July 2012
The trust concept has been in existence in India since the 1920s but the abolition of inheritance tax in the
1970s meant trust structuring fell out of favour. They are making a comeback but many generations have no experience of fiduciary structures and have been sceptical of their application for themselves and their families. However, there has been a gradual shift in the landscape where wealthy patriarchs and matriarchs are beginning to consider more formal arrangements in terms of succession planning for their businesses and their descendants.
Poor, or no, succession planning has resulted in familial disputes and expensive court cases and this alone has meant wealthy Indian individuals and families are taking the issue much more seriously.
Nerine Advisory Services Managing Director, Pranav Khanna, examines the structuring opportunities being considered in India and looks at examples of where things have gone right or badly wrong.
While the Indian government is still estimating a growth forecast for
2012/13 of over 7%, many others in the know have down-graded growth to anything from 5.5% to 6.5%. Even taking the lower growth estimates, the wealth management sector remains focused on the Indian market in terms of new business with some degree of certainty because there remain a growing proportion of wealthy families. Indeed, 36 wealthy families hold USD $191 billion – a quarter of India’s GDP. The Indian business environment is largely driven by these family-run businesses, public sector enterprises and professionally-managed companies. Family-run companies account for roughly 50% of the market capitalisation of publiclytraded companies in India and contribute to around 55% of GDP.
In recent years, India’s wealthy did not consider offshore wealth management structuring in any volume but there have been significant behavioural change in this area as a consequence of the increasing family disputes and legal cases. Now armed with a keener understanding of both succession and estate planning, wealthy individuals and families want a plan and look to offshore vehicles as part of wealth preservation and succession planning. In a country where discussion of death was virtually unheard of,
Indians have now started writing wills. The well-heeled, especially the newly rich, have become savvier about preparing for the inevitable and their favourite instruments of choice for bequeathing their riches: trusts and family offices.
The growing interest in trust funds can be attributed to two main factors: the changing mind set of individuals, especially wealthy professionals and first-generation entrepreneurs in the 35-60-year age group, towards succession planning and the rise of the professional wealth managers and corporate trustees.
Professionally-run succession planning is key for the sustainability of businesses. Traditionally, succession planning in family-run businesses has always been a hush-hush affair clearly depending upon the life expectancy of the founding chairman or patriarch; it has been an intuitive process with the family patriarch taking the decision as to who will take charge of the business empire. The
Hindu Undivided Family Act (HUF) had been very popular for succession planning but since 2008 it has become a little redundant and families are looking for structures which are more sophisticated and can cope with more complex arrangements.
If the statistics are to be believed, only 12-15% of family-run businesses survive through to the third generation and only 4-5%

go on to the fourth generation. Additionally, one third of the business families disintegrate because of generational conflict at the leadership issues.
Traditionally, family-run businesses focused on dividing the silver among the next generation rather than grooming the right person to take up the job. However, with changing times, family-run businesses need to ensure that the chosen successor has necessary education and skills and should be made to work his/her way up the management.
In the past family members (sometimes even far-off relatives) join companies as employees but demand legal ownership rights during division of assets. History shows that this situation should be avoided as dividing assets among so many claimants devalues the company. In the case of listed family-run business houses, the first step towards planning a strategic succession is to increase the holdings in various group companies. Companies such as
Ranbaxy, Murugappa Group and Eicher have been leading the behaviour change and been bold enough to appoint a professional manager when there is no suitable candidate within the family.
There is no question that those wealth management practitioners that have made a commitment to India, by having a permanent presence in the region, are best placed. The Indian market place is a dynamic one and respects “outsiders” who have invested time and effort in understanding the culture, the families and can get to grips with the changes that take place constantly.
In the last two years there has been a clear change in perception from Indian high net worth individuals (HNWIs) when it comes to both onshore and off shore structures. With the Liberal Remittance
Scheme (where families, including minors, can each remit up to
USD$200,000 to an offshore account each financial year) in place, most HNWIs are looking to have structures both in India and abroad. They have an appetite for bespoke structures where there is clear innovation. They are not looking to follow the western herd in terms of vanilla vehicles.
There are hurdles to wealth management in India from bureaucracy and red tape to the volatile stock market. However the opportunities are there. There is still vast wealth creation and India has the largest growing middle class in the world that is only getting richer.
While Mauritius was historically the offshore jurisdiction of choice, this too is changing. With growing financial sophistication many
Indian families are looking to quality jurisdictions that can demonstrate experience and expertise. In India perception is everything and recent bad publicity about Mauritius (coupled with the Indian government’s scrutiny of its double taxation treaty with the island) means that Singapore, Guernsey, Jersey and the British
Virgin Islands are now considered more favourably by HNWIs and they are prepared to pay a higher fee as a consequence.
