In the wake of many family-owned businesses running into trouble as in the case of Reliance, Bajaj, the Birlas, and a host of others, private banking has taken on a new spin with succession planning having emerged as a new area of interest.
Many family-promoted enterprises are asking banks to help them in succession planning. Preservation of wealth has become the mantra as private bankers are broadening their relationships with export communities and family-owned companies.
"One of our clients, a large industrial family, was about to break up. Through our advice on estate planning, we are trying to bring the family together," said Romesh Sobti, executive vice-president and country representative, ABN Amro Bank NV (India).
He declined to name any of his clients, but that many of them are small and medium enterprises.
Earlier advice was taken from lawyers and wills were made for the final settlement. Today many industrial families are approaching their bankers to help them plan and sort out what would happen to the family wealth after their demise, added Sobti.
The recent example of the two Ambani brothers would be a case in point. "Three to four deals have come through of late, where the industrial family has fortunes to the tune of Rs 50-100 crore (Rs 5-10 billion) and is looking to preserve this wealth for generations to come," said Sutapa Banerjee, senior vice-president, head-private banking, ABN Amro.
Owner-promoters of SMEs need help in succession planning with the setting up of trusts, she added.
Clients are asking their private banks to help in succession planning or trusteeship services as many fear their offspring would squander the accumulated family wealth.
Demand for discretionary trusts for the preservation of wealth has emerged as a new business avenue for banks offering private banking, said a senior HSBC official.
"Considering the amount of wealth being created in the country by first generation entrepreneurs, there is demand for the setting up of trusts to protect this wealth against the second generation frittering it away," said the foreign bank official.
Trusts in the western countries generally stem from the need to ensure against sizeable depletion of wealth through the payment of estate duty and other government taxes in the event of death of the owner.
This is especially true in the case of UK and European countries, where inheritance tax can take away 30-40 per cent of one's wealth. In India, however, there is no inheritance tax.
However, since the last budget, gift tax has been re-introduced, thereby calling for the need for setting up trusts, stated senior tax lawyers.
"Estate planning is emerging as one of our focus areas," said Sobti. This is especially apparent among large family-owned businesses, where the demand is to ensure professionals manage execution, said Sobti.
Private sector banks have not witnessed this trend. "This applies more to joint families, and most of our customers do not fit into this profile," said Abhay Aima, country head-equity and private banking group, HDFC Bank.