A trust is an arrangement by which the property of the author of the trust or settlor is transferred to another, the trustee, for the benefit of a third person, the beneficiary. In general terms, trusts fall into one of two categories, private trusts and public trusts.

The India Trusts Act, 1882 (act) governs private trusts. Public trusts are further classified into charitable and religious trusts, and the Charitable and Religious Trusts Act, 1920, (CRTA) the Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, the Societies Registration Act, 1860 and the Bombay Public Trust Act, 1950 are the statutes most commonly relied upon to determine the recognition and enforceability of public trusts.

Charities are mentioned in schedule seven of the constitution and therefore both the central and state governments have jurisdiction. Statutes of the state in which the charity is registered therefore also apply.

Public trusts set up and declared by means of a non-testamentary instrument, apart from any state-specific legislation are required to be registered under the Registration Act, 1908. While India has not ratified the Hague Trust Convention 1985, trust laws give due recognition to the principles in it regarding the characteristics, existence and validity of trusts. The act gives the author or settlor and the trustee wide powers to respectively establish and manage the affairs of the trust, particularly with regard to its property. This is provided that the trust is established for a lawful purpose and does not contravene the provisions of any other law.

The Trust creator, sometimes known as the ‘Grantor’ or ‘Settlor’, is the person who started out as the owner of the property that is to be transferred to and held by the Trust.

The Trustee is the person or financial institution (such as a bank or a Trust company) who holds the legal title to the Trust estate. There may be one or more trustees. The trustee is obligated to act in accordance with the terms of the Trust for the benefit of the Trust beneficiaries.

The beneficiaries are the persons who the Trust creator intended to benefit from the Trust estate. The rights of the beneficiaries depend on the terms of the Trust.

A person may set up a private trust under a written instrument; that is, either through a will (testamentary trust) or through a written trust deed during the person’s lifetime. A trust having immovable property and created through a non-testamentary instrument has to be declared through a registered written instrument (section 5 of the Indian Trusts Act 1882).

India, being a common law jurisdiction, not only acknowledges the concept of trust, but also recognises trusts governed by other jurisdictions. Depending upon the need of the settlor or family various trust structures are prevalent which include discretionary, non-discretionary, revocable, irrevocable, specific, general, determination linked to happening of an event or non-occurrence of an event. In a private trust, one has to be conscious to address the rule against perpetuity as provided for by Indian laws, which imposes a time limit on the age of the trust.

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Beneficiaries and trustees

India does not recognize trust as a separate entity (except for tax purposes). A trust is identified as a legal obligation that is attached to the ownership of property arising out of a confidence placed by the settlor in the trustee for the benefit of the beneficiaries (as identified by the settlor), or the beneficiaries and the settlor. The trustee is the legal owner of such trust property, whereas the beneficiaries have beneficial interest in the trust property.

Succession Planning through a Private Trust:

Succession through a Private Trust mechanism is a common mode of transition of assets as the Trust provides better legal protection, certainty and flexibility. Also as a practice, it is an accepted mode of implementing succession planning.

Trust is governed by Indian Trust Act, 1882 (“Trust Act”).

Section 3 of Trust Act defines a “Trust” as an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.

Thus, trust is a declaration which is made by the owner of the property that going forward, the same will be held by him or some other person (say a trustee), for the benefit of someone (ie beneficiary) and will be handed over to that person immediately or in due course.

What are the different types of Trust?

1. Private Trusts

A private trust is created for the benefit of specific individuals i.e., individuals who are defined and ascertained individuals or who within a definite time can be definitely ascertained.

A private trust does not work in perpetuity and essentially gets terminated at the expiry of purpose of the trust or happening of an event or at any rate eighteen years after the death of the last transferee living at the time of the creation of the trust.

A person can be settlor of a private trust if he has attained majority (i.e., has completed 18 years of age or in case of a minor, for whom a guardian is appointed by the court or of whose property the superintendence has been assumed by the court of wards the age of majority is 21 years) and is of sound mind, and is not disqualified by any law.

