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Bombay Dyeing episode is a good incident, says guru Ghoshal

Y Siva Sankar in Bombay

The corporate fracas involving the Nusli Wadia-led Bombay Dyeing management and Calcutta-based jute baron Arun Bajoria, over the latter's low-key acquisition of a 14 per cent stake in the company, may eventually help strengthen India's institutions for market regulation, according to management guru Professor Sumantra Ghoshal of the London Business School.

"It is a very complicated issue. It is very easy to oversimplify this one. I absolutely believe that market mechanisms, while by no means perfect, are better than most other mechanisms for allocation of resources at the company level and the societal level," Prof Ghoshal said.

"This includes market for corporate control. At the same time, what we forget is market mechanisms work effectively only when there are set supporting institutions in place around them," he added.

Prof Ghoshal opined that the timing of the Wadia-Bajoria duel is significant. "I think the Bombay Dyeing episode is actually a good incident to come up at this stage. It will focus now on where the market-based forces for corporate control are versus how effective the institutions are -- whether they be the SEBI guidelines on corporate takeover; or the issues of the promoters/entrepreneurs being able to buy only 5 per cent equity, while outsiders can buy 15 per cent; how right the current situation is."

Overall, he said, the result will be positive for corporate India. "The debate will hopefully lead to putting the right institutions in place. The market will evolve. The market will gradually become more efficient as indeed will the institutions become more mature. It's a stage I believe in the evolutionary process."

The professor compared and contrasted the scene in India and elsewhere. In the US, Germany, France and the UK, he said, while market mechanisms work, there are supporting institutions around them. "If you suddenly bring market mechanisms in without those institutions, then the markets often can be an ass."

India must have a market for corporate control. That is a very powerful force to rationalise industries to improve productivity, to cut out dead wood and all of that, he said. "At the same time, we must recognise that all the other institutions you wish around it for an efficient, effective market for corporate control to work, are not all in place."

Prof Ghoshal said that India must manage the new age developments gradually, pushing up the market forces, while simultaneously creating the institutions. "If you do one without the other, that is the source of Asian crisis, that is exactly what happened in Indonesia, Thailand and elsewhere."

Asked if he is satisfied with the situation in India, Prof Ghoshal said: "I think in some ways India is doing quite well, in its own meandering, somewhat elephantine style. Gradually, the institutions are emerging; gradually the market forces are coming in. At any point in time, there is a tension between the two."

Prof Ghoshal, who holds the Robert P Bauman Chair in Strategic Leadership at the London Business School, is currently on a tour of India to promote his new book, Managing Radical Change: What Indian Companies Must Do to Become World-class. The book's co-authors are Gita Piramal, business historian, and Christopher A Bartlett, Daewoo Professor of Business Administration at the Harvard Business School. Prof Ghoshal is to assume his new assignment as the founding dean of the Indian School of Business in Hyderabad shortly.

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