INDIA Trends and Developments Contributed by: Akshika Harikrishnan, Mohona Thakur and Nikhil Asrani, Khaitan & Co
the family business. The authors are increasingly wit - nessing several family businesses where one or more members are not actively involved in the business. While ownership and economic interests are aligned, the focus is on ensuring operational control with the active members to ensure uninterrupted decision making for the business. Family businesses are also walking the path towards professionalising the business. While they will contin - ue to play a role in providing strategic direction to the business, when it comes to handing over the reins to management, the approach is moving towards iden - tifying the right person – who could be either a family member or a professional. In several cases, promoters are future-proofing their businesses by professional - ising, diversifying, deleveraging, embracing AI and other emerging technologies to enhance operational efficiency and competitiveness, and voluntarily adopt - ing ESG and other best practices. When there is no clear successor or there is a lack of interest from the next generation in driving these initiatives, families are also open to monetising the business. While family constitutions are put in place with a multi-generational mindset, at the other end of the spectrum the authors are witnessing several family businesses, particularly in their third or fourth genera - tion and beyond, entering into family arrangements and separating their businesses and assets. Diverse vision and interests create fissures in the relationships and families are amicably segregating their interests with a view to maintain peace, minimise disputes and preserve value. Hindu Divided Family? Rising trend of partitioning Hindu Undivided Family (HUF) With joint family systems increasingly changing to nuclear families, the HUF concept is becoming more complex to manage with the growing number of fam - ily members and dynamic changes at the points of marriage, birth and death. The interest of coparceners is not fixed and keeps fluctuating with the birth and death of members in the family. This shared owner - ship has led to several disputes on the interest and management of HUF property.
The concept of ancestral property vs self-acquired property under Hindu law often determines the way a legal claim on property is determined. While an ances - tral property automatically entitles coparceners of an HUF to a claim on the property, a self-acquired prop - erty can be passed on through testamentary instru - ment or in a manner as prescribed under succession laws. This is important because under Hindu law one cannot bequeath joint HUF property under a Will and only the interest and share in HUF property can be bequeathed. This restricts flexibility in managing and transferring the assets. With the popularity of HUFs declining, families are opting to partition their HUFs to ensure clear own - ership of assets and avoid future disputes. Navigat - ing the complexities of HUF partition requires careful planning to ensure equitable asset distribution. Initial Public Offering (IPO): unlocking value With an active and stable capital market, family busi - nesses and start-ups are exploring IPOs as an alterna - tive to a fund-raising. Several overseas-headquartered companies are reverse flipping their structures back to India primarily due to the global financial outlook and possible listing opportunities. IPOs are unlocking value not only for promoters and investors but also for employees incentivised through stock/incentive plans. This emphasises a shift towards shared wealth crea - tion and increased governance in business. With business governance, promoters are also acknowledging the need for family governance by putting in place a family constitution. As a part of this process, they are reviewing their ownership structures and consolidating their shareholdings through holding vehicles including trusts. Pre-IPO trust structures have lesser regulatory rigour and provide more flexibility in structuring the trusts including layering of trusts and appointing institutional, private trustee entities or close confidantes as trustees. Post an IPO, the Securities Exchange Board of India (SEBI) has made it manda - tory to obtain an approval for transferring listed shares held by the promoter and promoter group to trusts, and such trusts need to be in line with the conditions laid down by SEBI.
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