Nandan Sharma (name changed) started a business in distribution of electronics in 2007. The industry on speed, Sharma’s business grew, trebling profits each year. From the dividend income, Sharma bought a plush house and a luxury car, and salted away for his children’s education.
He then expanded using bank loans, which were backed by personal guarantees. This time, however, things didn’t go as planned. Sharma struggled to service the loans and banks threatened to invoke his personal guarantees and seize his personal assets. At stake was his wealth of Rs 60 crore. A customer-investor bailed out Sharma and protected that personal wealth for now.
The crisis over, among the first calls Sharma made was to a legal firm, inquiring about legal structures that erected a wall between business interests and personal assets. The law firm helped Sharma create a trust for the business and holding structures for personal assets that insulated one from the other.
A similar thought is on the minds of several entrepreneurs. “Since the Vijay Mallya wilful default issue, many people are waking up to the fact that personal assets should be protected from business risk,” says Rajesh Narain Gupta, managing partner of SNG Partners, a law firm based in Mumbai. This is one kind of inquiry, arising because of the economic downturn over the past three years, that is increasingly coming the way of wealth-management practices of legal firms.
Even the work done by this practice around tax planning and inheritance issues in family businesses is becoming more layered. Wills are now a given among business families and high net worth individuals (HNIs). What’s gaining traction is crafting legal structures for protecting family wealth from materialistic spouses, allocations to differently-abled children, deterrents for sibling exits in a family business, insulating businesses from family disagreements, income distribution and foreign-settled children inheriting property in India, among other things.
“The revenue potential (of the wealth-management practice) is tremendous,” says Cyril Shroff, managing partner at Amarchand & Mangaldas & Suresh A Shroff & Co. “In fact, it is one of the biggest ones.” Amarchand has doubled this business every year for the last three years. Elsewhere, Nishith Desai, managing partner of Nishith Desai Associates, points to the wealth-management practice throwing up cross-selling opportunities. “This practice is not about the money it makes, but the contribution we make to our other practices,” he says.
Both Shroff and Desai, though, agree this practice is coming of age. Shroff explains there is demand across generations, for different reasons. The first-generation wealth creators from the 1991 period are on the lookout for solutions and sometimes don’t know where to start. And second generation promoters who have studied abroad have seen trusts at work. As a result, clients are becoming younger.
The family of industrialist Vikram Thapar has a legal agreement with a clause that spouses will be inducted into the business — and remunerated — as professionals and not as family members. “We had some pretty divisive arguments, but eventually, everyone came to the conclusion that this was the best way to ensure the future generation has this wealth,” says Thapar, of the agreement drawn up by SNG Partners.
Thapar has two children, Ayesha and Varun. While Varun is single, Ayesha recently married, for the second time, to Nikesh Arora, previously
a senior executive of Google globally and now vice chairman of Softbank Corp.
Typically, family businesses use wealth-management services to avoid conflicts in the business or, in case of one, to have a set of rules by which to resolve it. Urvi Piramal, chairman of the Ashok Piramal Group, initiated an agreement for her sons around five years ago. Having seen a family separation after the sudden death of her husband Ashok Piramal, elder brother of Piramal Healthcare chairman Ajay Piramal, she decided this was better done in advance.
“When you have no immediate vested interests, it is easier to be objective of how the sharing will work,” says Mahesh Gupta, group managing director of the Ashok Piramal Group and a family confidante. The trust agreement — drawn up after six months of discussions between family members — defines what will happen if one of the three brothers separates, ventures into a new field or moves to a non-executive role.
A lawyer, who represents a leading law firm and who spoke on the condition of anonymity, says four to five medium-sized companies or their promoters were signing on every day. Further, he added, three of 10 HNIs using these services were protecting illegitimate children or alternate families.