The Last Straw

By 1996, six years into its incorporation, Marico looked and felt like a different company. Sales had quadrupled and profits had doubled despite huge investments in infrastructure, factories, labs and offices. Marico’s efforts at brand building and culture development had laid a foundation for future growth. Backed by these successes, Harsh was emerging from the shadow of his elders and was gaining the respect and admiration of his corporate peers. Remarking on these progressions, Harsh said, “It was indeed a nice feeling to win recognition and laurels, particularly after years of anonymity and toil.”

Meanwhile, the other branches of the Mariwala family were grappling with the changes wrought by the demerger. While the family recognised that the changes were in the right direction for Bombay Oil, there were new realities and challenges with the arrival of winter. The Mariwala elders had to find new ways to keep themselves engaged. The system of a common treasury was no more in practice. Each business had to generate its own resources for investment and growth. The subsidiary companies now run by the Mariwala cousins as CEOs met the family board once each quarter to apprise them of their company’s performance.

Harsh’s cousin Rajen, the CEO of the Fatty Acids and Speciality Chemicals business, acknowledged the obvious when he said, “Harsh’s approach stood apart from that of the previous generation. Harsh had a more futuristic outlook for the company. He invested in professionals and delegated to them. He was very sensible in taking the initiatives that built long-term growth, stability and sustainability.”

He was also quick to add that the changes were “emotionally trying for some of the older family members.” Rajen’s father, Kishore Mariwala, echoed the same sentiments, stating that there were mixed feelings among the Mariwala seniors but that he personally was satisfied that the demerger had happened in a professional, a systematic and, most importantly, a transparent manner.

At these quarterly meetings, Harsh gave updates on Marico and its impressive growth. But he was soon to be met with an unprecedented challenge. Trouble was brewing very close to home. Disturbing and unnerving news came to light.

The Mariwala family had stayed together, parents with children, siblings with siblings in the same mansion through generations. Their ancestors and fathers had sagaciously held the family wealth and assets in legally bound and registered cross-holding companies, much as many other business families did, in that era. They had followed the practice of crossholdings to ensure that the future generations would continue to stay together. Under the circumstances, a family break-up was very difficult, and any division of wealth could happen only via mutual agreement.

So it happened in one of the quarterly meetings in 1992 that disturbing information surfaced about one of the jointly owned businesses losing much more money than was disclosed. As would be natural, it created doubts in the others’ minds. The family charter, set up in 1990, had created a framework for transparency, but the arrangement seemed to have unravelled. Family members were extremely rattled at this breach of trust. If those responsible for running the various companies in the group could not be trusted, the very basis of the business restructuring exercise stood threatened and was in danger of coming apart at the seams.

So far, all the businesses were jointly owned, in equal proportion by the four branches of the family. The rupture of trust brought to the fore the inevitability to call for a financial separation. A now distraught Harsh was resolute to sever this partnership.

Negotiations and Mediation

The quest for separate ownership saw Harsh enter into negotiations with one branch of the family to buy out their interests in Marico. As Marico was the most highly valued company in the group, any exchange of shares meant that Harsh would have to pay a very heavy consideration. Harsh learnt that he had the backing and innate trust of his uncle Kishore, who told him to also negotiate on his behalf.

Through the years 1992–94, negotiations among the family members continued. With multiple family members being involved in negotiations over the various businesses and other assets such as real estate properties, the process became extremely complex. Each asset had to be listed and a fair value arrived at. The only way in which this issue could be resolved would be through the mediation efforts of an external person that all trusted.

A contemporary of the senior Mariwalas, Bipin Shah, former chairman of Lipton and an executive director on the board of Hindustan Lever, was known to all in the family. Highly respected, and as a friend of the family trusted by all, he agreed to oversee the mediation process and held numerous rounds of discussions with the family, sharing his expertise and mediating among members, guiding them towards what was equitable. Many meetings followed: joint meetings and one-on-one meetings to resolve the complexities involved in this family separation.

