The feud between Raymond chief Gautam Singhania and his wife Nawaz Modi, also a non-executive director of the company, has led to destruction of shareholder wealth.The main concern is over how much of the family wealth Nawaj Modi eventually demands in the wake of the separation. She has reportedly sought 75% of the wealth for herself and her two daughters. This is important, as a bulk of Singhania’s wealth comes from the 49.11% stake he holds in Raymond.
The very public rift has thus brought the issue of ring-fencing a business from the adverse fallout of a marital dispute to the fore. Singhania’s is not an isolated case. Earlier this year, multi-billion dollar SaaS firm Zoho Corporation got embroiled in a tiff between founder Sridhar Vembu and his wife Pramila Srinivasan over division of assets as part of their divorce proceedings.
So how can a business leader or the head of a family’s business conglomerate protect his/her enterprise from any value erosion arising from a formal sepration? Legal experts say buying out each other’s interest in the business or a complete sell-out to a third party is one option “when the enterprise value is relatively small or when the channels of communication between the parties are open”.
When that option is ruled out, business families are increasingly looking to set up trusts. Rishabh Shroff, partner & co-head, private client practice, Cyril Amarchand Mangaldas (CAM), said, “A trust is a tried and tested formula for shielding assets from creditors and liabilities. Indeed, the reason promoters set up trusts is to protect their personal wealth from divorce settlements and attacks from vindictive spouses.”
Trusts are becoming the go-to solution in the country also because the common US/UK practice of drawing up pre-nuptial agreements — that lay down the control of the legal rights and assets a couple acquires after marriage, and what happens when the marriage is dissolved – enjoy no legal backing. Such agreements are binding only in Goa under the Portuguese Civil Code.
Singhania has also mooted the creation of a separate trust, where he would serve as the sole trustee and settler, with plans to pass it on to his daughters in the future. Modi has opposed this proposal.
“Whilst not a guaranteed outcome, if a discretionary irrevocable trust is used, with an independent professional or third party trustee, and if the assets are transferred in a timely manner at an early stage in the promoter’s life, then a trust is likely to help shield the husband’s wealth from his divorcing wife,” Shroff adds.
The basic defence used here by the husband who has set up the trust is that the trust assets are not in his personal name or estate, or under his control – and hence it does not form part of his personal net worth for divorce settlement purposes.
Experts say that the best time for a business house to form a trust is during “happy times”. If a trust is set up during matrimonial discord by stripping all assets out, it carries the risk of being challenged as being set up with “an ulterior objective” — as has happened in the Raymond case.
So trusts should be established early on in marriage, or even prior to one, say experts. Some business bosses have even created trusts early on in their children’s lives. In such a situation, the child can be a beneficiary and the creator parent becomes the trustee. The child can reap benefits from the protected wealth without it officially counting as their personal property.
That said, women need to keep their guard up as the trust approach can be unfavourable to them, cautions CAM’s Shroff. The trusts are almost never drafted by the women of the family business, nor are they consulted, nor their well-being under a fair settlement at the time of a potential divorce, considered. “Most trusts have automatic safeguards built into their excluded persons clauses, whereby female spouses who have filed divorce proceedings, or are separated from their husband, are automatically removed as beneficiaries of the trust (if they were even made beneficiaries in the first place),” he says.
That apart, in case of an emergency, the beneficiaries may not have access to the assets, except in accordance with the terms of the trust, points out Manmeet Kaur, partner, Karanjawala & Co. She says, “The transfer of immovable property to a trust might attract the payment of a significant stamp duty, which increases the cost of setting up the trust.”