But a trust can also be created by or on behalf of a minor with the permission of a principal civil court of original jurisdiction. Apart from an individual, a company, firm, society or association of persons is also capable of creating a trust.

A family trust set up to benefit members of a family is the most common purpose for a private trust. The purpose of the family trust is for the settlor to progressively transfer his assets to the trust, so that legally the settlor owns no assets himself, but through the trust, beneficiaries get the benefit of these assets. A family trust can be set up either while one is still alive (by a declaration of trust contained in a trust deed) or post death, in terms of a will.

Private family trusts may be set up either inter vivos i.e. during a person’s lifetime or under a will i.e. testamentary trust, either orally or under a written instrument, except where the subject matter of the trust is immovable property, the trust would need to be declared by a registered written instrument.

Private trusts may also be used as a collective investment pooling vehicles such as mutual funds and real estate investment trusts.

2. Public Trust:

A public trust is created for the benefit of an uncertain and fluctuating body of persons who cannot be ascertained any point of time, for instance; the public at large or a section of the public following a particular religion, profession or faith. A public trust is normally permanent or at least indefinite in duration.

As regards the public trusts, there is no Central Act governing formation and administration of such trusts. But various states such as Bihar, Maharashtra, Madhya Pradesh Orissa, etc., have enacted their own legislations prescribing conditions and procedures for the administration of public trusts. These Acts are more or less similar in nature though there may be certain variations.

A public trust is generally a non-profit venture with charitable purposes and in such cases it is also referred to as the charitable trust. A trust created for religious purposes is termed a religious trust and it can be either a private or a public trust. A religious endowment made via trustees to a specified person is a private trust and the one to the general public or a section thereof is a public trust. The creation of religious charitable trusts is governed by the personal laws of the religion. The administration of these religious trusts can either be left to the trustees as per the dictates of the religious names or it can be regulated to a greater or lesser degree by statute such as the Maharashtra Public trusts Act, 1950. In case of Hindus, the personal law provisions regulating the religious trusts have not been codified and are found dispersed in various religious books.

There are four essential requirements for creating a valid religious or charitable trust under Hindu Law, which are as follows:

1. valid religious as charitable purpose of the trust as per the norms of Hindu Law;

2. capability of the author of the trust to create such a trust;

3. the purpose and property of the trust must be indicated with sufficient precision; and

4. the trust must not violate any law of the country.

Who can form a Trust?

A Trust can be formed –

By any person competent to contract –

(i) above 18 years of age;

(ii) of sound mind;

(iii) not disqualified from entering into any contract by any law; or

On behalf of a minor (only with the permission of a principal civil court of original jurisdiction).

Requisites to a Trust –

(i) Author of the Trust – someone at whose instance the trust comes into existence (also called as Settlor);

(ii) Purpose to form a Trust – to divest the ownership of the Author/Settlor of the Trust in favour of the Beneficiary/Trustee;

(iii) Trustee – every person capable of holding property can become a Trustee;

(iv) Beneficiary – to whom the Trust income/corpus is intended for;

(v) Subject matter of Trust – any asset capable of being transferred can be a subject matter of a trust.

All these requisites are required for a Trust to legally come into existence.

A Trust can be either:

Discretionary Trusts:

A discretionary trust is a trust that has been set up for the benefit of one or more beneficiaries, but the trustee is given full discretion as to when and what funds are given to the beneficiaries. The beneficiaries of the trust have no rights to the funds, nor are the funds regarded as part of the beneficiaries’ estates.

Deep Analysis:

With most trusts, the beneficiaries are entitled to a certain proportion of the trust income, depending on the terms of the trust. They may receive a monthly allowance or receive the money when they reach a certain age. Because of this, the beneficiaries are considered beneficial owners.

A discretionary trust is different in that the beneficiary cannot claim or demand funds from the trust at any stage. The allocation of funds is entirely at the discretion of the trustee.

This has the effect of protecting beneficiaries who may not have the ability to use the funds wisely. It also provides protection against creditors, who cannot attach the trusts funds’ assets.