Two years of negotiations, and an agreement on Marico’s valuation still wasn’t forthcoming. Finally, the family decided to appoint a reputed third-party valuer, YH Malegam. An Agreement was signed whereby Harsh and his uncle Kishore were given eighteen months to buy out the shares of the other two families at a valuation determined by the third party. Till which time, they would place their own shares in escrow as security.

It was a trying and intensely stressful period for Harsh. He was working round the clock, getting a new company off the ground while at the same time sorting out the family ownership crisis. Harsh was well aware that he and his uncle would need access to substantial capital to repay the loans incurred by the deal. The large buyout of the other two branches of the family left them little room to manoeuvre financially.

In May 1994, Malegam was ready with the valuation. A family meeting was called at the Belvedere Club located in The Oberoi Hotel, Bombay. Based on his enquiries with some finance experts, Harsh had a rough sense of how much the business was worth. However, when the third-party assessment came in at double the value he had anticipated, he was stunned. When he heard the figure, blood drained from his face.

Now, basis the very attractive valuation, the second branch of the family also decided to sell their Marico shares. This meant doubling the cost that Harsh and Kishore would have to pay in a short time frame. Both debated at length about whether such payments would be within their reach. Ultimately, they determined that, though risky, it made eminent business sense to acquire the shares of the second branch as well.

They agreed that Harsh would continue as MD of Marico while Kishore Mariwala’s family would serve as joint promoters without any active involvement in the business. The high valuation nearly put Harsh’s future out of reach. He had to raise far more monies than he had expected he would need in order to buy out the other family branches.

To top it all, this turn of events happened at an inopportune time, at a stage when Marico was still in its infancy. As per the agreement, if he was unable to come up with the money to pay for the shares of the outgoing branches, his own shares in escrow would be forfeited. Based on this high valuation, he feared losing control of the company and having to let go of what he had so painstakingly created.

Harsh’s sense of hurt and injustice ran deep: it seemed that the curtain would come down on his future dream. For Harsh, Marico’s birth was all about liberating himself from the cage. Fatefully, he was still caught in the same cage. What kind of irony was this?

Ram Charan Observes:

“There are incredible ups and downs and stresses in family business ownership. Most siblings in business families crave liberation, which evades them due to lack of openness and family hierarchy. The issues are held subliminally and not discussed openly enough. Instead, a stalemate lingers. Then something happens unexpectedly, and all hell breaks loose. It becomes an emergency and then a war. Time and energy are diverted to deal with these exigencies and business suffers. So it is important to think ahead and plan for any such eventuality. Arriving at a win-win is the key but not everyone will end up happy.”

Financial segregation spells the ultimate departure and parting of ways. But how do you separate financially? Pay out the others, borrow at high costs, launch an IPO? Prof Ram Charan adds, “The quandary is compounded by a lack of experience in these matters. The desire for liberation can lead you to take huge risks – large debts at high costs, for instance – which may then return to haunt you. A cool head is needed and finding a trustworthy set of advisers is crucial. The confluence of the stresses of business, family and debt can be overwhelming and can happen in all family businesses. Harsh was not the only one.”

He continues, “In those days, it was common for business families to raise personal loans against their shares. For some, it worked out. In other cases, the families were destroyed. I am saying this: be cautious, because no one really controls lack of liquidity and interest rates. One of the three richest families got wiped out. And I mean wiped out. They put up their shares as collateral for a loan and it went the wrong way.”

Bankrolling the Buy-Out

During the darkest point of the crisis, at an offsite meeting with his management team at the Taj Fisherman’s Cove in Chennai, the pressure finally took its toll. Harsh broke down. He said he couldn’t understand where his fault lay. He had worked with utmost integrity and sacrificed a lot to keep the family together. Despite all his hard work, integrity and contribution to the family coffers, he was the one who had to now take on a massive personal debt. It felt like he was being sentenced instead of being rewarded. He despaired, wondering aloud if he could go on. How was he going to raise the money needed to buy out both his uncles’ shareholding?

On their part, the management team, obviously in the know, had not conjectured that the valuation would be such a big stretch and so out of reach. Pranab, who was well networked in the world of finance, was partnering Harsh through the valuation process and identifying strategies to fund the buyout.

