Everything you wanted to know about the Modi business family feud - and more

The Modi family is one of the country's oldest business families. Interestingly, it was also one of the first business groups to witness a long painful split due to warring brothers. The group's businesses ranged from chemicals to sugar, airlines to sponge iron. The companies under its fold included Modi Sugar Mills, Modi Vanaspati Manufacturing Company, Modi Industries Ltd, Modi Luft and Modi Rubber. Modi Industries had its headquarter at Modinagar in Delhi.

A new book, Business Battles: Family feuds that changed Indian industry, recounts the history of all famous family feuds that took place in the history of Indian business -- the Amabnis of Reliance Industries, the Singh family of Apollo Tyres, the Bajajs, BPL, the Chhabrias, the Kirloskars, Mafatlal, Ranbaxy, the Modis and the Shri Rams. Here is an excerpt on The Modi Warlords, from the book written by Shyamal Majumdar, Executive Editor, Business Standard.


The story of this family-from its foundation to the split to the ultimate reunion-begins with the young heir of a business family from Patiala setting up a plant 40 km north-east of Delhi, which cost him Rs 11 lakh. That was in 1933. Gujarmal Modi, then aged 31, saw an opportunity in the government's decision to encourage domestic production of sugar by increasing the import duty on it. The mill prospered, and subsequently diversified into vanaspati, rubber, paper, distillery, sponge iron, chemicals, rice mills and textiles.

By the late 1970s, Modinagar had earned a prominent place on India's industrial map. During this period, the Modi Group was the country's seventh largest conglomerate with assets of Rs 900 crore and annual sales of Rs 1,600 crore. By the time Gujarmal's brother Kedar Nath joined the business, the Modi Group was already an established name. Kedar Nath, the son of their father's fourth wife, was 19 years younger than Gujarmal. Gujarmal, born as Ram Prasad and named after his great grandfather, was the second child in the family of Multani Mal Modi, owner of a successful food grains mill in Patiala. Multani Mal earned the title 'Rai Bahadur' from the British for his contribution to public welfare.

Theson shared the same trait, which is evident from the number of schools, colleges and hospitals that he set up during his lifetime. Multani Mal had a daughter from his first wife who died young. Bowing to his parents' wishes that the family needed a son to carry forward its legacy, he married a second time. The joy of Gujarmal's birth was, however, short-lived; his mother died just six days later.

He was brought up by Gujari, his foster mother, and was even nicknamed Gujar after her. As time passed, the name Gujar stuck and the child came to be known as Gujarmal. Meanwhile, his father married a third time, and then a fourth after the third wife also passed away-childless. Kedar Nath was the son of Multani Mal from his fourth wife and was born many years after Gujarmal.

Gujarmal joined his father's business when he was in class 8, setting a tradition of sorts because his eldest son, KK, too joined his business very young, at the age of 19. By this time, KK's step-uncle Kedar Nath had begun to have a considerable say in how the business ought to be expanded. Gujarmal died in 1976 without leaving behind a will, but his brother ensured that the family remained united and relations remained cordial. His five sons and six daughters, and Kedar Nath's three sons, were married off into equally prosperous business families.

Modinagar was then a bustling township with as many as 35 factories and scores of educational institutions and healthcare facilities serving not only Modi Group employees but also people from all over India. Despite being stepbrothers, Gujarmal and Kedar Nath were close. Gujarmal brought him into the business and they both worked together for a long time. In fact, Kedar was quite content with letting his brother have the limelight. In any case, he was quite junior to him. After Gujarmal's death, Kedar took over as head of the family and steered the empire quite competently until his sons grew up and joined the business.


Around the mid-1980s, Kedar Nath started worrying about the future of his sons. He believed that they were of an age when they needed to carve out an independent identity and not remain content under the shadow of Gujarmal's five sons. Since there was no clear line of ownership, an insecure Kedar Nath initiated action for a share of the pie for each of his three sons. This was resisted by his brother's sons, who wanted to maintain status quo, stating that the group had been founded by their father.

And so, quarrelling over the family business began, leading to a steady decline of what was once a booming empire. Kedar Nath used his formidable connections in the then government to sharpen his attack on the family. It may be a coincidence, but soon anonymous letters began surfacing in the offices of the Enforcement Directorate (ED ) alleging wrongdoings in the Modi empire-violation of the Foreign Exchange Regulation Act (FERA), siphoning of money from group companies to fund new businesses, among others.

