India calling

  • Author : Sunil M Shah
  • Date : December 2012
ABOUT THE AUTHOR: Sunil Shah is Director of Evergreen Family Business Advisors

The Indian market has been out of favour recently owing to a slowdown of the reform process. However, the new Finance Minister, Palaniappan Chidambaram, has unleashed a fresh wave of actions encouraging investment interest. Confusion about tax rules is also being cleaned up. The stock market recently hit a new one-year high.

The market has become very attractive for trust and estate professionals, law firms and family business advisors.

As economic power shifts to countries in the Asia-Pacific, India has been at the centre of attention, with its rising earnings and economic growth. Net foreign institutional investment inflows in 2012 up to 14 September amounted to USD13.19 billion, much higher than USD274 million in the corresponding period a year ago. That interest doesn’t look like it will slow any time soon. The high-net-worth individual (HNWI) financial wealth forecast (Cap Gemini Merrill-Lynch) indicates an annualised wealth growth rate of 12.8 per cent for the Asia-Pacific region, versus a global rate of 8.1 per cent up to 2013. And by 2013 it is expected that HNWI wealth in the Asia-Pacific region will surpass that of North America. As a result, India is an attractive target market for advisors of all types.

ABOVE: Mumbai, India’s wealthiest city and home of the reserve bank of india

Indian ultra-HNW mindset

In India, as in many other parts of Asia, there is a tendency for influence in the family to be centralised in one or two people. Gaining the trust of the patriarch and his inner circle is the key to business acquisition. Maintaining confidentiality and discretion are considered highly desirable qualities in any business association. Many Western companies have followed the joint-venture model, so they can lead the business with an Indian partner. Not surprisingly, most private bank heads are of Indian origin. Though not xenophobic, Indians are just emerging from an inward-looking mindset.

Wealth in India is concentrated with entrepreneurs and business owners. Sixty per cent of the market capitalisation of non-government-owned listed companies in the Bombay Stock Exchange 500 is accounted for by family-owned businesses. A first-generation family may have most of its assets in the form of equity holdings in its own family business, and typical portfolios vary depending on the evolution of the family. Second-generation families have high concentration in family-business assets, and beyond the second generation, real estate constitutes a significant chunk of the portfolio.

Indians have a high-risk appetite and look for high returns, creating demand for expert investment advisory as well as sophisticated investment channels.

ABOVE: Finance Minister Palaniappan Chidambaram

Concerns of Indian families

Indian businesses are predominantly family-owned. Several family businesses have grown over generations by recreating the business over time, restructuring the relationship between the family and the business and handling personality differences through governance mechanisms. All of them grapple with growth, governance, resource management, succession and culture. Over the past ten years there has been a growing recognition of the need for a more structured approach to family businesses.

As Indian businesses turn global, families need help in many areas. There is increasing recognition of the need to evaluate and engage international asset managers, especially for alternative asset classes. Indian families see the value of international service providers offering one-stop advice on overseas tax, legal and regulatory frameworks. Following the crisis of 2008, there is also an increased sensitivity to risk management, transparency and cost effectiveness of providers. Many HNW families are investors in other enterprises through direct minority stakes, as well as traditional private equity. Traditionally, however, they are happy to co-invest with other known families.

Products and services

As wealthy families move from first generation to the second and third, they seek advice, structuring and facilitation for family governance issues (such as family agreements) and family business structures (such as family business boards and family councils). Wealthy families also need leadership development for the next generation, especially the heir apparent.

Unlike in the West, there is no great demand for philanthropy-related services in India. However, as elsewhere in the world, there is a curiosity factor related to exotic investments such as art and stamp collection. Consequently, providers of luxury goods such as private jets, yachts, cars and fashion goods have flocked to India in the past ten years.

“As Indian businesses turn global, families need help in many areas”

The market for HNWI services is fragmented. Such families have traditionally been offered primarily wealth management products and the services of departments of private banks (Citi Bank is the leader in non-resident Indian services) and diversified investment banks (Kotak and Merrill-Lynch are key players). In response to the changing demographic and the needs of the wealthy, the boutique multi-family office is appearing in major cities. Typically, these rely on an advisory-cum-product-distribution model to sustain themselves. Some of these boutiques are spinning out their own speciality investment funds, such as realty. As in any other market, there is no shortage of family advisors, such as accountants and lawyers, who attempt to offer a broader range of services to their clients.

Regulatory landscape

The Reserve Bank of India, the country’s central bank, regulates banks and foreign direct investments into India, and fund-based activities of non-banking financial companies.

The Reserve Bank of India has received considerable appreciation for its conservative management of regulatory grey areas, and is well regarded among its peers.

The financial markets have their own independent regulators for the securities, insurance and commodities markets; the Securities and Exchange Board of India (SEBI), Insurance Regulatory Development Authority (IRDA), and the Forward Markets Commission (FMC). SEBI also regulates secondary market investment by foreign institutional investors, foreign venture capital entities and portfolio management services (PMS).

A multi-family office may engage in its business from any offshore location. If this practice is carried out onshore it may be advisable to seek registration as a provider of PMS under the SEBI Act. (‘Any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise), the management or administration of a portfolio of securities or the funds of the client, as the case may be, is a portfolio manager.’)

Following Lawyers Collective v Bar Council of India and others (2009), foreign law firms are not eligible to open liaison offices or to practise law in India.

India is a virgin market for experienced professionals focused on achieving long-term goals. However, like all Asian markets, it requires patience and commitment to the client relationship to get a taste of success. In the borderless world of the ultra wealthy, I would argue that the cost of ignoring this market will be completely unaffordable.


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