Beneficiary funds are good for situations when the beneficiaries are immature, disabled, mentally impaired, irresponsible, spendthrift, gamblers, or are in debt or bankrupt.

The trustee of a discretionary trust has complete control over the fund and is regarded as the legal owner. Even though the trustee cannot benefit from the fund, it’s possible that the trustee won’t adhere to the grantor’s wishes and, for this reason, a discretionary trust may have “appointers” who have the power to remove the trustee and appoint a new one. Another method of limiting the discretion of the trustee is to appoint a guardian who has the power to veto distribution decisions.

Non-discretionary Trusts:

A trust in which the trustee has no ability to make investment decisions with regard to the assets in the trust and/or has no control over when and how the assets are distributed to the beneficiary. In a non-discretionary trust, the trustee simply sees to it that the grantor’s wishes are carried out.

Revocable Trust: 

A trust that can be revoked (cancelled) by its settlor at any time during this life.

Irrevocable Trust: 

A trust will not come to an end until the term / purpose of the trust has been fulfilled.

For succession planning, the Trust usually used is a Private (non-testamentary) Trust – be it specific or discretionary based on settlor’ swishes and is implemented during lifetime of the settlor.

Appointment of Trustee

A trustee has a fiduciary obligation under law to hold the trust Property for the benefit of the Beneficiaries to the trust. In doing so, the trustee is given various powers (as described below) under the trust deed to manage the affairs and Trust Property of the trust. Accordingly, it becomes important to choose the most suitable trustee for the commercial requirements of the family and the assets intended to be contributed to the trust. For example, a trustee may be an individual, either a trusted family advisor or a member of the family itself. The trustee may even be the Settlor or one of the Beneficiaries of the trust so long as the individual acts only in his capacity as a trustee and fulfills his fiduciary obligations when managing the affairs of the trust. Alternatively, an institutional trustee may be favoured, especially in instances where neutral decision-making is a primary concern. The family may also consider setting up a Private Trust Company (“PTC”) with family members appointed as directors of the PTC to make decisions with respect to the trust. As a PTC is a separate legal entity under the Companies Act, 2013, any liability arising from the decisions of the board of directors of the PTC should be limited to the PTC and the directors should not be personally liable (unlike individual trustees) to the extent provided under law.

Important considerations to keep in mind when deciding whether to appoint an individual, institution, or PTC to act as trustee include:

1. the level of control the family would like to maintain in day to day operations;

2. neutrality of the trustee;

3. objective and term of the trust;

4. expertise with respect to the discharge of various fiduciary duties;

5. knowledge/expertise with respect to various administrative functions like record keeping, legal disclosures, regulatory compliances, etc;

6. annual costs.

What are the Powers of Trustee?

The powers of the trustee are captured in the trust deed. While the trustee’s powers can vary depending on the needs of the structure, generally a trustee has wide ranging powers that not only allow him to manage the daily operations of the trust and make distributions to Beneficiaries, but also empower him to amend the trust deed itself, add or remove Beneficiaries, make contributions to charities, or modify the term of the trust. In order to balance the powers of the trustee, the trust deed may provide for the appointment of a Protector. As discussed previously, the role of the Protector is purely advisory in nature; however, by requiring that the trustee consult the Protector before making key decisions may help to ensure that the family’s best interests and the Settlor’s wishes are being followed. Moreover, the Settlor may also provide the trustee with a Letter of Wishes (“LOW”), which outlines the considerations that the Settlor would like the trustee to keep in mind when making certain key decisions.

Such key decisions may include determining the beneficial interest of each Beneficiary, making distributions, adding or removing Beneficiaries, etc. The LOW is a private document between the Settlor and the trustee, and while not legally binding, institutional trustees generally follow the guidelines set forth by the Settlor under the same.