According to the case files, there was one letter that suggested over-invoicing of imported machinery, while another claimed the Modi brothers had no intention of paying back money to financial institutions (FIs) and, instead, preferred to shut down some of the companies. The outcome was as expected. The FIs, as shareholders, initially allied with Kedar Nath and began probing the group's activities, demanding that more powers be given to him. Gujarmal's sons blamed the uncle for these selective leaks. They too tried flexing their muscles, and when that did not work, removed their uncle as chairman of the group flagship, Modi Rubber, in 1988. All hell broke loose after that, and corporate India witnessed one of the most vicious family battles. The brothers sparred in public. Neither was willing to concede even an inch to the other.

The prolonged dispute hit Modinagar like a typhoon. Business was neglected which led to labour unrest, mismanagement, technological obsolescence and a host of other problems. The mills started shutting down one by one (at last count they were down from 30 to just 6), hitting Modinagar where it hurt the most. Alarmed, the FIs which had substantial stake in the companies stepped in. A compromise formula was worked out on 24 January 1989 at the instance of the institutions, under which the empire was to be divided in a 60:40 ratio.

Gujarmal's five sons would get 60 per cent of the assets, and Kedar Nath's three sons would get 40 per cent. Accordingly, Modi Rubber went to the Gujarmal faction, while Modi Mills came under the control of the KN Modi camp. The following year, Kedar Nath's group rebranded itself as Modi Enterprises. The settlement, however, unsettled everything. Apart from the lack of trust between the brothers and cousins, what came in the way of reconciliation was the role and involvement of politicians and bureaucrats via the FIs.

'My experience is that the Modi Group has suffered a lot because of some politicians, who made us fight and then became arbitrators,' BK was to say at the family reunion in 2012. He may well be correct as institutions made full use of a rule that allowed them to convert 20 per cent of loan into equity. They behaved like a cartel, using their voting power to favour one section of the family over another and pitting brother against brother. Though it cannot be proved, it is believed that Kedar Nath was close to the Prime Minister's Office (PMO) during Indira Gandhi's tenure as PM, and this gave him considerable political clout.

What everyone misjudged was the difficulty that the group would have in disentangling the cross-holdings within its companies. Due to heavy taxes that were levied on industry and businesses in the 1970s and 1980s, the group's shareholdings comprised a complex web of holding firms in which every brother had a stake and that made it virtually impossible for family members to go their own way, even if they wanted to. Modi Rubber, which went to the Gujarmal faction, had `250 crore worth of holdings in 13 group companies, including Godfrey Phillips, Gujarat Guardian and Bihar Sponge, which were owned by Kedar Nath's sons.

For the FIs, the family battle served a double whammy. Not only were they stuck with a messy state of affairs within the companies, the Modis also refused to repay loans. They said that the cross-holdings of the various family factions were so complex that the liability of each of the brothers could not be fixed until the division of property was effected. So, the FIs blacklisted the entire group, complicating matters further.

It became a classic case of too many children bickering over a non-expanding pie. The terms of settlement stated that all disputes, clarifications, and so on, should be referred to the chairman of the Industrial Finance Corporation of India (IFCI) or his nominee, whose decisions would be final and binding on both groups. Meanwhile, the valuations that had been arrived at by Billimoria & Co left both factions of the family unhappy. They approached the IFCI chairman who, in turn, formed a committee ofexperts to assist him. Discussions were also held with the chairmen of the companies concerned, which went on until December 1995.

The matter did not end there as the IFCI chairman's 'final' decision was dragged through numerous arbitration proceedings and courts, which, in turn, gave individual orders restraining the sale or transfer of shares held by one group company to another. The courts' decisions made the process of division of assets impossible to implement. For example, one particular court restrained the sale or transfer of any stake held by the Gujarmal faction in Godfrey Phillips, owned by the KN Modi faction. Another judgement instructed that no meeting of the Modipon board should be held to consider any matter until further orders. The legal wrangling went on for six long years.

Business Battles: Family feuds that changed Indian industry
Shyamal Majumdar
BS Books

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Updated Date: Aug 05, 2014 14:44:53 IST

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