With the globalisation of business, and the multiplicity of solutions required by Indian families and their businesses, no one jurisdiction can cater to all their needs. The key is to be able to offer a raft of services to the right families in India to meet their varying needs.
One way of achieving this is to have a global spread of expertise where the fiduciary company can provide a range of solutions in a variety of geographies.
This kind of proposition will become all the more compelling to families as they continue to see the benefits for their businesses and their families of sound structuring. What is not yet clear is just how many trust and fiduciary professionals are truly prepared to cater to India’s needs.
Where it went wrong
The Modi Group: The late Rai Bhadur Gujrarmal Modi founded
Modi in 1933 with a sugarcane factory. Over the years the business expanded into various industries and was led by Modi’s son
Chiranji Lal Modi and grandson Rai Bahdur Multanimal Modi and taken to great heights by his great grandson Rai Bahdur Gujarmal
Modie and his son Krishan Kuman Modi. Modi Enterprises included
Modi Sugar, Modi Vanaspati Mfr Co., Modi Paints, Modi Oils, Modi
Electrodes, Modi Lanterns and Torch works, Tube wells/drilling,
Modi Distillery, Modi Steels, Industrial Gases, Modi Spinning and
Wvg. Mills Co. Ltd., Modi Yarn Mills, Modi Threads, Modi Soap and
Modi Carpets etc. later on the business expanded into aviation, tires, cigarettes, tea plantation and retail stores.
By the late 1980’s most of the family business had been divided and diluted and, because of infighting in the family and the lack of a cohesive succession plan through the generations, the group lost most of its value. In the last ten years some of the group companies have started doing well again and very recently the group stated that it plans to have a proper succession plan in place soon.
The Reliance Group: was founded by Dhirubhai Ambani and was the richest group in India. The Reliance group invested in refineries, hotels, textiles, telecommunications, gas, petroleum, mining, insurance, hospitals, education, cinemas, retail and film production.
In spite of being one of the richest people in India, Mr. Ambani did not make a will and this led to a power struggle between his sons to control his companies. This struggle lasted two years and wiped close to USD$2billion from the group’s market share. Finally a settlement was reached. This whole dispute, played out publicly and through the courts, was a shock to the average Indian and many questioned how such a powerful Indian businessman had not written a will and left his affairs in such a mess.
The Bhushan Group: consisted of two companies, namely
Bhushan Power and Steel and Bhushan Steel with a combined turnover of $4billion. The patriarch of the family tried to arrange a family settlement and have a succession plan but it was disputed by two of his three sons who went to court and sued their father.
This carried on for ten years wiping out almost USD$1billion from the companies’ market value. Finally a settlement was reached within the family and the companies distributed.
The Birla family: the Birla’s are amongst the most famous and oldest industrial houses in India. They have been pioneers in the textile, cement, infrastructure, housing, automobiles and insurance industries with a market value of more than USD $70billion.
The group had a succession plan in place for most of the companies. In one family there was a dispute where Priyamvada

Birla, chairperson of the MP Birla Group, who passed away at the age of 76, left her entire USD $1billion estate to her accountant.
The Dabur Group: was founded by Dr. S.K Burman in 1884 and is now a multi-billion dollar business. Dabur is one of India’s bestknown brands. In the 1990’s the family decided to implement a proper succession plan where majority of the assets were held by a trust and the family divested itself of management control. The board of trustees appointed a professional CEO and the company has gone from strength to strength.
Ranbaxy: Before the chairman (Dr. Parvinder Singh) of the company passed away he ensured that there was a succession plan in place and that the management was in the hands of professionals. Although his two sons (Malavinder Singh and
Shivinder Singh) were working in the companies (Ranbaxy
Laborites, Fortis Hospitals and Religare) they did not have senior positions until they were trained and ready to take over the reins of the business. The transition was smooth and there were no disputes.
RPG Enterprises: In the recent succession plan chalked out by
RPG Enterprises, Group Chairman R. P. Goenka segregated the ownership and control of various group companies among his sons, Harsh Goenka and Sanjiv Goenka, with the former named as chairman and the latter vice chairman. The business will, however, continue to run the same way with each brother continuing to control and run the companies they were handling previously.
The Tata Group (which is the largest trust in India) too is on the lookout for a successor to Ratan Tata, who retires in 2012 and for other group companies too, as the Heads of Tata Steel and Tata
Motors head toward retirement.