While a single trustee may be appointed for the sake of efficiency and / or convenience, the trust structure may also provide for multiple trustees acting as co-trustees. The Trusts Act provides that if a trustee:

(i) deals with the trust-property as carefully as a man of ordinary prudence would deal with such property if it were his own;9 and (ii) takes all steps as would be reasonably requisite to preserve Trust Property, then such trustee should not generally liable for a breach of trust committed by his co-trustee provided that the trustee shall be liable if:

1. he has delivered trust-property to his co-trustee without seeing to its proper application;

2. he allows his co-trustee to receive trustproperty and fails to make due enquiry as to the co-trustee’s dealings therewith, or allows him to retain it longer than the circumstances of the case reasonably require;

3. he becomes aware of a breach of trust committed or intended by his co-trustee, and either actively conceals it or does not within a reasonable time take proper steps to protect the beneficiary’s interest.

In the event that multiple trustees are appointed to govern the trust, it becomes important for the trust deed to provide a mechanism by which the trustees will make decisions. For example, in case of two trustees, decisions may be made only with the unanimous consent of both trustees, and in case of deadlock either status quo is to remain or a third independent individual (or Settlor) is to be chosen by the trustees to break the tie. In the case of three trustees decisions may be made by majority vote. Alternatively, the trust deed may provide that certain trustees are responsible for only specific matters. In certain instances (especially in the case of revocable trusts), the Settlor may be empowered to direct the trustees or have veto rights. Further, the Trusts Act provides that a trustee may be discharged of his duties only by:

1. the extinction of the trust

2. the completion of his duties under the trust

3. appointment under the Trusts Act of a new trustee in his place

4. consent of himself and all the beneficiaries being competent to contract

5. the court to which a petition for his discharge is presented; or

6. whatever means provided under the trust deed.

What are the disabilities of trustees?

The disabilities of a trustee are:

1. Once he has accepted the trust; he cannot refuse to act as a trustee.

2. A trustee cannot delegate his duties to another or a co- trustee.

3. A trustee should not use the trust property for his own profit or any other purpose, unconnected with the trust.

4. A trustee cannot buy the trust property on his own account or as an agent of a third person.

5. A trustee cannot act unilaterally but must consult his co-trustees, if any.

6. Co-trustees should not lend the trust money to each other

How does a trust cease to exist?

A trust ceases to exist:

1. When its purpose is completely fulfilled; or

2. When its purpose becomes unlawful; or

3. When the fulfillment of its purpose becomes impossible by destruction of the trust property or by any other cause; or

4. When the trust is expressly revoked.

What are the rights of a beneficiary?

The beneficiary has the right to:

1. Enjoy the rents and profits of the trust property.

2. Expect the trustee to transfer the trust property to one or more beneficiary.

3. Inspect and take copies of the instrument of trust, the documents relating to trust property and the accounts of the trust property.

4. If for any reason the execution of the trust by the trustee becomes impracticable the beneficiary may institute a suit for the execution of the trust.

5. To expect the trustee to properly protect and administer the trust property.

6. To compel the trustee to perform his duty properly.

7. To transfer the benefits arising out of the trust to any other person after the beneficiary attains majority.

How a trust can be revoked?

When a trust is created by will, it is revocable at the pleasure of the testator, because it does not become effective during the lifetime of the testator.

Any other trust can be revoked in the following ways:

1. By the consent of all the beneficiaries.

2. By the settlor in exercise of powers of revocation expressly reserved to him.

3. If the trust was created for repayment of debts, the settlor can revoke the trust at any time irrespective of whether the debt is repaid or not. However, if the debt is not repaid and the creditor has knowledge of the creation of the trust, then, the trust cannot be revoked without the consent of the creditor.

STEPS FOR IMPLEMENTATION

Broad steps involved in implementing a private trust are as below.

– The settlor contributes his/her identified assets to a private trust formed for the purpose.

– Settlor appoints a trustee (can be individual, company or himself) to manage the trust properties.

– The trust deed will list names and % share of beneficiaries in case of specific private trust. If not, then the trust would be classified as discretionary trust where the names and/or % share of beneficiaries are unknown or indeterminate.

– Once the property is contributed by a settlor to the trust, then the property would be owned and controlled by the trustee for and on behalf of benefit of beneficiaries. The property can be any asset – be it cash or any other movable and/or immovable assets.

