Family Business in Mumbai, India

Financial Challenges Faced by Family Businesses: A

Mumbai Perspective

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Family Business in Mumbai, India

Table of Contents
1. Chapter I: Introduction........................................................................................
1.1. Background of the Study..............................................................................
1.2. Aim.........................................................................................................
1.3. Objectives................................................................................................
1.4. Methodology.............................................................................
1.5. Rationale for topic..........................................................................
1.6. Conceptual framework..............................................................
1.7. Problem Statement.......................................................................
2. Literature Review...........................................................................................

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Family Business in Mumbai, India

CHAPTER 1:- INTRODUCTION:

The study emphasises on the identification and discussion of the financial challenges faced
by the family businesses in India, especially Mumbai. Since many centuries, one of the crucial
characteristics and key features of the business landscape has been the family-business (Colli and
Rose, 1999). This chapter presents a brief overview of the reason behind selecting the scenario
for study, along with specifying the research approach, methodology, and type, objectives and
scope of study.

1. I: Background of the study:

Stoilkovska (2011) mentions Family businesses are a way of life for many successful
families. One of the important organizational types all over the world is family business, as the
majority of businesses around the globe are controlled by some or the other family (Sethia,
2008). Gersick et.al (1997) also point out that family businesses and their contribution is of
integral importance to the world economy, because they influence the GDP of a nation positively
and significantly. Moreover, the economic condition of a nation gets improved because of the
greater amount of contribution made by family businesses through means of employment and
profit generation.
Bhattacharya (2012) describes family business as the one which is owned and managed by
one or more than one family members. These are those organizations where, through kinship ties,
management roles, or ownership rights, two or more family members influence the direction of
flow of business. In other words, a family owned business is the one where the majority of
ownership or control lies in the hands of one or the other member of the family, though this very
fact makes the concept complex where management of both, family and business, is supposed to
be taken care of.
The research on the referred topic has been going on since 1950s, and since then, family
business has remained the characteristic and key factor of researcher in the respective area (Colli
and Rose. 1999). The main contribution of the family-businesses all over the world has been in
employment, income generation and wealth accumulation. Family-business, as Perez (2010) puts
it, are the most common type of entrepreneurial network in the world.
Sethia (2008) further informs that the family businesses in India are accountable for around
70 percent of the total sales and net profit earned by the biggest private sector companies. It can
be clearly identified that family businesses play a major role in the economic system and stability
of the nation and since their setup is unique, they are considered as different from the other
businesses. Chua, Chrisman and Sharma (1999) too agree to the fact that family businesses are
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Family Business in Mumbai, India

unique, but according to them its the involvement of family in the business that makes it unique.
There are two aspects of the family business that makes it different from other businesses:
advantages offered by it, and problems that arise in these businesses (Stoilkovska, 2011).
Chua, Chrisman and Sharma (1999) inform further that there have been made many
attempts, and the quest still continues, to define family business, but not a single standard
definition has been identified so far because of the fact that every researcher attempts to define
the term in their own way. One fact, though, which almost everyone has agreed to, is that family
business is such a business where involvement of family members in the management and
ownership of the company is involved.
Arora (2008) emphasizes on the importance of family in India, where three factors
contribute and play a very important role in the economy of the country, i.e. faith, festivals, and
family. The concept of family business, as he puts it, has been into existence since the
independence of the country and growth of industries in modern India. Despite of the wave of
recedes of family businesses during 80s and 90s, the younger generation is keen to revive the
family managed businesses by their devotion and new ideas. This has led to an increase in the
concept of family owned businesses in the country, which indicates that not only the number, but
also the importance of family businesses in the country, has been increasing.
Feffer (2011) says that despite of family businesses being unique and benefit yielding, they
face unique challenges too. Iwan (2006) proves the fact as correct by highlighting 20 challenges
faced by the family owned businesses in his article. The cluster of challenges includes emotions,
informality, and tunnel vision, lack of written strategy, and compensation problems or financial
problems. CII-FBN (2012) informs that most commonly cited challenges of family businesses
include finding and retaining good talent, raising capital and building value chain.
Ningthoujam (2012), in her article, reveals two important facts about the Indian family
businesses, which seem ironical to the above discussion. The article informs that 70 % of
market capitalization on BSE is attributed to family businesses and 75% of the employment of
Indian citizens is in family-managed enterprises. It is intriguing that in India, where the family
businesses contribute almost 70% share of the total sales and profit (Sethia, 2008), and are
capable of providing employment to 75% of the total employed citizens in the country, family
businesses face financial challenges. Also the fact that most of the family businesses struggle
hard to survive during the reign on second or further generations (Ningthoujam, 2012), raises
questions and doubts about the status of family businesses in the country.
Therefore, aforesaid studies are conducted in context of various countries, thereby
establishing a link with the family sector of Mumbai, India, especially the small scale industries.
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Family Business in Mumbai, India

The facts identified so far have motivated the researcher to conduct a study to identify the
possible challenges faced by one of the fastest growing economies in the world! Though studies
have been performed to find out the challenges and issues faced by the family businesses in the
country, but literature informing about the challenges faced by the family businesses in Mumbai
is hard to find. Also, since Mumbai is considered as one of the biggest metropolitan cities of the
country, where opportunities never end for the deserving ones, it will be challenging, interesting
and most of all, a knowledgeable experience to identify the challenges and issues, especially
financial ones, faced by family businesses operating in the city.

