By: Clay Chandler

October 31, 2005, Fortune International

Kumar Mangalam Birla was 28 when he inherited custody of his family's multibillion-dollar business empire. His great-grandfather had amassed a fortune by outsmarting British monopolists in the jute and sugar trade in the colonial era and had bankrolled Mahatma Gandhi's campaign for independence. His father, Aditya Vikram Birla, had parlayed investments in a handful of textile factories into a conglomerate with holdings in aluminum, cement, rayon, palm oil, and carbon black. But when Aditya died of prostate cancer, few knew what to expect from his son. Soft-spoken, almost shy, Kumar was fresh out of London Business School with barely two years experience as a middle manager in the cement business.cement, But when Aditya died of prostate cancer in 1995, few knew what to expect from his son. Soft-spoken, almost shy, Kumar was fresh out of London Business School, with barely two years' experience as a middle manager in the cement business.

In the decade since, Kumar Birla has lived up to the family name. Through restructuring, streamlining the group's business portfolio, and imposing stricter management discipline, he has grown the business nearly fivefold. He still speaks softly--but when he does, people listen. "We're very comfortable being a conglomerate," he says, rocking his chair onto its back legs at the group's elegantly appointed headquarters in Mumbai. "We have a proven track record of achieving superior returns."

For old-line Indian dynasties like the Birlas, comfort is a commodity that's increasingly hard-won. The demise of the license Raj--the byzantine nexus of politicians and bureaucrats that parceled out business permits until liberalization in the 1990s--has made it harder for the familiar dynasties to hold off newcomers. The burgeoning stock market has diminished the importance of family networks for access to capital. New technologies often favor smaller, more nimble players. Foreign multinationals are baying at the door.

Even so, family-run conglomerates remain the "backbone of the economy" and account for most of India's GDP, according to John Ward, family enterprise expert at Northwestern University's Kellogg School of Management. The affiliates of family business groups play a leading role in nearly every industrial sector, including petrochemicals (Ambani), steel (Tata), auto manufacturing (Tata, Mahindra, Birla), telecommunications (Tata, Ambani), and consumer products (Godrej). Even the nation's relatively new software industry counts family-led concerns (TCS, a Tata affiliate, and Wipro, 85% owned by cooking-oil scion Azim Premji) among its top performers.

The prevalence and sophistication of India's established dynasties make doing business in Mumbai or Delhi feel different than in Shanghai or Shenzhen. In China, the prominent business families fled or faced persecution by Mao's Red Guards. Those families have rushed back to invest, but the stolid apparatchiks appointed to manage the nation's state-owned giants and the scrappy entrepreneurs of its private sector tend to be a parochial lot, new to wealth and unsure of themselves beyond the Middle Kingdom.

In India, by contrast, the great families hung on to assets at home and sent their children abroad--to be schooled at Cambridge, Harvard, or MIT. India's business scions are at ease in Delhi or Davos, as adept at English as Hindi or Marathi, and thoroughly conversant in the language of modern management. They are men like Anand Mahindra, who studied art and photography as an undergraduate at Harvard, stayed on to earn his MBA, and now runs India's largest manufacturer of farm equipment. Over wine and kabobs in the elegant drawing room of his home on Mumbai's Malabar Hill, he extols the dedication of Mahindra's Houston sales force and teases wife Anu for her capacity to hold tequila. Or Gautam Thapar, head of India's largest pulp and paper company, who can talk with equal ease about the dynamics of doing business in the U.S., where he sells paper products; Belgium, where he has just purchased a $ 42 million transformer plant; or Spain, from which he's importing olives to stuff with pimentos grown in Bangalore for export to Russia.

Where China's state-owned companies have struggled to find their footing in global markets, India's family firms are quietly finding opportunities to leverage their wealth and business savvy overseas. Thapar's Belgian transformer plant is one of a string of international acquisitions by India's business groups that includes Tata's $ 350 million purchase of Britain's Tetley Tea and Bharat Forge's $ 55 million purchase of Sweden's Impatra Kilstra, Europe's largest manufacturer of front axles. "I fully expect the outward investments of Indian business to exceed the nation's inward FDI," says Godrej Group chairman Adi Godrej, whose family got its start in safes and soaps and now makes everything from aerospace components to hair dyes.