– Depending on commercial needs, there could be one trust or multiple trusts being used. Also there could be Master trust and/or sub-trust for legal protection and fencing of assets. For say Father and a son, there could be different Master trusts and sub-trusts with different trustees and different beneficiaries. The settlor can be one person say father or head of family.

Before executing the succession planning, one needs to examine various tax, commercial and regulatory implications to preserve and protect value of assets being transferred/transitioned to the next generation.

These would include mainly following.

– Income tax

– Stamp duty

– SEBI Takeover Code (including Insider trading regulations)

– Foreign exchange regulations

– Estate duty/Inheritance tax.

Taxation of Trust

This is further discussed under following heads.

1. Taxation of beneficiary

2. Taxation of settlor/transferor of assets

3. General Anti Avoidance Rule

4. Taxation of Trust.

Taxation of beneficiary – Income under Section 56(2)(x)

– when a property is settled under a Trust, it is practically a gift and provisions of Section 56(2)(x) of Income tax Act (IT Act) are attracted.

– As per Section 56(2)(x) of IT Act, any cash or property (immovable or movable property) received by a person from anyone without consideration or for inadequate consideration is treated as income of the recipient.

– In the first instance, the settlor/recipient may argue that the trust is established as part of family arrangement and for succession planning and hence, it is not without consideration. The same may be litigative.

– Please note Section 56(2)(x) also lists down certain exceptions where the provisions of the section are not applicable.

– The last proviso (X) to Section 56(2)(x) states that the section will not apply to any sum of money or any property received from an individual by a trust created or established solely for the benefit of relative of the individual. The term ‘relative’ is defined as the same meaning assigned in Explanation to Section 56(2)(vii).

– Thus if a trust (be it specific or discretionary, whether irrevocable or revocable or whether testamentary or non-testamentary) receives any sum of money or property from an individual solely for the benefit of relative of the individual, then trust should be exempt from provisions of Section 56(2)(x).

–  the exemption under Section 56(2)(x) applies only if the trust is created solely for the benefit of relative of the individual. What if one of the beneficiaries is settlor himself together with his relatives? It appears that in a situation where the settlor is also one of the beneficiaries, on strict interpretation, the exemption may not apply. This is possibly not envisaged. Another argument could be that there cannot be tax on ‘self’ when the settlor himself/herself is a beneficiary. A clarification from Central Board of Direct Taxes (CBDT) would be appropriate in this regard.

Taxation of settlor/transferor of assets:-

– Section 47(iii) exempts transferor from capital gains tax any transfer of capital asset under an ‘irrecovable’ trust. Please note if the trust is revocable trust, then exemption under Section 47(iii) is not available and such transfer would be subject to capital gains tax.

– Considering above, the trust vehicle should be ‘private irrevocable trust’. This will be non-testamentary trust as it is formed during life time of settlor.

– If the trust is testamentary (i.e happens on the death of the settlor) as a part of will, then one can take stand that transfer is under will and exempt in the hands of settlor under Section 47(iii) (taxation will be on representative assessee).

General Anti Avoidance Rule (GAAR)

– Creation of multiple trusts in the structure could be complex and Tax authorities could question the same being subject to GAAR. However, the commercial rationale of having multiple trust entities can be explained which would be for legal protection of assets and done for family realignment. Also this is a normal practice adapted for last several decades by families for succession planning.

– Interestingly, FAQ no 3 dealing with GAAR (dated January 27, 2017) issued by CBDT states that the choice of entity for effecting an arrangement is the prerogative of the assessee and does not per se attract GAAR only due to the choice being made.

– Section 2(31) of IT Act defines the term ‘person’. The term ‘person’ does not specifically cover ‘trust’ but the definition is inclusive in nature and hence, Trust should be specifically taxed as an entity under IT Act even though it may not be a legal entity as per Trust Act. There have been precedents that status of trust is linked to status of Trustee. Thus, if trustee is an individual, then the residential status of the Trust should be that of an individual. This residential status of trust is a debatable issue in the past.