1.II: Aim:
The research aims investigating an analytical content that can contribute in finding the apt
and most suited solution to the research question, i.e. the financial challenges faced by familybusinesses in India, especially Mumbai, along with adding a fruitful content to the already
existing literature base on the same issue.

1.III: Objective:
The objectives include those set of targets that a researcher intends to achieve, in order to
answer the research question correctly and efficiently. The objectives of this research are:
1. To investigate the different financial problems faced by family-businesses in India,
Mumbai.
2. To evaluate the role of management pattern on the financial decision making process.
3. To examine the sources of arranging funds for family-businesses in India in general and
Mumbai in particular.

1.IV: Research Methodology:

Research methodology defines the step by step procedure to conduct the research by data
collection, comparison, statistical calculation and finding the solution to the research question
(Cresswell, 2003). The research methodology talks about the research approach followed by the
researcher, so as to head forward in the best suited manner, research method, research data type,
and the research type. A research is a fully planned and structured enquiry which takes into
consideration the acceptable methodology to solve the research problems and create, altogether, a
collection of new knowledge and facts that has not been known by others so far, or has not been
worked on before (Cresswell, 2007).
Deductive approach for the prevailing study has been taken into consideration by the
researcher to conduct the research. This approach calls for study of relevant theory or facts
associated with the concept, so as to develop an understanding of the same. Once the
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Family Business in Mumbai, India

understanding has been developed, the researcher subjects the data and information collected to
statistical evaluations and calculations. Finally, by comparing the theory with the calculated data,
the researcher confirms the hypothesis as right or wrong, which leads to the identification of
solution to the research question (Burney, 2008).
The research method which has been chosen for data collection for the study is mixed
research method, where both qualitative and quantitative methods of data collection are taken
into consideration, as it helps in arriving at a conclusion that signifies the research solution
(Johnson and Onwuegbuzie, 2004).
Expository Research, performed completely on the already existing data and information
by comparing, contrasting, criticizing, analyzing etc. the views, theories and information
available on the topic, is found to be the apt research type for study, while the data type to be
collected for the study will cover both primary and secondary data. Primary data will be
collected from the already available data sources such as magazines, books, internet, journals,
newspapers etc. where as secondary data will be collected by conducting interviews and
questionnaires.

1.V: Rationale for topic:

The study aims at identifying the financial challenges and issues faced by the family owned
businesses in Mumbai. As has already been mentioned, there have been a lot of studies in the
field of family owned business and challenges faced by them, of which many have been country
specific. This research intends to fill the literature gap of availability of effective and
knowledgeable content on city specific financial challenges. India is considered as one of the
fastest developing economies of the world, where 70 % of market capitalization on BSE is
attributed to family businesses and 75% of the employment of Indian citizens is in familymanaged enterprises (Ningthoujam, 2012). Yet it has been noticed that family owned businesses
face financial challenges. Studies, from the country perspective, have been performed that aim to
identify the financial challenges, but so far, very few literature attempt to perform a city specific
study, which this study aims to do.
Moreover, the study will act as another relevant data source that can be added in the pool of
literatures based on the referred concept. The findings of the study will help other emerging and
existing entrepreneurs and business leaders to take notice of the financial challenges in their
firm. Further, itll help the family business owners to identify their financial risk areas and find
the corrective measures to deal with them.

1.VI: Problem statement:

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Family Business in Mumbai, India

The problem statement or the research question represents the main focal point of research,
to attain which, the researcher takes all the pain and does the required work. The research
question/problem statement of this research is:
What are the financial challenges faced by family-businesses based and operating in
Mumbai, India?

1.VII: Conceptual framework:

In order to find out the answer to the research question, the researcher first intends to
understand the concept and its history, from a national as well as international perspective, with
the help of already available literature content, archives, journals, internet, databases and other
sources of information. After developing a clear understanding of the concept, the condition of
family businesses in India and the world, and the financial challenges faced by them, will be
studied thoroughly. Eventually, a hypothesis will be formed, which will be proved true or false,
based on the data collected and calculated, which will help in answering the research question.
The primary data will be collected from the already available data and content on the
concept, whilst the secondary data will be collected by subjecting 50 small and medium
enterprises owners, belonging to different family owned businesses (selected randomly), to
interviews so that an in-depth knowledge and information regarding the concerned issue can be
collected, to a set of questionnaires and interviews. Based on the responses received and further
calculations, the solution to the research question will be obtained.

