by Zulfiqar Shivji
We are witnessing a shift in the Indian family business landscape in the light of evolving business dimensions and their impact on family wealth as an indicative of national income.
Despite the fact that Indian families are getting smaller and nuclear, family-owned businesses still own more than 65 per cent of India’s GDP and contribute to 90 per cent of industrial output. It is a logical derivative, hence, to say that the largest wealth residence is in family businesses.
With the advantage of long-term commitment to business, linear structures leading to quick decision making, ability to rapidly move with unconventional logic, it is easier for family businesses to bet on new opportunities and strike about 18 per cent return on equity as opposed to 14 per cent, states one of the global investment banks .
Since the ‘family’s name’ is at stake, promoters are willing to traverse the challenging business conditions and look beyond the way professionals do, at risks and rewards. Their business thrives on their goodwill in the market as their business ethics are defined on the bedrock of legacy values like long-term commitment and inherited relationships. A recent joint venture between Starbucks and the Tata Group can be an exemplary case of global confidence vested in a business that resounds value driven promise to the end-users.
At the same time family corporate houses are touted to flout protocols of professionalism, practicing nepotism incidentally resulting in infightings and mismanagement. Statistics suggest that just 13 percent of Family businesses survive until the 3rd generation & only 4 percent go beyond. One third of business families disintegrate because of generational conflict. Recently we have seen a large burger chain entering into India by forging a joint venture with a private equity player and not a family business house. However, the global trend of nuclear families, simplified corporate structures, higher professional involvement and openness to the investor and advisor community could possibly change dynamics that are to be seen in the next 10 to 15 years.
On the professional side revival of capital markets opened up a lot of investment opportunities where there is manifold growth in AUMs (assets under management) and creating innovative products such as solar energy projects, insurance, agro business opportunities and structured instruments.
The cross-border nature of such investment opportunities, changing residential status of the owners and beneficiaries and need for better management, control and jurisdictions, has given rise to evaluation of various structures to house wealth such as holding companies, limited liability partnership, trusts in India and offshore. These have been favorite topics of regulators in the respective jurisdictions and hence require a close evaluation from control, management, future dispute resolution and tax transparency perspective.
The Indian regulatory scenario is yet to become conducive to vehicles situated in multiple jurisdictions for holding family wealth. Regulatory considerations will become even more critical in the light of recent judicial precedence, evolution of substance and anti avoidance based regime.