Taxation provisions for Private Trust:

Irrevocable Determinate (Specific) trust

In such a trust, the beneficiaries are identifiable and their shares are determinate, a trustee can be assessed as a representative assessee and tax is levied and recovered from him in a like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him (i.e. the beneficiary). The tax authorities can alternatively raise an assessment on the beneficiaries directly, but in no case can tax be collected twice.

While the income tax officer is free to levy tax either on the beneficiary or on a trustee in his capacity as representative assessee, the taxation in the hands of a trustee must be in the same manner and to the same extent that it would have been levied on the beneficiary, i.e., qua the beneficiaries. Thus, in a case where a trustee is assessed as a representative assessee he would generally be able to avail all the benefits / deductions, etc. available to the beneficiary, with respect to that beneficiary’s share of income. There is no further tax in the hands of the beneficiary on the distribution of income from a trust.

In relation to assets settled / gifted into an irrevocable trust (both determinate and discretionary), such contribution should not be taxable in the hands of the transferor. This is because such settlement / gift is specifically excluded from the ambit of “transfer” for the purposes of levy of capital gains tax. However, there has been conflicting views in relation to taxation in the hands of the trustee, i.e., the transferee, especially, where one / more beneficiaries of the trust are not “relatives” (as defined) of the transferor.

Up to FY 2016-17, receipt of fund / any property by any “individual” without consideration or for a value less than the fair market value of the property was taxable in the hands of the transferee individual, except where the transferors were “relatives” 3 of the transferee. In the context of certain facts, some rulings have held that income of trust should be taxed as the income of an “individual”. However, it may be possible that trust income is not taxed as income of an “individual” depending on the facts and circumstances. Further, considering that ‘trust’ is “an obligation annexed to ownership of property”, it is questionable as to whether settlement of property into a trust can be treated as transfer of property without consideration.

Based on recent amendments, from FY 2017-18, the provisions have been expanded such that they are applicable to all transferees and not only individuals. This expansion has been coupled with a specific exclusion for settlement into trusts set up solely for the benefit of “relatives” of the transferor. Therefore, it appears that settlements in other circumstances may be taxable in the hands of the transferee trustee. Having said that, the primary issue it is still unsettled, i.e., as to whether settlement of property into a trust can be treated as transfer of property without consideration.

Irrevocable  Discretionary trust

A trust is regarded as a discretionary trust when a trustee has the power to distribute the income of a trust at its discretion amongst the set of beneficiaries. In case of an onshore discretionary trust, with both resident and non-resident beneficiaries, a trustee will be regarded as the representative assessee of the beneficiaries and subject to tax at the maximum marginal rate i.e. 30%.

In case of an offshore discretionary trust with both resident and non-resident beneficiaries (including offshore charitable organisations), a trustee should not be subject to Indian taxes or reporting obligations. However, if all the beneficiaries of such discretionary trust are Indian residents, then a trustee may be regarded as the representative assessee of the beneficiaries and can be subject to Indian taxes (on behalf of the beneficiaries) at the maximum marginal rate i.e. 30%

Revocable trust

Under the ITA, a transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor or it in any way gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets. Thus, where a settlement is made in a manner that a settlor is entitled to recover the contributions over a specified period, and is entitled to the income from the contributions, the trust is disregarded for the purposes of tax, and the income thereof taxed as though it had directly arisen to the settlor. Alternatively, even in a situation where a settlor has the power to re-assume power over the assets of a trust, the trust is disregarded and the income is taxed in the hands of the settlor. In the case of a revocable trust, income shall be chargeable to tax only in the hands of the settlor. If there are joint settlors to a revocable trust, the income of the trust will be taxed in the hands of each settlor to the extent of assets settled by them in the trust. This arrangement is not specifically required to be recorded in a trust deed.

STAMP DUTY

Stamp duty is levied under Indian Stamp Act, 1899 (Central Stamp Act). Power to levy stamp duty is divided between central and state government. States do have the right to adopt Central Stamp Act with or without modifications.