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Family Business in Mumbai, India

CHAPTER 2:- LITERATURE REVIEW:

The concept of family business has become one of the most attractive areas of work and
study for the researchers and analysts, theorists, investors, policymakers, practitioners and many
others. The major reasons for all the interest, as Poza (2009) puts it, are: value creation for
shareholders and their capacity to create jobs. Not only this, in this era of globalization and
the hypertension created by the same, has also been the reason for such an awareness about the
concept, as it leads to generation of competitive advantage for the companies or businesses on a
global level. This chapter of the study aims to present a critical evaluation of the concept, its
definition and other related aspects, so as to generate a clear understanding of the same, and has
been divided into two parts where in the first part deals with the discussion and understanding of
the concepts and aspects of family business, and the second part tries to link the theories and
concepts to the Indian family businesses.

PART A: CONCEPTS & ASPECTS ASSOCIATED WITH FAMILY

BUSINESSES:
2.A.I: Family Business Defined: A National and International
Perspective:
2.A.I.I: Family Business: Definition from International Perspective:
Gulzar and Wang (2010), in their work, inform that any entrepreneurial business that is
family-owned and where the next generation of the founder becomes the next controller or owner
of the business. There are different forms of family owned business, such as sole proprietorships,
partnerships, and limited liability companies. Family business, according to Poza (1999) is:
constitutes the whole gamut of enterprises in which an entrepreneur or next-generation
CEO and one or more family members significantly influence the firm. They influence via their
managerial or board participation, their ownership control, the strategic preferences of
shareholders, and the culture and values family shareholders impart to the enterprise. (p. 5).
While Poza (1999) defines family business as above mentioned, Walch (2011) considers it
as the succession process where transitioning the management and the ownership of the
business to the next generation of family members is done, where as Davis and Tagiuri (1982)
define it as organizations where two or more extended family members influence the directions
of the business through the exercise of kinship ties, management roles, or ownership rights. But
one common characteristic that can be noted in all the definitions is that in family-owned
businesses, ownership, and management or right to take decision, lies in the hands of one or the
other member of the family, usually its the eldest member.
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Family Business in Mumbai, India

Rouvunez and Aronoff (2005), on the other hand, talk about the uniqueness and the quality
of the business that is family-owned. It was highlighted that there is a sense of loyalty to the
principles, values and ideals of the founder of family business. The best part of family businesses
are that even when the founder is no longer present, there remains an enduring sense of respect
for what he/she succeeded in achieving (p.18).
Alderson (2011), dealing with totally different aspect of family business, has revealed an
interesting fact about definition of family businesses. He says the reason behind the nonexistence of a general or standard definition of family business is the fact that there is variety of
definitions on the subject, and hence, there are more number of comparisons and generalizations
which make it more difficult to arrive at a common consensus! There are number of definitions
presented by him on concept which he has selected to include in his work, and those are:
A family member is chief executive, there are at least two generations of family control,
a minimum of five percent of the voting stock is held by family or trust interest associated
with it.
One in which a family has enough ownership to determine the composition of the board
where the CEO and at least one other executive is a family member, and where the intent
is to pass the firm on the next generation.
The family business is a business governed and/or managed with the intention to shape
and pursue the vision of the business held by a dominant coalition controlled by members
of the same family or as small number of families in a manner that is potentially
sustainable across generations of the family or families.
Casillas, Acedo and Moreno (2007), on the other hand argue that defining family business
is one of the difficult issues associated with the concept. So far not a single standard definition
has been identified or agreed upon by researchers that could represent the exact meaning of the
scenario. Within the past few years, despite of all the research and study, there is a lot more to
uncover by the researchers that is part of the scenario, which only makes it difficult for them to
define the concept. Rather, there are a set of characteristics that can be taken into consideration to
understand the nature of the concept. The set of characteristics include: ownership or control of
business, and business is passed on to next generation of the family.
Alderson (2011) has tried to present a definition of the concept that serves the broader
perspective of the scenario, where he reveals that there are two important aspects associated to
the concept: there is an involvement of more than one member of the family in the firm who acts
as an owner, and the dominant family exercises the control on the management and operations of
the firm. Bornhein (2000) defines family business as a company in which a given family
controls the voting equity(p. 14).

