The Story Behind the Godrej Group Separation

Six years ago, on the 119th founding anniversary of the Godrej Group, Adi Godrej made a crack out of GST, a hot topic back then, by marking the day as “Godrej Starts Today”, i.e. G-S-T.

Six years later, we are witnessing G-S-T as well. Only this time, it stands for “Godrej Separates Today”.

The $4.1bn-valued Godrej Group of Industries announced last week that it has begun the official process of dividing the business between two groups. One, led by the brothers Adi and Nadir Godrej and the other, led by their cousins Jamshyd Godrej and Smitha Godrej Crishna.

Why? Officially, the separation is the result of a “difference in business strategy” between both the groups which hold material stakes in the company.

Unofficially, however, the story goes deeper and involves layers of unresolved differences between the scions of a 125-year-old family that is now into its fourth generation of corporate control.

Let’s unravel a few layers, shall we?

The Godrej History

The company’s archives date back to the 19th century when two Parsi brothers — Ardeshir Godrej and Pirojsha Godrej — founded it in 1897. Their debut business was selling locks, the demand for which scaled as a result of increased burglaries in Mumbai during that time.

Over the years, the company diversified into different areas including soaps, real estate, appliances and even satellites. It gave the country its many market firsts — the first India-made fridge, the first soap made out of vegetable oil, the first ballot boxes used in independent India and the first indigenous typewriters.

The Godrej brand has become ubiquitous across the Indian consumer landscape with its products ranging from almirahs to air-conditioners to Cinthol soaps to components used in Chandrayaan’s launch!

The listed entities of the Group are currently being controlled and run by Adi Godrej and his brother Nadir and largely their side of the family. However, the private-held Godrej & Boyce (also happens to be the holding company of the conglomerate) is headed by their cousin Jamshyd Godrej as the Chairman. He also sits on the board of all other key group companies.

Basically, all key family members own shares in each other’s companies and have board representations. There are also several cross holdings among family members and trusts. The fourth generation of the family is also in the process of entering into key management positions.

All in all, the entangled ownerships, conflicting aspirations, inequality in managerial control and ownership stakes, all contributed to the rift that is driving the conglomerate’s division now.

But at the core of the discord lie the differences with regard to monetisation of lands owned by the family members.

Land and Other Use(s)

Godrej & Boyce is currently the biggest private landowner in Mumbai with over 3,400 acres of land under ownership. As part of a family arrangement reached in 2011, the land parcel owned by the family in Vikhroli is supposed to be “co-developed” with Godrej Properties, the group’s real-estate subsidiary (run by Pirojsha Godrej, son of Adi Godrej).

If developed, the value of the land is expected to be around $12bn. But there’s an issue. Over a third of the total area comprises mangrove forests and is ecologically sensitive. A part of the land has also been encroached upon. So development may not be a sound idea given the circumstances.

And Jamshyd Godrej agrees. Bit of context: He is an environmentalist who sits on the board of organisations like the World Wildlife Fund. He was also named as one of the “richest green billionaires” by Forbes magazine in 2012. And so, as the Chairman of Godrej & Boyce, he continues to oppose the idea of “excessive development” as presented by his cousins.

Ever since these reports surfaced in the media in 2019, there have been rumours about external advisors (mostly trusted friends of the Group in the business circle) being roped in to resolve the issue (e.g. Uday Kotak, Nimesh Kampani, Zia Mody, Cyril Shroff etc.).

The last several years have also been dotted with eventful business developments for the Godrej Group. Starting with high-profile partnerships with Procter & Gamble, GE, Sara Lee, Tyson Foods etc., the Group has undergone a series of joint ventures with an intent to further diversify its consumer goods product lines.

Although these ventures have ramped up the Group’s turnover by three times, many of the partnerships have ended in less-than-desirable ways. By virtue of being at the helm of the Group during these developments, Adi Godrej’s judgment has often been called into question and that is possibly what drives the “long-term strategic plan” that the two family groups have claimed to try and work out amongst themselves in the past two years.

Terms of the Divorce

The stepping down of Adi Godrej, the de-facto patriarch of the Group, as the Chairman of Godrej Industries Limited, and the subsequent elevation of his brother Nadir Godrej to the position, may have been the beginning of the separation exercise. This could set the stage for the next-gen Godrejes to take over and formalise the separation of roles and businesses.

But that is a job easier said than done. Separation of assets for a locks-to-satellites business empire that has thrived over a century requires levels of due diligence and valuations on a humongous scale.

For instance, the consumer, properties, agrovet and life sciences subsidiaries of the conglomerate (all under Adi Godrej & Co.’s control) are pegged at a far greater valuation than Godrej & Boyce (under Jamshyd Godrej & Co.), which calls for conflict if things were divided on a status quo basis.

Then there are real estate assets and land holdings, the real size and scale of which remains unknown.

Moreover, the fact remains that Godrej is too big a group to consider its separation as a wholly private or family affair. Their market presence is too entrenched and involves public investors, employees and stakeholders. Any change in structure and governance will entail regulatory and tax clearance to avoid substantial liabilities.

Even though the Godrej Group is considered as one of the better-governed large family businesses in the country, rifts like these are reflective of a timely reboot for large corporations to reevaluate their course and operations. Truth be told, the Group has actually fared better when the family has relinquished management control in the past. It happened when the family hired an outsider (Vivek Gambhir) as the MD/CEO in 2009 which led to a tremendous 15x jump in stock value.

And yet, there are some, according to whom, the reports of the Godrej Group’s separation are likely exaggerated, or as Harsh Goenka would say, “people making a mountain out of a molehill”. Having been a part of a corporate division himself, Mr. Goenka believes that there is no “one-size-fits-all” approach that family businesses can take in today’s rapidly-changing business environment but the key lies in doing it amicably.

In any case, should there be a restructuring, the Godrej Group stands to enter an unenviable club of India Inc. Comprising enterprises (e.g. Reliance, Bajaj, RPG Group) that have split on account of intra-family rivalries. We will see more in six months’ time, when the resolution on the division of assets is expected to be released.

(Originally published Novemebr 2nd 2021 in transfin.in)