Family Businesses

1. Family Businesses Challenges and Legal Solutions

2. INDEX • Introduction • Typical Business Family Structure • Succession – Issues • Legal solutions • Succession Planning • Specimen I- Trust framework • Specimen II- Business Hold Co model • How to get there- Process of Planning • Liberalized Remittance Scheme

3. Each business is unique and special Global family businesses are a backbone of any economy BUSINESS Legal & Lawful 1

4. Typical Business Family Structure • STAGE I : • STAGE II : • Marriages of S1, S2,D1 • Their spouse & children • Children’s education/ business opportunity [Requires planning] [smooth] 2

5. Indian Families Friends Cousins Grandchildren Role of Spouses Sibling rivalry In-laws • Emotions v/s Business Continuity (Insulation Required) Introspection needed • Why are we together? • Is business running well? • Is the structure alright? • Owners or Professional management? • Resistance to change? • Basis of business decision? 3

6. Mughal Dynasty Babur Humayun • Third generation witnessed disputes • Fifth generation collapse started • Patriarch arrested by sixth generation Akbar Jahangir Shah Jahan Aurangzeb 4

7. Succession - Issues How do you pass on the same values or principles? How do you divide responsibilities? Performers or non performers Pie becomes smaller New business ventures needed Maintenance of family wealth Preservation of family wealth Handling personalities Handling differences or dispute resolution Guaranteeing business continuity Proper legal and tax structures Distribution of powers Professional management Communication 5

8. No Succession Planning • Void created on the demise of the Patriarch • A vicious circle starts – This void impacts the decision making • Slow decision-making results in business slowdown • Business slowdown impacts the stakeholder's confidence • Lack of stakeholder's confidence impacts the overall credibility of the company • Impact on the credibility of the company, cripples the growth, resulting in the value of the company getting diminished • In case of divorce, trust deficit between separating spouses results in acrimony and in turn impacts the functioning of the business 6

9. Legal Solutions FAMILY • BUSINESS • Governance Mechanism • Family council • Family constitution • Addressing key issues: • Finance • Medical • Wealth management • Education etc. • Legal structures • Continuity • Succession • Insulate business from family emotions • Tax efficient • Structure depends upon: • Nature of business and vision of family • Family owned and controlled to listed entities • Domestic companies or ambition to acquire business overseas • Self funded or need for private equity/ debt 7

10. Succession Planning The concept of business succession planning is gaining ground as there is a need to protect and preserve their wealth from future uncertainties & inheritance tax Estate tax was levied in India till 1985 It is already a reality of developed nations like USA & UK (with tax rates upto 40%) Strong possibility that it might be re-introduced in India soon Accordingly, a family trust structure may be setup which will hold the entire stake of group companies, with family members [including lineal descendants] as its beneficiaries – the key benefits of trust structure are us under: • Enables separation of control and management from economic ownership • Shields against any future estate duty/ inheritance tax risks • Helps in ring fencing family wealth • Defines rights and obligations of each family member in the family business • Provides mechanism for effectively managing family disputes, if any 8

11. Specimen I – Trust Framework Sub-Trust 1 Sub-Trust 2 Beneficiaries could be Son 2 and his family Beneficiaries could be Son 1 and his family Beneficiaries More sub trusts for grand children can also be considered as beneficiaries. Also possible to add married daughters in the family as beneficiaries, as may be desired Master Trust Settlors (current owners) Asset owning companies Operating companies Other assets All the trusts can be discretionary trusts, with a view to provide full flexibility in decisions regarding whom to add beneficiary, how much to distribute etc 9

12. Specimen II – Business Hold Co model • No Group Hold Co created in this structure • Business Hold Cos created for businesses where multiple ventures are envisaged (such as real estate) • For rest of the businesses, stakes can be directly held by Family Trust – if any such business expands later on, the same can be undertaken in different company under the respective operating companies or directly under the Trust • Any divestment of such companies may be done at respective operating company level Promoters Family Trust Real Estate Hold Co Fintech Hold Co Fin SPV 1 Jewellery Commodity Mining Fin SPV 2 RE SPV 1 RE SPV 2 10

13. How To Get There – The Process Of Planning • Step 1 : Group family meeting(s) - facilitated by a family business advisor to define : • - Personal, family, business goals • - Values and vision • - Assess compatibility of generational objectives • Step 2 : One-on-one meetings of family members with the family business advisor to understand individual thoughts & objectives • Step 3 : Group Family Meetings • Step 4 : Collect and analyze information • Step 5 : Generate Options • Step 6 : Make preliminary decisions • Step 7 : Design, develop and formulate a succession plan • Step 8 : The succession plan is documented • Step 9 : Implement the succession plan 11

14. Liberalized Remittance Scheme (LRS) REGULATORY FRAMEWORK • June 2000 - Foreign Exchange Management Act, 1999 (FEMA) • February 2004 – Liberalized Remittance Scheme announced by Reserve Bank of India • Master Direction - Liberalised Remittance Scheme (LRS) • Under FEMA, all transactions involving foreign exchange have been classified either as capital or current account transactions • Current Account Transaction - Transactions other than capital account transactions that do not alter the assets or liabilities of the resident, including contingent liabilities, outside India • Capital Account Transaction - Transactions that alter the assets or liabilities of the resident, including contingent liabilities, outside India 12

15. Who Can And Cannot Remit Under LRS CAN REMIT • Individuals including minors who are persons resident in India (as per FEMA) CANNOT REMIT • Individuals who are not persons resident in India • Corporates • Partnership firms • Hindu Undivided Family • Trusts 13

16. How Much Can Be Remitted Under LRS • Up to USD 250,000 per financial year (April – March) • Remittances can be consolidated in respect of close family members - Each family member can invest up to USD 250,000 per financial year. • Clubbing is not permitted by close family members for capital account transactions such as opening a bank account or investment or purchase of property, if they are not the co-owners/co-partners of the investment or property or overseas bank account. • The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions. 14

17. Purpose Of Remittance • Allowed to freely remit for any permissible current or capital account transaction or a combination of both. • PERMITTED CAPITAL ACCOUNT TRANSACTIONS • opening of foreign currency account abroad with a bank; • purchase of property abroad; • making investments abroad- acquisition and holding shares of both listed and unlisted overseas company or debt instruments; acquisition of qualification shares of an overseas company for holding the post of Director; acquisition of shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration; investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes; • extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013 15

18. Permitted Current Account Transactions • private visits abroad, other than to Nepal and Bhutan; • gift to a person residing outside India or as donation to an organization outside India; • going abroad on employment; • emigration; • maintenance of close relatives abroad; • business trip; • medical treatment abroad; and • studies abroad 16

19. Prohibited Items Under LRS • Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000. • Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty. • Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market. • Remittance for trading in foreign exchange abroad. • Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time. • Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank of India to the banks. • A resident cannot gift to another resident, in foreign currency, for the credit of the latter’s foreign currency account held abroad under LRS. 17

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