2.A.I.II. Family Business: Defined from Indian Perspective:

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Family Business in Mumbai, India

In his article Family business groups in India: A resource-based view of the emerging
trends, Manikutty (2000) informs that since independence, the private sector of Indian economy
has been dominated by the family owned businesses. In fact maximum number of the
manufacturing of organized sector was looked after by the Indian families who promoted these
enterprises further. Post independence, when the introduction of the socialistic pattern was
introduced into the society, most of the promotion and running of the enterprises got restricted
from private companies to the state. Though the definitions of family business discussed above
are all applicable to the Indian context as well, some researchers and analysts have worked on
providing the definition of the concept especially from the Indian perspective.
Shirur (2005) has rather talked about the concept and strategies associated with it, from the
Indian perspective, in contrast to Manikutty (2000), where he defines family business as a
phenomenon where the owner enjoys the power of taking strategic decisions and have the liberty
and power to appoint his/her relative at any position of choice in the company. Further
management and governance of the company depends on its culture, history, state relations etc.
(Shirur-2005, p.1). Anuranjan (2009), on the other hand, defines the family business from an
Indian perspective in a different manner. The Indian family owned firms are closely held where
in the ownership and policy making are dominated by the members of emotionally and
biologically attached group, along with being the holders of the legal rights of the firm and its
profits.
Johann and Andrew (2012) in their report on family firm, irrespective of others, talk about
the unique quality of family businesses operating in India. They reveal that despite each family
and their business being different, there is one thing common in all of them, and that is the
ambition and dedication of the family to grow their business.
PWC Network (2012) contradicts to what others have provided as the definition or
characteristic of the family owned businesses in India. It suggests that these businesses are more
entrepreneurial in nature. Though it does agree with one common fact that the family owned
businesses play an important role in job creation. Not only has this, the PWC Network (2012),
unlike others, also highlighted the backdrops of the mechanisms and approach of the Indian
family businesses. According to PWC network, the Indian family businesses are less open to
new ideas and thinking and take more risks.

2.A.II. Contribution of Family Business to Economy and Growth:

Nationally and Internationally:
2.A.II.I. The International Outlook:
Bhattacharya and Ravikumar (2001) reveal that the family businesses are those
predominant forms of business which are part of countrys economic development. Though with
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Family Business in Mumbai, India

the development of capital markets, the dominance of control of the family businesses have
decreased, but they are considered as an important part of the economic system of any country.
The Family Firm Institute (2013) puts forward some important facts about the contribution
made by the family businesses on an international level to the world economy. It informs that the
family businesses are accountable for an estimated 70-90 percent of the total global GDP created
annually. It adds further that where 45% of the Canadian GDP is created by family businesses,
thereby providing employment to half of the total workforce in Canada, the maximum share of
wealth generation of the country is done by the family businesses (as 80-90% of the total
business enterprises are family owned). Same trend continues in Brazil also, where majority of
the businesses are family owned which represent the 70% of the total firms and play a major role
in the economy of the country. In Europe and UK too, the trend continues with almost 80% and
65% of the total businesses belonging to the families. In the Gulf countries, the 75% of the
private economy is dominated by the family owned businesses that generate 70% of the
employment of the region. The similar trends can be noticed in China, Indonesia, Japan,
Singapore, and Taiwan also, where family owned enterprises are though medium-sized, but are
accountable for the economic development of the country.
While Family Firm Institute (2013) has provided distinguished data with respect to
different countries, Epperlein (2010), on the other hand, claims that of the total businesses in the
world, approximately 70-85 percent share of businesses are family-owned. Mohd. Nor (2010)
supports this fact as he reveals that family businesses are an important segment to the global
economy which contribute in the 75% of GDP in majority countries, along with providing
employment to more than 85% of the population worldwide. Some of the major family-owned
businesses that are operating successfully on the international level and are into beyond 4th
generation ownership, include Lee family (China), the Deague family (Australia), the Dunn
family (USA) and the Frescobaldi family (Italy).

2.A.II.II. The National Outlook:

PWC Network (2012) informs that the family businesses in India are bullish in nature when
it comes to growth goals, which has undoubtedly yielded positive results as growth has been
strong in India in comparison to any other country in the world. PWC network further
acknowledges that out of every three family business in the country, one business aims at quick
and aggressive growth. The validation of the information can be confirmed from the fact that out
of total businesses in the country, 74% of them have grown in the last year.
Viewpoint of Raju (2008) are similar to that of PWC Network, though the facts provided
by him are new. He claims that the contribution of this business is highly significant in different
countries including India, which not only creates employment opportunities in the country, but
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Family Business in Mumbai, India

also generated income and wealth for the economy altogether. He adds that, indifferent to PWC
Network, in the early 2007, the net worth constituted by family businesses in the country ranged
from US $8 billion to US $ 32 billion. The Indian Express (2012), on the other hand, indifferent
to Raju, claims that 85% businesses in India are family owned.