Stamp duty is levied on the instrument of transfer and hence, location or state of transfer assumes importance.

Relevant articles for Trust in Central Stamp Act (Schedule I) are as below.

– Article 58 – Settlement

– Article 64 – Trust

As per these entries, stamp duty on instrument of transfer (ie Trust deed) attracts a stamp duty of 2-3% of value of assets transferred under the Trust deed. However, the State Stamp Act will be the final authority to decide actual levy of stamp duty. Generally, the duty is levied on transfer deed and there should be no further duty on distribution of assets to beneficiaries in future.

It is to be noted that gift of assets to relative (defined) attracts a very nominal stamp duty irrespective of value of assets transferred e.g. Stamp duty on immovable property being transferred in State of Maharashtra is 5% of value of the property. However, if the same property is gifted to a relative, the stamp duty is Rs.200. Similarly, in State of Karnataka, the stamp duty is approx Rs.1,000. There is a possible view/argument that the same should apply to assets transferred under Trust deed where the trust is formed for the benefit of relatives. This has to be examined for the respective states before a call is taken to form a Trust.

SEBI TAKEOVER CODE REGULATION

– SEBI has prescribed rules on substantial acquisition of shares beyond 25% of share capital and same need to be adhered by Promoters of shares in a listed company. The acquirer needs to make an open offer to existing shareholders of at least 26% of shares at a price determined based on a formula.

– The Takeover Code provides exemption from open offer in certain situations including ‘inter se transfers between promoters’.  Also Promoters can approach SEBI for Takeover Code exemption (ie open offer) by making a specific application. The relevant rules are Rule 10 (prescribing exemptions) and Rule 11 (making specific application for exemption). It is understood that SEBI also provides informal guidance on this matter.

Considering that the matter is complex in case of transfer of assets (assuming these include substantial shares of listed company held as a promoter group/family), it would be advisable to seek a specific exemption under Rule 11 from making an open offer (rather than seeking recourse to Rule 10 and claim exemption) or in the alternate, seek an informal guidance before the transfer is effected under Trust deed.

SEBI has also prescribed rules on Insider trading regulations which need to be strictly adhered while the transfer of shares is effected under the Trust deed.

FOREIGN EXCHANGE REGULATIONS

Provisions of Foreign Exchange Management Act (‘FEMA’), 1999 are relevant for creation of trust by a settlor.

A trust outside India (ie overseas trust) can be created by a resident owning a foreign asset for the benefit of beneficiaries whether resident or non-resident. The overseas trust can be specific or discretionary trust.

Similarly, a trust in India can be created by a resident owning assets in India including a non-resident beneficiary.

There are no specific regulations under FEMA governing trusts. However, it appears that the transfer of assets under Trust should be a ‘capital account transaction’ under Section 2(e) of FEMA.

Interestingly, Master Direction on “remittance of assets” does make some reference as below.

iii). in case of settlement is done without retaining any life interest in the property ie during life time of the owner/parent, it would tantamount to regular transfer by way of gift’ (emphasis supplied).

– Thus one argue that settlement of property under trust is akin to gift and provisions dealing with gift under FEMA may be applied (which in most situations are freely permitted).

– Having said that there is no absolute clarity on the subject and a specific clarification from RBI would be desirable.

– Also in the context of a resident being a beneficiary in an overseas trust with overseas assets, the long standing question is whether RBI approval is required when the beneficiary may not be aware if he/she is the beneficiary in the trust (….if done without his/her knowledge by the settlor) and certainty there is no identification of share of income. Under Black Money law, such questions were raised and Tax authorities’ view was that such beneficial interest in discretionary trust should be disclosed by the resident in the Return of income.

ESTATE DUTY/INHERITANCE TAX

India had estate duty on transfer of assets on death of an individual but the same was abolished in 1985. Since then, there is no estate duty or inheritance tax . Also currently, there is no wealth tax since last few years.

There were talks of re-introduction of estate duty or inheritance tax in India 5-6 years back but in the recent past, the same have died down.

