A large number of mergers and acquisitions (M&As) in India take place between businesses whose directors belong to the same caste group, a study by IIM Bangalore found.
After studying over 1,000 merger and acquisition deals struck between 200-2017, IIM-Bangalore revealed that in nearly 50 per cent of the cases, boards with a higher representation of Brahmins had opted for mergers with firms whose boards were similarly dominated by members of the same community,
Caste preference in the corporate world was also prevalent among other castes, including Kshatriya, Shudra, and Vaishyas, according to the IIM-B paper titled Firms of a Feather Merge Together: Cultural Proximity and Firms Outcome.
Narrowing it down further, castes within castes, or Jatis, also paint a similar picture. Agarwals often signed deals with companies with Agarwal directors, and Maheshwari dominated firms acquired those with Maheshwari directors.
According to the study, merging with companies which have similar caste representation can harm the business prospects of the deal. “Stock markets penalize mergers between firms of the same caste; the values generated for both acquirer and target in same-caste deals are lower than in other deals. Aspects of negotiation between the firms, such as the premium on the target firms’ book values that acquirers pay, or the time they take to complete the deal, also do not improve,” the study said.
However, such mergers do personally benefit the directors when it comes to compensation, the study said. Directors belonging to the dominant castes of the acquired board enjoy a higher compensation — an average of over 400 per cent increase as compared to 200 per cent of directors of a different caste. The probability of retaining the top position is also higher when the corresponding directors of the acquired company belong to the same caste.