The Nerine Group of Fiduciaries has
become the first Channel Islands independent trust company to open an office in
India.
Nerine’s Indian resident Director Pranav Khanna examines the growth of the
Indian market and looks at why now is the right time for trusts in the growing
economy.

There are few
people unaware of the growing economy in India. Indeed some commentators it
will outstrip China’s
growth by 2015 and certainly those in the know are tipping a gross domestic
product of £6 trillion (around $9.99 trillion). Many see the potential of the
region across all business sectors and those offering financial services are no
exception.

Many might
believe that, because India’s
legal system is based on UK
law, that the path to Anglo trust structuring for wealth preservation and
family succession planning would be a smooth one. This is not the case. Indian
family law is complex. Each religion has its own specific laws which must be
adhered to. In some regions the registration of marriages and divorces are not
required which can make clear, concise succession planning rather more
complicated.

That said,
there is no question there is significant potential for those in trust who are
offering the right structures and understand the Indian market. In order to do
this it is important to look at the history of trusts.

After
independence in 1947, trusts were really only used by the Indian elite, of
which there were many, to ensure they held onto their assets. They transferred
their properties into family trusts to ensure they were not excessively taxed
and stayed in the family.

In the
1970s the Indian government removed any tax advantage that lay with setting up
a trust. With a tax rate of almost 90 per cent and all tax benefits revoked
there was little incentive to make use of trusts and the only ones in existence
were charitable and educational trusts.

Indians
were also not allowed to remit money abroad and foreign bank accounts, unless
opened with government consent, were deemed illegal.

During this
period families used wills as a method of succession and estate planning. There
was a range of different types of will on offer, mostly depending on the rules
each religion. The most popular was the Hindu Undivided Family Act (HUF) where all family
money goes to the common pool and all property is held jointly, across genders
and across generations.

However,
several factors in the past ten years have meant that there has been a
renaissance in trusts as a mode of succession and estate planning. One reason
is the rapid and broad economic growth which is setting the agenda for change
in a number of areas. The other, arguably, more significant reason is that
large businesses which have been overwhelmingly successful have remained within
the same family for more than two generations. Their needs have outgrown a HUF
or equivalent and they now need a structure that ensures optimisation and
continuity of ownership and management skills matching the business’ needs now
and in the future.

There remain
no domestic tax benefits for family trusts but they are considered the perfect
vehicle for succession planning. Three large and prominent businesses have led
the way in terms of innovative trust structuring.

Dabur India Limited is the fourth largest fast moving consumer goods company
in India
with revenues of $750 million and market capitalisation of $3.5 billion in hair
care, oral care, health care, skin care, home care and foods. Tata Sons is
involved in information technology/communications, engineering, materials,
services, energy, consumer products and chemicals and Reliance Industries
Limited deals with energy and exploration. Each of these family-owned
businesses have started using the trust structure in conjunction with wills and
or the HUF act. A trust in India
is more difficult to challenge that a will and this is attractive to families.

At the same time as the re-emergence of trusts as a solid financial
structure in India,
the government has relaxed its rules on remittance of funds abroad by resident
Indians. Every individual is allowed to remit $200,000 per year, including
minors. This amount is expected to rise to $400,000 in the next year.

As a consequence, high net worth individuals have started to accrue
assets outside India
that are subject to foreign taxes and laws. Working with expert advisors in
those jurisdictions, trust companies should be able to provide estate planning
and wealth management solutions which meet the needs of each client.

This new found Indian desire to look further afield and to diversify
their portfolios by investing in foreign equity and debt has not escaped the
attention of many of the world’s largest banks eager to offer up vehicles and
products.

Here is
where caution should be exercised if some of the more established offshore
jurisdictions are going to stand a chance of seizing the opportunities that India
has to offer. It is no good just to see the potential and dive in without
careful consideration of a number of factors which dictate the way India
does business. This kind of knowledge only comes from years of experience in
the region.

Those who
are keen to take advantage of the India’s burgeoning wealth but have no history
in the country may run the risk of alienating the very people they want to
court as clients; at the same time risking the firm’s reputation and that of
the jurisdictions they represent.

It is my
experience that the wealthy families and HNWIs in India are happier to smaller,
boutique firms not just the larger corporate institutions. India’s wealthy
are attracted to face to face relationships built on mutual trust over time.
They are very family-oriented and seek out service providers in all fields who
demonstrate a similar focus. They are astute business people but underpinning all
they do is a desire to ensure those they work with treat them with respect and
understand their motivations for business.

The key is
to be able to offer a raft of services to the right families in India who are looking beyond Mauritius. One
way of achieving this is to have a global spread of expertise where the trust
company can provide a range of solutions in a variety of geographies.

One of the
strengths of India’s
economy is a "can do" approach to business. If client solutions are
to achieve the objective of planning to protect future generations, those
wealth management businesses seeking the work need to adhere to the highest
professional standards.