Having said that there is estate duty in developed countries like USA and U.K. It is also possible that the same may be re-introduced in future in India considering socio-economic objectives and balancing wealth and removing inequalities. These are all hypotheses which may or may not happen and difficult to predict future outcomes.

Succession Planning through Trust was one of the important mechanisms to protect wealth being subject to estate duty during estate duty days.

Also under erstwhile Estate Duty Act (Section 6), gift done within 2 years of death of an individual was ignored and was subject to estate duty. These aspects may be considered while doing potential planning for estate duty or inheritance tax for future. Therefore, transition of assets as early as possible could protect the same from estate duty assuming similar provisions come into effect as and when the law is re-introduced. On a parallel situation, it is understood that protection under Insolvency and Bankruptcy Code, 2016 is not available for assets gifts during last 2 years. Thus legislature considers 2 year window as reasonable time frame.

If a settlor has set up a revocable trust or is one of the beneficiaries in the trust, the estate duty protection may not be available as per erstwhile Estate Duty Act.

Setting up a discretionary trust without a settlor being a beneficiary would be ideal.

Gaining traction among High Net Worth Individuals:

Trust formation is an important tool in the hands of private client practitioners and is gaining momentum in India as most wealthy families, high net worth individuals (HNIs) and ultra high net worth individuals wish to adopt appropriate trust structures to address the needs arising in the area of estate planning, family succession and business succession. There is a growing need for a trust platform for promoters or families to have a bankruptcy remote vehicle for wealth protection and preservation by creating legally valid structures at the right time. A need for trusts has also arisen owing to the large non-resident Indian population. Trusts are subject to different laws in the respective jurisdiction where they are located and people usually desire to address their succession issues by creating suitably fitting structures in India. This need to set up private beneficiary trusts has also gained momentum due to the various news items from time to time related to the re-introduction of inheritance tax in India.

The benefits of having a private trust are enumerated below:

better and efficient control of assets;

planning for the family needs present and future;

better succession planning;

Better tax planning in the event of inheritance tax being reintroduced;

Precautionary exercise to avoid attachment of assets in the event of any liquidation / insolvency threat etc.

A trust holding shares of family business prevents/restricts disintegration as there is no scope for the individual family members to transfer/dilute the shareholding of the family business.

Dispute Resolution Mechanism

Last year, the Supreme Court (“SC”) of India, in Vimal Shah & Ors. vs Jayesh Shah & Ors.13 , held that as beneficiaries are not signatories to a trust deed containing an arbitration clause, any disputes arising between beneficiaries or trustees of a trust cannot be referred to arbitration as such arbitration clause is not an “arbitration agreement” between the trustees interse, between the beneficiaries inter se or between the trustees and the beneficiaries for the purposes of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”).

Furthermore, the SC clarified that even if the beneficiaries are considered to have accepted the trust deed vis-à-vis the settlor by accepting the benefits deed to provide a mechanism by which the trustees will make decisions. For example, in case of two trustees, decisions may be made only with the unanimous consent of both trustees, and in case of deadlock either status quo is to remain or a third independent individual (or Settlor) is to be chosen by the trustees to break the tie. In the case of three trustees decisions may be made by majority vote. Alternatively, the trust deed may provide that certain trustees are responsible for only specific matters. In certain instances (especially in the case of revocable trusts), the Settlor may be empowered to direct the trustees or have veto rights. Further, the Trusts Act provides that a trustee may be discharged of his duties only by:

the extinction of the trust

the completion of his duties under the trust

appointment under the Trusts Act of a new trustee in his place

consent of himself and all the beneficiaries being competent to contract

the court to which a petition for his discharge is presented; or

whatever means provided under the trust deed.

In summary, succession planning is a process and should be planned in an organised manner. Planned succession can help in protection and smooth transition of wealth whereas an unplanned succession can lead to erosion of family wealth and could create bitterness and feuds in family. Finally, Trust is an established mechanism of succession planning tool and provides protection, flexibility and transition of assets to next generation.

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