2.A.III. Need of Finance for Running Family Business: A Historical

Perspective:
In order to understand the need for finance in Family Business, we have to take a detour to
the historical evidences of businesses in India. Jauhari and Misra (2000) inform that that the
concept of businesses in India evolved over a period of time and tool shape with the
colonization in India. There existed many business communities during the regime of East India
Company. In the 18th and early half of 19th century, as Bhattacharya (1999) argues, the East India
Company started transforming into the Government of India during the colonization phase of the
country. Tripathi (1999), on the other hand, informs that during the later years, the Indian family
businesses started taking their stand, where they challenged the British Monopoly in business.
Companies like Mafatlals, Tatas etc. Initially, as Tripathi puts, the Indian family businesses
concentrated more on financial gain and profit. But when the abolition of all restrictions on the
export of textile machinery was ordered, a radical change was witnessed by the business
environment of the western India, as after that ambitious Indians got the opportunity to establish
their textile mills.
Though very less number of literatures so far, has been able to provide the evidences for
the need of capital or finance by the family a business, Tripathi (1999) has pointed out some
cases in his work that ensure that need of finance by family businesses has a historical
background. Tripathi (1999) claims that after the abolition group of Surat Merchants (in early
1847) were the first ones to explore the possibility of establishing their textile mill, which wasnt
possible without the support of the English officials. Another incident, which reveals the true
power of finance for family business, was that an initiative taken by Ranchhodlal in Ahmedabad
to set up spinning mill, which failed because of the lack of capital. Bhattacharya (2012) adds
further that the family owned businesses were operating with full swing during 1980s, which is
identifiable from the fact that Tata Airlines was among the top 10 airlines of the world, until the
government of the country took a socialist stand on investment. This again makes it evident the
importance of finance of finance for running the family business.
McKinnon (1973) also claims that the financial intermediaries and various other sources of
finance are crucial for the family businesses, as they serve the necessity of growth and continuity
of the firm. It is clear from the historical evidences, and also we know that no business can run
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Family Business in Mumbai, India

without the financial aid, and so again the question pops up that: what are the sources from
which the financial support can be obtained?, which has been discussed further.

2. A.IV: Sources of Finance for Indian Family Businesses:

This section of the study aims at addressing the third objective of the study wherein the
sources of finance available in India, for the family owned businesses. Rajan and Zingales (1999)
inform that there are different sources of finance that help the family businesses in meeting their
financial requirements. While some are best suited for long term fund necessities, others serve
the short term fund requirements best. Banks, venture capital, non-banking financial
intermediary, capital markets, informal credit market, own finance, and industry or firm specific
source are some of the most important and fruitful sources identified. Kunt and Levine (1999) on
the other hand, claim that the non-banking financial intermediaries, such as insurance
companies, pension funds, and mutual funds, are also the better sources of finance for the family
businesses. Allen, Chakrabarti and Sankar De et.al. (2009) support the work of Rajan and
Zingales (1999) and Kunt and Levine (1999), while talking about the sources of finance
available in India for family businesses. Rather, they also suggest the same sources, in addition
to the other sources. Vittas (1997) add further that the best part of the non-financial
intermediaries is that they mobilize savings and facilitate the financing of different activities,
but do not accept deposits from the public at large (P.1). Levine and Zervos (1998) argue that
the non-banking financial intermediaries are operational more in developed or large countries, as
compared to the underdeveloped nations. In India, though, these sources are taken into
consideration by the large scale industries only.
Peek and Rosengren (1995) support Rajan and Zingales by informing that many of the
small-scale family businesses depend on banks to meet their financial requirements, and it is
very well known that not all the family owned businesses all over the world are large scale and
big ones. They further inform that it is not only in the interest of firms, but also in the interest of
banks to provide financial aid. Moreover, as Boot and Thakor (1997) claims, banks are organized
and are in a better position to lend and monitor firms, along with being able to support the firms
through difficult times.
Timberg and Aiyar (1984), irrespective of others, inform about the informal credit markets
as the ones that are not regulated by any banking authorities. They are critical integral part of the
countrys financial system and are common in the developing countries in terms of usage and
importance. The reason behind their importance is that they act as a catalyst in the fast growing
firms and the regulated financial sector. There are three different forms of informal credit
markets: indigenous bankers, commercial financiers and brokers.
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Family Business in Mumbai, India

Fama (1970), indifferent to others, claims that role of capital market is allocation of
ownership of the economys capital stock. The reason behind capital market being the good
source of capital is the fact that it is not serviced by any interest factor. Also, the shareholders are
paid dividend only when the business of the firm runs in a healthy condition and earns profit,
though the option is not feasible for the small and medium scale firms.
When it comes to family, sacrifice is one thing that is dominant in the scenario of business
or any monetary transaction for that matter, which is attributable to familys pride and name.
Donnelley (1988) informs that own finance is one such source that has contributed in the
survival of family owned businesses during underperformance years, along with transforming
them into big industrial corporations.
Any firm that has innovative idea and wishes to start their own business needs investment
capital from an external fund, and that external funding source is venture capitalist. The venture
capital, as Engel (2008) put it, not only allows the investors to provide financial help to the
firms, but also contributes in their overall development. Hawawini, Subramanian and Verdin
(2003), in contrast to others, talk about firm specific factors to be the important sources of
raising funds, especially the size of the firm.

