Planning succession via Constitution

PERSONAL FINANCE

When Grandhi Mallikarjuna Rao, chairman of the GMR Group, made a Family Constitution a few years ago, he included intricate details such as the minimum qualifications required by the family members to enter business (management graduates), their remuneration and perks, and even the car they would drive.

Of course, none of these conditions have any legal binding and it is completely up to the individual family member to agree and follow them. But the process of succession planning in family-owned businesses is becoming more professional.

And GMR’s Rao is not alone in seeking professional help. According to industry sources, business families like the Murugappa group, the family of Venu Srinivasan, promoters of TVS Motors, the Dalmia family, promoters of Dalmia Cements and the Godrej family have already started this exercise.

Helping them are international wealth management companies like DSP Merrill Lynch, Credit Suisse, JM Financial and the country’s largest private sector bank, ICICI Bank.

According to Pradeep Dokania, managing director and head of global private clients, DSP Merrill Lynch, more business families are opening up to the idea of doing succession planning through wealth managers.

Simply put, succession planning is a process where the family’s wealth and business from one generation is passed on to the other by adhering to certain parameters.

The procedure requires a complete analysis of all the assets in the family and their division, according to the abilities, or sometimes interests, of members.

For instance, some members may not be interested in their family business. The planning has to take all these considerations into account. The process is also time-consuming.

Normally, it takes at least three to six months and several meetings with the various stakeholders to decide upon the division of wealth and business. Once the right division has the consent of everyone, the assets are transferred to a trust.

The trustees then have to make sure the wishes are executed as per the wishes of all the stakeholders.

“For all the legal purposes, this trust is at par with any will,” added Dokania. For those families, who want to preserve the moral values along with the wealth, opt for a more strenuous exercise — Family Constitution. “In a family constitution, only asset-related matters have legal value. Other things are only morally binding,” said a retired banker, who takes care of the family constitution of a business family.

As far as wealth management companies go, they have set up different processes to educate families. For instance, DSP Merrill Lynch conducts customised classroom courses for the children of these families.

“The children and other family members, who are not part of the day-to-day business, are educated about their business and wealth. The courses are conducted to ensure that all members understand the family assets and ownerships,” said Dokania.

However, such services are not for one and all. For a family-business, which wants professional help, the minimum wealth required is at least a million dollars’ worth of assets.

Some, like Credit Suisse, also look at scalability of wealth. “Though we start with $1 million, we look for clients whose wealth can be scaled up to $3 million,” Puneet Matta, head, India (wealth management) Credit Suisse Securities.

Also, the cost of these services can be quite steep. According to Anil Sainani, a family constitution consultant, the client has to spend upwards of Rs 25 lakh for succession planning.