In this article, Abeer Sharma pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses How do families in India plan and manage succession.
India is a country where a good majority of people still live in complex joint family units. This tradition carries over into business, where 15 of the country’s top 20 business groups are family-owned and 79% of employment in the private organized sector is generated, thanks to family businesses. Family businesses have unique strengths that might not be available in other forms of business composition. Since the welfare of the family is tied into the health of the business, the people in charge tend to have a larger stake in the continued success of the business and it pushes them to give it everything they’ve got. A family business allows for a lot more flexibility in operations and allows more intra-organizational trust to foster. In fact, Indian family businesses are frequently considered “catalysts for growth” in the Indian economy. It makes sense, then, considering the proliferation of family businesses in India, that careful succession planning would be a priority for these businesses.
Succession planning is important for the long-term survival and health of the business. If there is no well-structured succession plan, then the business can devolve into squabbles between various stakeholders, each trying to grab a piece of the pie. This happens in all kinds of family businesses – whether it’s the family trying to decide what to do with the patriarch’s cloth manufacturing enterprise or whether it’s Mukesh and Anil Ambani engaging in a high-profile feud concerning the division of their father’s multi-billion dollar conglomerate. Furthermore, while traditional “wisdom” has been to give priority in inheritance to the first-born son, reality doesn’t generally conform to archaic notions of propriety, and a good succession plan should focus on handing over the reigns to an individual in the family whose skills will be best utilized in furthering the business. As business relationships become more complex, particularly with entities such as foreign corporations or government agencies, there is a strong requirement for new dealings with regulatory bodies, vendors, clients and all sorts of intermediaries. These bodies prefer to see stability and a sense of predictability in their business relationships so that they can trust their commercial partners. When there’s no succession plan, there is a whole bunch of uncertainty regarding the future of the business. The potential for a family quarrel, while fun to gossip about, is not something that makes continued dealings with an entity very predictable or stable. Considering the fact that family businesses can also control vast amounts of assets overseas, it becomes even more imperative that they minimize the risk of multiple litigations taking place across various jurisdictions.
Unfortunately, family feuds over succession aren’t exactly a rarity in India. As per a report published by PwC, only 15% of Indian family businesses have a robust succession plan. What this means is that there is the shadow of an axe continuously looming over the heads of 75% of Indian family businesses. While it is a popular cliche to insist that “blood is thicker than water”, it is never wise to take a gamble on the strength of family unity when there is an easier way to go about succession-related matters. Below I will explore some of the ways Indian family businesses can plan and manage succession:
A common-law definition for family settlement (or arrangement) can be found in paragraph 301 of Halsbury’s Laws of England, Volume 18, Fourth Edition:
“A family arrangement is an agreement between members of the same family, intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed right or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour”.
“The agreement may be implied from a long course of dealing, but it is more usual to embody or to effectuate the agreement in a deed to which the term family agreement is applied”.
As it can be inferred from the definition provided, family arrangements are generally governed by principles that don’t apply to dealings between strangers. The over-arching objective of the agreement must be an arrangement that benefits the family unit holistically. Such agreements may be oral, but it is always advisable to reduce them to writing and have them registered, as registration in line with the Registration Act, 1908 helps serve as a formal record of the settlement and helps prevent any needless litigious disputes later on. A family settlement must be bonafide, and the division of properties must be executed in a fair and equitable manner among all the members of the business family. It must be done in order to preserve peace or maintain harmony among all the family members. In all instances a family settlement should be voluntary and not be vitiated by factors such as fraud, undue influence, coercion or inducement. There are certain tax benefits in going for settlement, as a settlement which is reached so as to avoid any disputes in the family and to maintain good relations will not attract capital gains tax on transfer of assets between family members, as provided by section 47 of the Indian Income Tax Act, 1961.The precedent for this case was set down in CIT v. AL. Ramanathan .
Law of Wills
Wills are an ancient legal concept that have proliferated since the times of Roman Law. In fact, they could be considered the bedrock of all kinds of succession planning today. In india, the creation and execution process of wills is governed by the Indian Succession Act, 1925. A ‘will’ is defined in section 2(h) as follows:
“The legal declaration of the intention of the testator, with respect to his property, which he desires to be carried into effect after his death.”
It can therefore be seen that a will is effected through the intention of the owner of the property regarding how it will be treated after his death. A person who dies without leaving a will is said to have died intestate. When this happens, succession is governed by various personal laws, such as the Hindu Succession Act, 1956. Large conglomerates in India can comprise up to three living generations these days, therefore relying on intestate succession can be a bit risky and undesirable, as it can create friction and enmity among the members of the family and even harm the profitability and management of the business. If a large business group has multiple heirs, it is preferable to divide property with the help of a will and avoid any potential complications in the relations.
The person who writes the will is called the testator. In it, he names an executor who is responsible for administering the testator’s estate in accordance with the will and is so authorised by the Court. It is not enough for the will to be written, however. For it to truly be effective, it needs to first be proved in Court. Certain rules and principles are applicable in determining whether or not a will is a valid one. For instance, the testator must have possessed a sound mind while he was making the will; the testator must have made the will with free agency, and a will obtained by coercion, fraud, importunity or any other factor that infringes on said free agency is void. The will needs to be certified by the seal of a competent Court granting administration to the testator’s estate. This certification, known as a probate, proves that the will is genuine. The probate is also necessary in case one needs to claim immovable assets which are spread across various states.
If a will is found to be invalid by a court or if there is no executor or the named executor is unable or unwilling to act, then the Court will appoint an administrator to administer the estate. Depending on the personal laws governing the family, there might be certain limitations on the power to dispose of property by way of will. For example, under Hindu law or under the sanction of the Indian Succession Act, a testator has complete power to dispose of his property by way of will. If the testator is a Muslim, however, the testator can only dispose of 1/3rd of his estate by way of will. Any more than that will require the consent of his heirs.
A private trust is an increasingly popular option for families to plan succession while also protecting themselves from regulatory changes and onerous taxation. A trust helps ensure the separation of ownership and management of assets. Thus it is possible to protect family interests and provide for their welfare even if the beneficiary members are unable or unwilling to take care of the day-to-day administration of the assets.
There are two kinds of trusts – public and private. Public trusts are set up to be charitable in nature, to perform some sort of public good. On the other hand, private trusts are created by individuals or families with the objective of caring for their heirs.
In order to establish a trust, the owner (also known as the settlor/grantor/donor) has to transfer the property (known as trust property) to a person (the trustee) whose duty is to hold it for the benefit of another person (beneficiary). The legal definition of a trust as per the Indian Trusts Act, 1882 is as follows:
A “trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner. A private trust may be discretionary or it may be specific.
A specific trust is one where the interests of each beneficiary are already defined. In a discretionary trust, however, the beneficiaries may either all be specified or there may be an indicative list of beneficiaries which can later be changed. In such a scenario, the trustees have discretion to decide how the distribution will be made among the beneficiaries.
A trust of immovable property can be created with the help of a duly registered trust deed signed by either the grantor of the trust or the trustees. It may also be created with the help of a will. The procedure for creating a trust of movable property is similar, but ownership of the movable property must first be transferred to the trustee.
It is always advisable to design a trust carefully, so that control over group assets are guaranteed, the management control and economic interest are separated, the assets and income are diversified and distributed so as to minimmize risk, and assets are safe from potential claims by creditors.
Halsbury’s Laws of England, Volume 18, Fourth Edition
Income Tax Act, 1961
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Indian Trusts Act, 1882