He assuaged Harsh’s fears, saying, “I am confident we’ll find a way out. We have a healthy business, a credible management and a very good track record. Money will not be hard to find. There are numbers of FIIs (foreign institutional investors) looking to invest in the India growth story. Only, we need to be very cautious on the terms of any such funding.”

The management team, who had worked with Harsh for over five years, had never seen Harsh in such distress. He was always composed and upbeat. Upset, they reassured Harsh that they stood with him and were committed to supporting him through this difficult phase. They were sure that Marico would prevail. That as always, Harsh himself would make it happen. Recalling the moment, Jeswant Nair said, “Seeing Harsh break down was very humanising. Role boundaries instantly dissolved. We were touched that he trusted so completely in us.”

Harsh was between a rock and a hard place. He had barely put together a strategy to raise funds for what he imagined would be the anticipated valuation – which by itself was a big stretch. Now having to raise twice the funds was a task for which he had neither a plan nor the wherewithal...And the clock was ticking. With shares in escrow, if Harsh and his uncle Kishore were unable to come up with the funds in time, they risked losing the company.

Once again, Harsh turned to someone trusted to seek guidance and counsel. Harsh asked Uday Kotak, his friend and founding partner of Kotak bank, whether his bank would lend the funds needed to settle the family deal. He emphasised that he was not requesting a favour based on family ties and would pledge his shares as well as those of his uncle Kishore as collateral.

As they talked, Kotak noticed the physical toll that the separation process had taken on Harsh. Kotak knew that many other family businesses faced the same difficult process of disentanglement— and quite a few had handled the separations badly. Often, decision- making bordered less on rationality and more on what the opposing party would receive. Said Uday later, “I must give credit to Harsh for his maturity. The Mariwala separation went better than a lot of family business experiences I have witnessed.” A statement which emphasised the professional and open approach that Harsh brought to the situation.

Along with Uday Kotak, Harsh also approached Sajjan Jindal for bailing him out by loaning funds. Cognizant of Harsh’s integrity, Sajjan agreed without hesitation to stand by him. Again, as with the bank, the shares stood as collateral.

Interest rates in India during that period were exorbitant. Harsh and Kishore Mariwala borrowed money at rates ranging from 18 per cent to 24 per cent per annum in order to pay the other two branches for the shares buyout. They were required to repay the loans in a period of eighteen months, in accordance with the signed agreement.

The loans gave Harsh and Kishore Mariwala a bit of breathing room, but it still put them under a big load of debt. The sum was huge and the risk one which could sink a less stern entity. But for Harsh, every hurdle seemed surmountable as long as he emerged with control over Marico. And his own master. No price was too high to attain that freedom. He had invested so much of himself in the company and its people; there was no way he would let his dream sink now.

Another option, Harsh reasoned to himself, would be for Marico to attract private equity investors. He spoke with several prospects. Goldman Sachs showed particular interest. They met with Harsh and CFO Pranab Datta at the Marico office. Post their meeting, one member of the Goldman team, Steve Remus, stayed behind to gather information for further analysis.

He delved deep into the numbers to grasp the foundation of Parachute’s growth and Marico’s landscape of distribution and competition. “I’m an information hog,” Remus said as he vacuumed all the data he possibly could. Goldman Sachs made an offer to acquire part of Harsh’s shares so he could repay the loan. But Harsh and Datta found their valuation too low. Although they nearly came to an agreement, negotiations broke down.

It was an extremely taxing period for Harsh. On the one hand, he had to devote time towards growing the business of his new company while on the other, he had to find a way out to repay the burdensome personal loans. Harsh had to present an aura of business as usual but underneath the surface was the back-breaking fear of the debt he was carrying. Meanwhile, interest costs mounted and the time it would take the loan to be serviced stretched beyond two years.

Harsh Realities: The Making of Marico

Excerpted with permission from Harsh Realities: The Making of Marico, Harsh Mariwala and Ram Charan, (as told to Archana Mariwala and Jeswant Nair), Penguin Business.