Many heirs to a fortune? Plan in advance

Most companies don’t do any succession planning; family offices and trusts are the way forward


That lack of succession planning can lead to the disintegration of families is part of lndian lore. The stories of the Ramayan and Mahabharat have succession at their core, while Aurangzeb’s ascent to the throne of the Mughal empire in the 17th century by killing elder brother Dara Shikoh is recorded history. In contemporary times, the demerger of the Dhirubhai Ambani-led Reliance Industries remains one of the biggest examples of corporate splits in the absence of a succession plan.

“Succession planning provides an orderly framework for the transfer of assets and family values from one generation to the next, ensuring that the business remains with the family for generations,” says Soumya Rajan, chief executive officer, Waterfield Advisors, a boutique firm that offers advice on succession planning through family offices and trusts.

A report by Ambit Capital Pvt. Ltd, “Succession Planning by Family Owned Businesses in India”, cites an example of effective succession planning: “The Murugappa family (one of the leading business conglomerates in India) is now in its fourth generation and lives in harmony with family values and responsibilities that guide the family-owned business.”

Long road ahead

“The ultra HNIs (high net-worth individuals) like the Birlas have always followed a structured process for succession planning, such as a family office or trust. But when it comes to self-employed or first-generation HNIs and small and medium industrialists, not more than 2% are into it,” says Abhijit Bhave, CEO, Karvy Private Wealth Management (India and the Middle East), which also provides family office services.

Family offices are private wealth management advisory firms that offer complete investment solutions to individuals and families, tying up the taxation and legal ends, and resolving differences to avoid conflict later. Trusts allow a third party to hold assets on behalf of the beneficiaries, and can specify exactly how and when the assets pass to the beneficiaries.

S. Abhaya Kumar, executive director, Strides Shasun Ltd, and his sons Mayur and Deepak went in for a family office last year. “Succession planning is for value creation through clarity on roles and a structured way of passing on powers to the next generation,” says Kumar, who turned 60 in 2015.

The Kumars are one of the few business families in India to have a family office. Some others are the Murugappa family office, Azim Premji’s family office PremjiInvest, N.R. Narayana Murthy’s family office Catamaran, Nandan Nilekani’s Ent-rust family office and the Ambani Family. “There are less than 100 family offices in India at present,” says Bhave.

How to go about it

For the Kumars, the Murugappas, their family friends, were a big inspiration.

But unlike the two Chennai-based families, most business owners fail to plan seriously. “Smooth succession planning is something that takes time, and the handoff needs to be carefully planned and executed if it is to be successful,” says Rajan.

She suggests planning should begin at least 10 years before retirement to guard against unforeseen events like death.

Though Kumar does not plan to retire in the near future, the family is in the process of finalizing the draft, which takes care of individual needs. The plan also provides for the security of Mayur and Deepak’s families in their absence.

Family offices and trusts are recommended over wills. “Wills can be contested, but family offices and trusts are foolproof frameworks,” says Bhave. And therein lies a major challenge.

Challenges and solutions

A major issue is lack of awareness. “In tier II and tier III cities, businessmen still depend on traditional agents who do not provide holistic solutions,” says Bhave.

But the second generation, aware of global best practices, is coming to the rescue. Mayur, who has a master’s in management from Northwestern University, US, says he and his brother Deepak, who did his MBA from Cardiff University, UK, helped their father in setting up a family office.

The other challenge is to align interests. Traditionally, succession planning among ultra HNIs meant dividing assets among the next generation, but it is not that simple any more. Ultra HNIs are broadly taking two approaches to succession planning. “One, where ultra HNIs look at harmonizing expectations with the family members before drafting a blueprint; two is more about dividing the empire,” according to a Kotak report, “Top Of The Pyramid, 2016”.

“The aspirations of some of the family members were not aligned and that is when we realized that we should have a family charter,” says Kumar.

But the best person to carry the legacy forward may not always be a family member. “A common mistake that business owners make is assuming their kin will want to take control when the time comes. The next generation has to have the combination of wanting to take over the business and being good at it,” says Rajan.

“If the family members are taking over, they should be encouraged to get relevant college degrees, and assume a non-management position in the company to get a comprehensive feel of the industry,” suggests Rajan.

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