India: Succession Planning In Real Estate Business

Last Updated: 30 January 2015
Article by Sunil Tyagi and Jayshree Navin Chandra

In a dynamic economic climate, sudden and unexpected change in the ownership and management of a business is a cause for concern for both internal and external stakeholders. To inspire confidence in an entity's long-term prospects and protect continuity and performance of the business, entities engaged in real estate business and development must adopt a strategic approach to succession planning. In fact, one of the most crucial governance responsibilities of a Board is to implement best practices in the area of succession planning.

As there is no universal or uniform approach to business succession planning, numerous factors must be considered including practical and commercial aspects of the business concerned and circumstances that are unique to an entity. An effective succession strategy balances and harmonizes the interests of all stakeholders. Unfortunately, such efforts are often ignored or improperly executed. The main issues can be broadly categorized under three heads – ownership and passing on of business to second/third generation; takeover of management responsibilities; and Tax planning.

As far as succession planning is involved, family-owned businesses in the real estate sector face unique challenges. The important question that needs to be addressed in succession planning is the role of family members – what shall be the nature and extent of each member's ownership as well as width of responsibilities, and whether these individuals possess the requisite skills and acumen to run the business competently. Families who consider themselves unequipped/under-equipped to handle the day-to-day running of the business, may opt for external management for executive roles. However, key portfolios as well as managerial positions are generally retained within the family.

It is desirable to involve family members from the very outset, to disentangle family feuds from succession planning and to recognize that ownership and management do not have to be necessarily combined. For instance, it may be viable in some cases that ownership of an entity be transferred equally to some family members, even though only one/few are given managerial responsibilities. As family members may have different long-term business aspirations for the entity, drawing up the succession plan in writing and involving them in open dialogue can help prevent misunderstanding leading to bitter disputes and breakdown of the family business. The aim is to ensure the continuity of family's welfare as well as wealth and business legacies.

The first step is determination of the most efficient mode of transfer of family stakes (whether wholly or in part) to the next generation. Succession of family-owned assets and interests in a business can be effected through various modes depending on the goals to be achieved and the challenges thrown due to sensitive family dynamics. If desirous of completing the transfer during one's lifetime, outright sale, making a gift and setting up a trust are some popular modes employed. On the other hand is the more traditional mode of bequeathing one's assets under a Will, where the transfer takes effect upon the testator's demise. The Will should clearly set out the specific bequest to each beneficiary and appointment of a competent executor. In the absence of a Will, succession of one's assets is governed by the rules of intestate succession under personal law – these rules may/may not be favorable from the point of view of competency and leadership ability of the beneficiaries.

Family trusts are increasingly being used as a more secure vehicle to protect wealth, especially since one can be both Settlor and one of the beneficiaries at the same time. This mode also does away with the apprehension of long-drawn legal disputes on alleged authenticity/validity of Will. Creating a trust fund can act as a buffer against unforeseen contingencies and business failures. A trust can be revocable or irrevocable. Revocable trusts are ideal where the Settlor is desirous of retaining control over the income and/or assets of the trust. Such a trust can be dissolved once it has achieved its stated purpose. Revocable trusts are a popular mode employed for separating one's personal wealth from the business. On the other hand, if the objective is to permanently transfer one's assets in favour of legal heirs, an irrevocable trust is preferable. Other issues to keep in mind include objects of the trust, appointment, remuneration and removal of trustees, powers of trustees, trust property, etc. Keeping in view the complexities of the business of real estate and the family hierarchy as well as the goals proposed to be achieved by the family unit, an effective succession structure is required in place and necessary documentation to effect smooth transfer must be drawn up by legal experts. For example, conflict situations amongst family members and management can be prevented by executing a well-drafted Shareholders' Agreement.

Choosing the best option is also intricately linked to undertaking the valuation of a business – whether it is a purely family-owned business or only part of it is family-owned and the remainder is held by public or other outside entities. A comprehensive business valuation shall take into account numerous factors including financial history, current and projected performance, debt liability and investments, existing and projected industry and market conditions. Though there are numerous models and methods in place for valuing a business, it remains a subjective exercise, depending largely on judgment and projections.

Succession plans are equally about efficient transfer of managerial responsibilities to the next generation. The first step should be to identify the challenges that the real estate business is facing and is likely to confront in the near future. Potential successors can be then identified whose competencies and skill sets are closely aligned to the entity's long-term strategic goals. These individuals must have a sound understanding and appreciation of all business verticals – finance, legal, human resources, operations and management, marketing, etc. The search for prospective successors can be conducted either internally (within the promoters' family) or within trusted and long-serving employees/directors. Prior to the handover, the potential successors should be given the opportunity to work alongside and under mentorship of the present leadership. They must also be exposed to the working and challenges across different business verticals. The earlier the prospective successors are identified, the longer their training period which facilitates steady handover of the leadership.

Tax implications must also be taken into account when framing a business succession strategy. The choice of a mode of transfer of family stakes is also affected by direct tax implications. Long-term and short-term capital gains tax implications as well as tax exemptions/reliefs that are available are some factors that must be considered. For instance, capital gains tax is leviable on transfer of assets by sale, but is not leviable when such transfer is by inheritance/upon death of the benefactor. Further, there are differential tax implications on what is being transferred – whether it is a transfer of shareholding or a transfer of business assets. Though the concept of estate duty/inheritance tax does not exist in India, beneficiaries in certain countries may be liable to pay the same on their inheritance. Further, stamp duty is payable on setting up of Trusts and by transfer of assets by gift or sale. In India, stamp duty rates applicable may also differ from State to State. Keeping such factors in mind, tax-efficient succession structures can significantly reduce tax liability, and the entity can invest its tax savings back into the business or in other avenues.

It is never too early to start planning. Given the crowded real estate market, the creation of trust and security amongst customers definitely gives a competitive advantage. Moreover, second generations have often infused fresh ideas and innovative approaches into the business. Timely succession planning of a business can help mitigate family/stakeholder discord and public acrimony. It promotes frictionless operation of business affairs during the transition period, makes entities less vulnerable to takeovers and prevents damage to value and brand image. By projecting security, a real estate business can also maintain its relationships with suppliers, protect the morale of employees and garner stakeholder support.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions