Why India Inc studiously avoids will while managing change of ownership
Premium- In most cases, the transfer of ownership happens during the patriarch’s lifetime.
The classified pages of the Mumbai edition of The Times of India on July 4 had an interesting advertisement. It was a routine notice and had no big names, but it held clues to how India Inc manages its inter-generational ownership transfers. For example, the recent change of management at some of Reliance’s new-age companies was seen as succession planning; did it also mean a change in shareholding structure?
Back to the public notice which was necessitated during the probate of a will and last testament. In the notice, a deceased person’s will and last testament had named a person – perhaps unrelated by blood – as a sole executor but the law requires that there are no disputes or challenges to the will before granting of probate. Hence a public notice was issued in the form of a classified advertisement to “all concerned", as well as to another specific person living overseas (perhaps a blood relative), to ask if anybody had any interest in the deceased person’s estate or wished to oppose the grant of probate.
Why was this classified ad significant? One simple reason: India Inc studiously avoids this process while managing change of ownership, usually from father to son, in either a group of companies or a single company. If anything, there’s risk writ large over this process; legal risk, if you want a specific category.
Let us say Dad wants to hand over Company A to Son through the instrument of a will. It is duly written up, the draft approved, the final version signed off by the testator (Dad) and two witnesses, the document registered and then finally submitted to the courts for grant of probate. Now along comes disgruntled Cousin who feels he should be the rightful heir and owner of the company. He challenges the probate in court and then, just like that, 5-10-15 years pass by before the matter is settled legally or otherwise. Or not settled at all.
The company, in the meantime, suffers from a management vacuum and indecision. Any major decision – large capital expenditure or profit-sharing – requires promoter sign-off and becomes difficult to obtain when the ownership of the company is embroiled in legal niceties.
There are many living examples. There’s a well-known case where a business owner and her husband, who had pre-deceased her, had no children. She bequeathed the entire group, including flagship infrastructure companies to a son of a senior associate of the group through a will and last testament. It’s more than 18 years since her demise and discovery of the will but the legal cases are still dragging on.
Most family-run companies want to avoid this undiluted risk.
In most cases, the transfer of ownership happens during the patriarch’s lifetime. The ownership structure of group companies and property is always ring-fenced from future litigation and dispute through multiple (and impenetrable) layers of special purpose vehicles, which could be in the form of joint stock companies or even family trusts. The ownership of these SPVs can always be transferred to the chosen son through a variety of mechanisms. One alternative is to gift the control of these SPVs because any gift between blood relations is tax-free. Another option is to induct the son as an equal shareholder in the controlling companies and then writing down the patriarch’s shares, leaving the son’s share as 100% of the written-down capital, and layering the transfer of ownership with some tax elegance.
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There are as many methods as there are family-owned businesses in the country. There is an entire army of lawyers, accountants, tax experts and consultants who specialize in this sort of structuring and re-structuring. Depending on the nature of the assets (which includes property), risks, personal cash flows, personal liabilities and tax issues, a structure is worked out. The transfer is also normally protected with an ironclad contract or shareholder agreement to avoid disputes raised by third parties.
So, is there no will at all? Of course, there is. But it is usually limited to only a portion of the testator’s personal wealth: some cash deposits, some fixed deposits, mutual fund investments, a bit of jewellery and perhaps some art. But the main assets – the controlling shares in the group companies and the various real estate properties across cities – are almost always kept out of the will.
There is intense speculation about the recent management changes in the Reliance group. Mukesh Ambani recently stepped down from the board of Reliance Jio Infocomm and his son Akash took over as the company’s chairman and managing director. This triggered some speculation whether Akash’s twin sister, Isha Ambani, would also be elevated to the top job at Reliance Retail, where she is on the board. Or the position being carved out for the youngest sibling, Anant Ambani. There was also the usual commentary about succession plans.
There is only one hitch in the entire story. Father Mukesh Ambani is still the chairman and MD of two critical companies in the group: Reliance Industries, which is the mother ship, and its subsidiary Jio Platforms, the holding company for all digital ventures. In a sense, he still controls the group’s monetary levers. This has led to some confusion about the changes taking place: whether Akash Ambani’s new position at wireless company Jio Infocomm is only part of a management restructuring without any change of ownership, or is this the first step in a complex chain of transactions set in motion to transfer ownership of specific parts of the conglomerate to specific heirs?
As the cliché goes: watch this space.