Indian billionaire Mukesh Ambani's succession plans may have initially failed to excite investors, as shares in his conglomerate Reliance Industries fell after he recently revealed that his three grown children would join its board.
However, the market reaction is short term and investors are likely to be won over in the longer term, some analysts say.
Mr Ambani, 66, India and Asia's richest man, announced the decision to appoint his sons Akash and Anant and daughter Isha to the board of the $200 billion conglomerate at Reliance's annual general meeting last week.
His wife, Nita, is stepping down from the board.
Mr Ambani is to remain chairman and managing director of the company for five more years, during which time he said he would “groom and empower all the next-gen leaders at Reliance and prepare them for the challenges and opportunities of the future”.
Reliance's share price closed down 1.1 per cent on the day of the announcement and ended the week down 2.37 per cent.
Succession planning for Reliance Industries is being closely watched, as the interests of India's largest private sector corporation spans several sectors, from oil to telecoms. The company which was founded by Mukesh Ambani's father, Dhirubhai Ambani, in 1958, began life as a textiles company.
“Market reactions to significant leadership transitions, especially in a conglomerate as influential as Reliance, often exhibit short-term volatility and apprehension among investors,” says Parul Saxena, associate professor, management, at Sharda University in Noida in north India.
“It's not uncommon for investors to react cautiously when experienced leadership hands over the reins to a newer generation, even if the successors are well-qualified and capable.
"These short-term apprehensions can be attributed to concerns about how the new leadership will navigate the company's future and whether they can maintain or even improve upon past performance," she says.
Investors may also worry about changes in strategy, decision-making, and risk management, Ms Saxena says.
But she believes that the transition is part of the “natural evolution” of a successful company.
“As the next generation of leaders settle into their roles, gain experience, and demonstrate their abilities, investor confidence typically stabilises and even strengthens over time,” says Ms Saxena.
Investors will be assured by the conglomerate's strong track record and its ambitious plans for the future as long as it maintains its commitment to transparency, corporate governance and delivering shareholder value, she says.
Mr Ambani is well aware of some of the challenges that can come with passing on a company to the next generation when there is not a clear succession plan.
His father died in 2002 without leaving a will. This resulted in a bitter public feud between him and his younger brother Anil, ultimately leading to their mother having to intervene and their father's conglomerate being carved up between the two siblings.
Widely perceived as a shrewd businessman, Mukesh over the years managed to expand Reliance Industries, while Anil, who was once the sixth richest person in the world and at one stage wealthier than Mukesh, has not fared well in recent years. In 2020, he said that he was bankrupt.
Experts said that Mukesh Ambani has carefully thought through the strategy of his succession planning over the year and is placing his children at the helm of different verticals to avoid a repeat of the situation he faced after his father's death.
“The Ambani family is getting serious about succession,” says Suman Bannerjee, chief investment officer at Hedonova, a hedge fund which invests in alternative assets.
Mr Ambani's children have already been heavily involved in Reliance and have taken on increased business responsibilities in recent years.
Akash, 31, who has a degree in economics from Brown University in the US, became the chairman of the group telecoms company Jio Infocomm last year.
His twin sister, Isha, who has an MBA from Stanford University, was appointed as the head of Reliance Retail last year. At the same time, the youngest of the siblings, Anant, 28, became the leader of Reliance's new energy business.
“The careful grooming and mentoring of Isha, Akash, and Anant Ambani for leadership positions within Reliance's diverse business segments indicates a well-thought-out plan to ensure a seamless transition of power,” says Anirudh Garg, partner and head of research at Invasset, a portfolio management services firm in Mumbai.
He says that the move makes "sense” from a business perspective.
“It offers stability and reassurance to investors and stakeholders by clearly delineating the company's future leadership,” says Mr Garg.
“Moreover, the division of responsibilities among the Ambani siblings across different sectors, including green energy and financial services, demonstrates a forward-looking approach to diversification and risk management, which can be pivotal in sustaining the conglomerate's growth trajectory.”
It is common for markets to react cautiously to such transitions, particularly when they entail a shift from a long-established leader like Mukesh Ambani, he says.
“Concerns may linger about the seamless execution of this transition and whether the next generation of leaders can uphold the company's historical growth trajectory,” says Mr Garg.
“However, it's crucial to keep in mind that markets tend to adapt over time as the new leadership's competence and strategies become more evident. If the Ambani siblings prove their proficiency in guiding the company effectively, it's plausible that investor confidence will gradually strengthen, potentially leading to a more favourable long-term outlook.”
Mayank Joshipura, associate dean and professor of finance at the School of Business Management at NMIMS University, Mumbai, says that there is a “difference between nepotism and proper grooming of next generation of the largest shareholder and promoter group into the management” that has to be understood.
“The whole argument of separation of ownership and management has emerged from the West, assuming the large shareholders will compromise the interest of small shareholders and leads to corporate governance issues,” he says.
But bringing in family members means that there is “continuity” and “skin in the game”.
“The clear division of responsibilities and business units among the next generation will also provide each business to chart its own growth strategy and it will benefit from the visionary leadership of Mukesh Ambani in the initial years,” says Mr Joshipura.
He believes that “one should not read too much into the market reaction”.
“If you see examples from the past related to succession related uncertainties markets have reacted very nervously with large fall in stocks on account of change in CEOs and related announcements,” he says.
In fact, investors are less concerned about Reliance's succession planning and more concerned about its expansions in areas that are not core to its business, including the fast-moving consumer goods and financial sectors.
This makes some “investors nervous [who] might think, ‘is Reliance spreading itself too thin?',” says Mr Joshipura.
“Experiments of many other businesses into unrelated ventures where they do not have core competencies have not yielded great results and that could be the reason most Reliance Industries group companies have delivered negative returns over last one year.”
Mukesh Ambani has announced that he expects Reliance's value to double by 2027, as it continues to focus on an aggressive roll-out plan of its 5G network, expand its green energy portfolio, and enter the insurance sector.
But “investors have all the reason to be nervous about Reliance Industries channelising resources into too many unrelated businesses”, says Mr Joshipura.
“Despite Reliance's phenomenal track record of project executions and business launches that remains a valid concern.”
