The Securities and Exchange Board of India (Sebi) is deliberating on a policy concerning family trusts to prevent any abuse of such structures by promoters, especially in cases involving corporate trustees and transfer of listed companies’ shares.
The number of promoters wanting to transfer their business assets, including shares of listed entities, to such trusts has seen a significant jump in recent months, according to market watchers.
At present, promoters need prior permission from Sebi before transferring shares of listed companies to a trust.
The regulator has been granting approval selectively, being apprehensive that the trust structure could be abused to benefit non-family members or transfer control outside a family. Sebi is especially uncomfortable in cases where the trustee is an external corporate entity.
“Sebi’s concern stems from the fact that it’s the corporate trustee and not the beneficiaries (family members) who will vote on shareholder resolutions for shares held in a trust. However, given that a trustee acts in a fiduciary capacity for the beneficiaries, Sebi should reconsider its reservation on allowing corporate trustees, as such an arrangement contributes in making a trust structure more robust,” said Anuj Sah, partner, Khaitan & Co.
There is also ambiguity with regard to the trigger of an open offer when shares are transferred in a trust. “Sebi has granted exemption from applicability of the takeover code where the beneficiaries and the trustee are the promoters. However, a similar exemption has not been granted in cases where the trustee is a corporate entity. This has resulted in a major hurdle for promoters wanting to park their investment in listed securities into a trust,” Tax & Regulatory partner at BDO India.
Under the takeover norms, one of the triggers for an open offer of equity is when an entity acquires 25 per cent or more in a listed company. The entity then has to make an offer to buy an additional 26 per cent stake in the company from the public shareholders.
An open offer during formation of family trusts need not ordinarily get triggered if there is no change in control and ownership and control of the trust is held with the same family members. However, promoters still have to seek exemptions from Sebi, given on a case-to-case basis.
“This is a concern, as promoters’ equity once transferred to an irrevocable trust is not their property any longer and the said equity is not available to any creditor,” said Rajesh Narain Gupta, managing partner, SNG & Partners.
Experts believe Sebi should consider simplifying the process of forming a trust, with guidelines pursuant to which such transfers can be undertaken without any prior approval. They also feel the regulator should spell out clear rules to ensure control of shares in a trust cannot be passed to an external party.
An e-mail sent to Sebi did not get a response.
A number of promoters have started forming family trusts in the recent past to ring-fence their personal assets from business liabilities. Additionally, there has been speculation for some years about introduction of an estate duty or inheritance tax, prevalent in developed countries such as the US or the UK.
Contribution of assets to a trust does not attract any tax, either for the contributor or the trust. The 2016-17 Union Budget had given rise to some ambiguity on taxability in the hands of a trust and this had led to a rise in the number of family trusts between February and March. However, the position was clarified and contribution received by a trust wherein the beneficiaries are relatives is not taxable.
Wealthy individuals have started relying on family trusts as a tool for succession planning. It is a simpler, less expensive and easier way of holding assets, as opposed to owning these in individual names or through other entities.
“The trust is an effective succession planning tool, as it is a perpetual entity, separates ownership and management of a business, provides for any eventuality like death or incapacitation, and decreases the probability of any legal challenge to assets,” said Mitesh Shah, co-founder, Credence Family Office.