2.A.V. Capital Structure and Related Theories:

Importance of capital has been discussed in the previous sections, but in order to perform
the study and identify the applicability of the same in the field of family business, it is important
to understand the theories related to capital structure. Moreover, the capital structure theories
allow the businesses to decide the source of finance to be taken into consideration so as to fund
their operations. Ahmadinia, Afrasiabishani and Hesami (2012) talk about capital structure
theories, which include net income theory/approach, net operating income theory/approach,
traditional approach, Miller and Modigliani theory/approach, static trade-off theory, asymmetric
of Information Hypothesis, Pecking Order Theory, Signaling Theory, Agency Cost Theory, Free
Cash Flow Hypothesis, Dynamic Trade off and Market Timing theory. They have summed up the
effect and results of the theories into a table, which has been presented as follows:
S.No.
1.
2.
3.
4.
5.

Theory/Approach
Net Income Approach
(NI)
Net Operating Income
Approach (NOI)
Traditional Approach
Miller and Modigliani
approach (Non-debt
Tax Shield)
Debt Tax Shield
Static Trade off Theory

Effect (1)

Effect (2)

Results

K P

K, R

L
L

K
K (financial

V
Trade off
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6.

7.

8.

9.

10.

Asymmetric of
Information hypothesis

Between
shareholders and
investors

Pecking Order Theory

First internal
sources and then
external sources

Signaling Theory

Financial
decisions are
signals for
investors

Agency cost theory

Conflict of
interest between
management,
shareholders and
creditors
Conflict of
interest between
management,
shareholders and
creditors

Free Cash Flow

Hypothesis

L, Dividend

Family Business in Mumbai, India

distress )
V
Benefit for
new investors
Undervalue of
, loss for
shares for new
current
investment
shareholders

Benefit for
Endeavour to
present
invest on
shareholders,
positive net
and then an
present value
opportunity
projects
for new
investors
Asymmetric
of
-------------------information
can be solved

--------------------

--------------------

Agency cost

Correct future
-----------------V
forecasting
11.
Dynamic trade off
Incorrect future
-----------------V
forecasting
Overvalue of
Issuing new
V
shares
shares
12. Market Timing Theory
Undervalue of
Buyback their
V
shares
shares
Where L= Leverage, K= Cost of capital, V= Value, R= Expected return, = increase and
= decrease
[Source: Ahmadinia, Afrasiabishani and Hesami (2012)]
The theories of capital structure not only guide the firms but also the investors, so it
becomes crucial for the owner, as well as the investor to consider the factors involved in capital
structure so that the venture for both the parties result into profitable outcomes.

2.A.VI. Problems Faced by Family Businesses:

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It has been noted down that the family businesses play an important role in the economic
condition of the country as well as the world on the whole, and also they are different from other
businesses because of their unique characteristics. Despite being unique, these firms face
challenges in operating their business. There are different set of issues altogether faced by them,
and this section intends to address them. The family businesses, be it on the national or the
international level, face almost same problems or challenges, more or less, in running their
because of the characteristics of the family owned businesses. Shure (2011) considers successor
training, efficient and effective delegation and fair compensation as the biggest problems of
family businesses. Morrin (2011), on the other hand, considers following as the issues confronted
by the family businesses:

Lack of family mission statement connection to strategic/tactical plans.

Lack of well trained and qualified future leaders.

Competition from entrance of multinationals.

Poor communication between generations and branches of family.

Non-existence of exit plan, or effective succession for that matter.

Lack of interest in business by successor generation.

Lack of understanding and documentation of corporate governance.

Lack of formal budgeting and planning process.

Lack of board and management outsider representation.

Lack of access to debt and equity capital for growth.

Iwan (2006), on the other hand accounts different problems faced by the businesses that

include, effect of family problems on business, lack of outside opinions and diversity on how to
operate the business, incompetency of management, influence of tradition in decision and
control, unavailability of long-term plan to deal with problems, financial and capital problems,
different visions, lack of participation of family members in the day-to-day activities. This
section of the review has served the purpose of the first objective, though partially (as the
financial challenges are still to be identified) wherein we were required to assess the problems
faced by the family businesses in India. Further, the next section of the literature review
addresses the financial problems faced by the family businesses, both on the national as well as
international level.

2.A.VII. Financial challenges Faced by family businesses:

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Ramschandran And Bhatnagar (2012) remind that effective management and, generation
and protection of wealth are of paramount importance for existence as well as healthy operation
of family-owned business. Financial risk is the biggest challenge or problem, of all the ones
discussed above, which is faced by the family businesses, irrespective of the era. Further they
add that proper financial goals of both family and business, are required to be balanced and
ascertained, so as to achieve the objectives and goals of the business. Jaiswall and Banerjee
(2012) are also of the view that earnings and financial management is crucial to the profit and
sustainability of business of family-owned firms.
On an overall pretext i.e. international front, as CII-FBN (2012) presents, the main
challenges faced by the leader of family owned businesses that are of great concern include
raising capital and building value chain. The journal further informs that the most challenging
job for firms is to raise fund for business operations during the pilot state of the business. The
reason is that the firms need to have a proper financial return background so as to motivate the
investors. Usually it happens that the firms are not able to generate funds in the early stage of
business. On the contrary, Hutcheson and Lane (2006) are of the view that debt managing, cash
handling and long term planning as the three major problems of financial nature, faced by the
family businesses.
On the national level too, as per CII-FBN (2012), the biggest financial challenge is to
attract investors at the nascent stage of business, because the investors judge the companys
reputation through means of returns and profits and then only they get willing to invest. Jaiswall
and Banerjee (2012) add further that, based on the findings of their research that since there
exists a negative association between firm size and earnings, it is evident that the firms have to
face problems in raising funds for their operations.

PART B: APPLICATION OF CAPITAL STRUCTURE THEORIES

ON THE INVESTMENT PATTERN OF INDIAN FAMILY
BUSINESSES:
2.B.I: Application of Capital Structure Theories: The National
Context:
Pahuja and Sahi (2012) in their attempt to identify the determinants of capital structure of
the family businesses, inform that growth and liquidity are the two factors that affect the
investment decision, and hence the capital structure of the family owned businesses. While
Manos (2001) and Gill et.al. (2012), in their work on emerging markets and capital structure,
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have identified debt and equity, number of shareholders and debt-holders, and interest, dividends,
and capital gains as the factors that affect the investment decisions of the firms. Whereas Gill and
Biger et.al. (2012), consider board size, business growth and family as the positive factors
affecting the investment decisions. Considering the factors, Pecking Order Theory and Agency
Cost theory are found to be applicable on the study, i.e. the investment pattern of the family
businesses in India. As is evident from different literatures studies so far, the family-owned
businesses consider own finance as the preferred source of financing. This is where the Pecking
Order Theory, as Niu (2008) informs, is applicable where considering the internal sources first
and then the external sources; the investments are made on the present value of the firm that
leads to increasing benefits for the shareholders and increasing the opportunities for the new
investors.
The Agency Cost Theory, as Moores (2009) presents, considers conflict of the owners,
shareholders and managers are ones that affect the business firms most and hence, the investment
decisions. The theory says that based on the increase or decrease of the conflict of interest
between the owners, shareholders and managers, the decrease or increase, respectively, of the
value of the firm depends. Power and money are two things that each and every individual
strives for, and family businesses are no different from in such case.

2.B.II: Application of theories: Mumbai Scenario-Linking investment

patterns with Theories:
Brahmabhatt, Kumari and Malekar (2012) have studied about the investment patterns
followed in Mumbai. It was noted that the investment decisions are more influenced by the
prevailing market position, news and not the real facts because they tend to fail to check the
actual figures, along with being more obsessed with the prevailing trend rather than solid
information. Also, the power and position to take decisions of the owner, shareholders, and
managers is the one such factor that affects the capital structure and investment decisions, as
argued by Kumar (2005). In maximum cases, as brought out by Kumar (2005) and Gill, Biger &
Bhutani (2008), Agency theory and Pecking Order Theory are found most apt for the family
businesses operating in Mumbai, considering the prevailing trend, as the internal and external
sources of finance, as well as the shareholders and debt-holders are found to be affecting the
capital structure and investment decisions of the family owned businesses in Mumbai.
This section of the review makes it clear that the management pattern and investment
decision of the family owned businesses are influenced by the conflicts amongst the shareholders

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Family Business in Mumbai, India

and managers, along with the profitability and capital gains, debt and equity factors. Most of the
factors are the ones related to the firms directly.

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Family Business in Mumbai, India

CHAPTER 3: RESEARCH METHODOLOGY:

Research is such a systematic procedure of scientific inquiry that aims at learning new
facts, testing ideas, views, thoughts etc. (Degu and Yigzaw. 2006). The methodology of a
research reflects the procedure and manner in which the researcher collects data and information
relevant for the study, along with revealing the necessary exercise and analysis done on the data
collected, so as to derive an accurate and effective solution to the research question. The chapter
aims at discussing about the methodology that will be taken into consideration. In other words,
the chapter aims at presenting the design of the research through which the study will be
conducted so as to find the solution to the research question. The chapter will talk about the
research approach, methodology and research type taken into consideration to perform the study,
along with the purpose of the study and the research question.

III.1. Purpose of Study:

The purpose of the study is to review the available literature work done by analysts and
researchers, so as to identify the financial challenges faced by the family businesses in India as
well as in the World, so that the special case of Mumbai can be studied. The reason behind
selecting the city to study the scenario is the fact that so far, very few literatures or studies were
identified, which have taken into consideration the perspective of the city. Also, the purpose of
the study is to find the solution to the research problem, which is: The financial challenges
faced by family-businesses based and operating in Mumbai, India.

III.2. Research Objectives:

1. To investigate the different financial problems faced by family-businesses in India, Mumbai.
2. To study the role of management pattern on the financial decision making process.
3. To examine the sources of arranging funds for family-businesses in India in general and
Mumbai in particular.

