s Sabiha Gokcen International Airport for around Rs 1,900 crore ($308 million) to Malaysia Airport Holdings Berhad. Earlier that year, it divested 70 percent stake in GMR Energy Singapore to FPM Power Holdings for Rs 1,231.25 crore.
“If you compare GMR with other infrastructure majors, I would like to believe it is on a better wicket,” says Shankar K, associate director at Edelweiss Securities. An article in the June 13 issue of Business Standard says JP Associates has a debt of around Rs 61,000 crore, Adani Power of about Rs 41,000 crore and Bhushan Steel of about Rs 38,000 crore. GMR Infrastructure’s debt stands at Rs 39,500 crore.
“If you break up GMR’s asset portfolio, the airports segment has been profitable for the company. The problem is largely with power. And that has nothing to do with GMR in particular because the entire sector isn’t seeing an off-take as there are delays in coal allocations, and gas-based projects are also getting limited fuel. That’s the reason their debt is around 3.5 times their equity,” adds Shankar.
GM Rao admits that in the years preceding the 2008 financial meltdown, infrastructure companies would be “dearest” to banks. “Now we have become untouchables,” he says.
But that’s the cyclical nature of the industry. “Once their power projects start operating at improved utilisation levels, debt servicing is also expected to improve,” says Shankar.
With the patriarch in the saddle, the company seems well on its way. But his real test will come with managing succession issues, which could be more vexing than tackling debt.