For many, however, the greatest challenge lies--quite literally--at home. India's business press carries tales of family feuding on a daily basis. The most sensational of those sagas played out this year at India's largest private company, $ 23 billion Reliance Industries, as the 2002 death of Reliance's founder, Dhirubhai Ambani, gave way to a bitter power struggle between his sons, Mukesh and Anil. The clash made for riveting copy--the flamboyant Anil, a marathon-running member of Parliament married to a Bollywood star, charging his shrewd and secretive older brother with stock manipulation and fraud--not least because 3% of India's GDP hung in the balance. In August the brothers (neither of whom would talk to FORTUNE) announced a settlement that leaves Mukesh in charge of the family's flagship, Reliance Industries, with control of the petroleum and petrochemical businesses, and Anil with responsibility for new businesses, including holdings in energy, finance, and mobile communications. Their mother, Kokilaben, who had little involvement in her husband's business before he died, brokered the peace settlement and reportedly will remain the largest shareholder.

Family feuds that spill into the boardroom aren't limited to India, of course: Witness the recent departure from News Corp. of Lachlan Murdoch, Rupert's eldest son. But Northwestern's Ward believes that in India the natural tensions inherent in any family enterprise are aggravated by the speed of change in the Indian economy and evolving attitudes about the role of the family itself. Should management control always pass to the elder son? Should daughters be given a corporate role? Should the family step aside in favor of professional managers? Ward discerns "great stress and despondency" among India's business dynasties as they try to cope.

At United Breweries, it is taken for granted that Vijay Mallya, who inherited the business from his father at 27, intends to turn it over to his 18-year-old son, Sidhartha. But in many other Indian dynasties, the transfer of power is more complex. Earlier this year the Tata Group, India's second-largest private conglomerate, deferred the question of finding an immediate successor to Ratan Tata, who has no direct heirs, voting to extend his tenure as non-executive chairman until his 75th birthday in 2012. At Wipro, the departure earlier this year of CEO Vivek Paul, a star executive wooed from General Electric, stirred speculation that Premji, 59, is unwilling to relinquish management control and hopes to pass the reins to one of his two sons: Rashid, 28, a student at Harvard Business School, or Tariq, who works at the Premji family's charitable foundation.

Family members who do take the helm must contend with the perception that they are little more than modern maharajahs, whose positions of power have come by birthright not by merit. "I would be a moron if I claimed that my becoming managing director had nothing to do with my last name," Anand Mahindra acknowledged in an interview a few months after his appointment. "My last name got me the job, but how well the company does from now on will decide whether I retain the job." Eight years later, he's still around, and shareholders are the richer for it.

The creation stories of India's oldest business families are entwined with the nation's struggle for independence. Kumar Birla's great-grandfather was inspired as much by his determination to smash iniquitous British trade cartels as by his desire for financial gain. Jamsetji Tata built the magnificent Taj Mahal Palace hotel in Mumbai out of indignation at being refused admission to a British establishment. But many of the great business families chafed at the restrictions imposed on enterprises by the Congress Party. In the 1970s, Kumar's father invested aggressively in factories in Thailand, devising an ingenious method to get around Indira Ghandi's capital controls. Asked if he shares his father's frustrations with over-regulation, Kumar demurs. "I'm a businessman, not a politician," he says. But he acknowledges that he is trying to reposition his commodities businesses further downstream to be closer to customers and away from the meddling of government regulators. If India's other big business houses can match the restlessness of the man who runs its oldest, there's good reason to believe they'll stick around for a few more generations.

The demise of the license Raj in the 1990s has made it harder for family dynasties to hold off newcomers and multinationals.

For many, the greatest challenge lies at home. India's business press carries tales of family feuding on an almost daily basis.