III. 3. Research Approach:

Duffy and ODonnell (1999) define research approach as the design that presents a basis
for carrying out the research and acts as a template that is subject to alteration depending upon
the nature of the work. They say further that the approach of the research acts as a complete
guide for the researcher to conduct or carry out his/her study.
Burney (2008) in his work, talks about two main approaches to carry out a study, i.e.
deductive approach and inductive approach. In order to select an approach, it is mandatory to
understand these. The deductive approach and inductive approach, both involve four stages of
research study, i.e. to complete the study and find the solution to the research problem, there are
four steps taken into consideration. While the deductive approach is mostly referred to as topPage | 20

Family Business in Mumbai, India

down approach, where specific results are drawn from the general theories and data, inductive
approach is the bottom-up approach where the results are presented in a generalized form. The
deductive approach considers the derivation of results of the study based on analyzing the
available facts and information.
In this study, since the researcher is required to study the available data, records and
information on the prevailing scenario or issue, deductive approach has been taken into
consideration to conduct the study. Here, the researcher is required to identify the financial
challenges faced by the family businesses in Mumbai, which in itself is a specific requirement.
So, pertaining to the requirement, deductive approach will suit the study best.

III.4. Research Methodology:

The methodology of a research defines the path around which the researcher is required to
travel, so as to find the solution to the research question. There are basically three methodologies
taken into consideration by researchers to conduct their study: Qualitative method, Quantitative
method and Mixed Method. Qualitative method of research is the one where the data is collected
on one-on-one basis by means of presenting questions in front of the participant itself, in the
form of presenting questions through an interview. This method helps the researcher to perform
an in-depth study and analysis of factors, so as to derive more accurate and apt conclusions
(Creswell. 2003). In this method, the researcher performs the content analysis, where in the
presentation of data and other important information is done in the non-numerical form. Mostly,
despite of providing the researcher with a better insight in to the scenario that he/she is studying,
this approach is not best suited to maximum number of researches. Reason being the fact that the
views and data are not only in non-numeric form (which means the certainty cant be assured),
but also are available in the general form.
Quantitative method, as Creswell (2003) adds further, requires the researcher to subject a
sample size of population, to a certain set of questions are generally multiple choice (closedended) or open-ended, formulated to meet the research objectives and hence, based on the
response of the participants, the solution to the research question is identified. The tools in this
approach are generally borrowed from the physical sciences, because of the fact that they are
structured. The results are obtained in the numerical form where the researcher puts those
numerical data under calculation and deduction methods, which finally leads them towards the
solution of the research question. The tools of this approach are straightforward and guide the
researcher to a specific research solution.
Another type of approach, as brought out by Creswell (2003), which has come into
existence and importance, based on the necessity of the research, is Mixed approach. As the
name suggests, when any research study involves the following of both the types of approaches
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Family Business in Mumbai, India

mentioned above, i.e., qualitative and quantitative approach, then the research is said to be
following the mixed approach. This approach is applied to the researches where the researcher
tends to arrive at a conclusion by considering the type of data that are consequence-oriented,
problem centred etc. The data collection is done either simultaneously or sequentially so as to
understand and arrive at a conclusion in a step by step manner, and then interrelate all of them to
find the answer to the question.
As the researcher is required to arrive at a conclusion by considering both, the qualitative
as well as the quantitative method, the mixed method of research is best suited for the study and
hence, it has been chosen as the research method. In order to collect data for the study, the
researcher has taken into consideration both the types of data collection methods, i.e. the primary
as well as the secondary data collection methods. The reason behind selecting both the types of
data collection methods is the fact that collected data will provide a better insight into the matters
associated with the concerned topic, along with guiding the researcher through an efficient and
effective research solution.

III.5. Research Type:

Goddard and Melville (2004) have mentioned in their work that research is a
phenomenon where an information or data is collected, and then sequenced in a manner so that
the researcher can find solution to the research question. But, in reality, it is not merely a process
of data collection or sequencing, rather, through research, a person tries to answer those
unanswered questions that take birth with the development of research and that are related to the
topic of research. Expository Research, performed completely on the already existing data and
information by comparing, contrasting, criticizing, analyzing etc. the views, theories and
information available on the topic, is found to be the apt research type for study.

III.6. Data Collection:

The collection of data will be done by means of digital media, technology, archives,
journals, magazines, books etc. to develop an understanding of the concept and theories
associated. Also, interviews and questionnaires will be taken into consideration to collect
practical data and information, so that they can be processed to derive a conclusion and the
solution to the research question. A sample of 50 participants, owners of small and medium
family owned companies/organizations (selected randomly) will be subjected to questionnaires,
and interviews, so as to get a better insight of facts associated to family-business and crucial to
research. The data and information so obtained will be subjected to numerical calculations and
statistical methods to interpret them and derive a conclusion.
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Family Business in Mumbai, India

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Family Business in Mumbai, India

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