ISSN 0972-1983

VOL 52 | NO. : 08 | Pg. 1-156 | August 2022 | `100/- (Single Copy)

THE JOURNAL FOR GOVERNANCE PROFESSIONALS

REWRITING THE RULES OF

CORPORATE GOVERNANCE :
CG 2.0
ARTICLE
Family Offices: A Guide to their Growing
Prominence
In India, family offices are a relatively recent development. It is becoming a desired structure for the ultra-
wealthy to grow, safeguard, and transmit their money throughout their family. Multigenerational families
and businesses have begun to recognise the need of family offices in different elements of wealth
management and preservation, strategic planning, and grooming the next generation, among several other
things. As opposed to the preceding generation’s inclination for reinvesting earnings back into the family
businesses and staying away from risky investments, Indian families have recently entered the family office
market, which was formerly dominated by European and American families.

Shammi Khanna Sumit Kochar Shivam Gera, ACS

Partner at Dolce Vita Trustees Corporate Lawyer Senior Associate at Dolce Vita Trustees
Gurugram Partner at Dolce Vita Trustees Delhi
[email protected] Mumbai [email protected]
[email protected]

T
INTRODUCTION In India, family offices were typically separate family offices
that managed the private fortune of large business families.
he increase in investment in these last Following the opening of the economy in the early 1990s,
years has showed a positive shift in the many industrialists’ private fortunes expanded dramatically,
desire of people buying assets like shares, necessitating more careful management. To handle their
gold, mutual funds and other securities. family riches, several of them established their own single-
This shift in the economy requires financial family offices.
consultation which a person can drive from
an individual or a group of individuals with EVOLUTION OF FAMILY OFFICES
the knowledge of how to go about investing and managing
the funds. Factors influencing the evolution of Family Offices -
In this investing world, family offices are becoming more
Initially, the work of family offices was almost exclusively
popular and well-known. The rise in their popularity stands
by families’ desire for better knowledge, greater freedom limited to asset management, family administration
and control over their assets. Family offices are firms which through estate preparation, and tax planning. However, the
help the families to build and manage their wealth. They function of family offices has been dramatically expanding
serve the ultra-high worth investors who need financial, in recent years. As the ultra-wealthy try to centralise the
legal and lifestyle related aid to manage their wealth in a provision of their needs to one service provider, family
better and efficient way. Family offices are as diverse as the offices are experiencing an increase in the services they
people whose money they manage in terms of source, size, can give.
organisation, and strategy.
Multigenerational families and businesses have begun to
A lot of families belonging to well-off background are unaware recognise the need of family offices in different elements of
of the wide range of services available to them through
wealth management and preservation, strategic planning,
family offices. In addition to asset management, family
offices may assist them in a variety of ways. A major job that and grooming the next generation, among several other
family offices can (and have) performed for many families things. In the last four years, the number of family offices in
throughout the world is assisting families in establishing India has increased, with many business families establishing
a strong family governance structure as a method of single-family offices. Certainly, the function of some of these
enhancing and safeguarding the family’s heritage across family offices extends beyond investment management to
generations. include duties like:

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— aiding with compliance obligations;
— monitoring and record keeping; and
— philanthropy; Multigenerational families and businesses
— according to the family constitution (if one exists);
have begun to recognise the need of family
offices in different elements of wealth
— family secretariat; and management and preservation, strategic
— assisting with new endeavours or businesses that the planning, and grooming the next generation,
family may start. among several other things. In the last four
years, the number of family offices in India
ESTABLISHING FAMILY OFFICES
has increased, with many business families
When creating a succession planning system, there are establishing single-family offices.
number of factors to consider. These include the family’s
long-term investment objectives and vision, risk appetite,
expected future requirements of various family branches,
relevant legal, regulatory, and tax frameworks of various
nations involved, and so on. — enhance and professionalise a family’s investment
function; Educate the next generation on how to be
There are several alternatives for establishing family offices excellent custodians of wealth; transferring wealth from
in India. The trust structure is generally favoured because generation to generation; act as the family’s philanthropic
of the flexibility it provides. Appointing a trustee can also be arm;
done in a variety of ways. A trustee is someone appointed to
serve as the caretaker of the Family’s Trust. He or she is the — encourage the family’s business ventures;
monitor of the management and administration of the trust in — Co-investment opportunities should be created and
question. managed;
— coordinating family governance mechanisms, activity
PURPOSE OF ESTABLISHING A FAMILY planning, and communication vehicles;
OFFICE
— Managing any family liabilities at the parent/family level;
A family office is a specialised solution for managing a family’s — Managing the group holding companies.
money. It is a tool that assists the family in the administration
and management of the family’s affairs on a day-to-day basis. With these goals in mind, there are currently five different
Family offices are generally setup to serve the 5 P’s, i.e.- types of family offices available on the global market.
— Personal,
TYPES OF FAMILY OFFICES
— Privacy,
Family offices are majorly categorized into two main heads:
— Prosperity,
i. Single Family Offices: These type of family offices work
— Perpetuity, and for only one rich family and aids it with all the necessary
guidance and direction as to how their wealth should be
— Professionalism.
allocated and managed in a better way. Single Family
Offices also provide with a high level of anonymity and
These offices are usually custom-made for a single client,
confidentiality, as well as execute more specific duties
such as a family. They allow a family to save all personal
and demands, but they are frequently the most expensive
information in a secure location that is only accessible to
choice.
a small number of people, therefore acting as guardians
of the family’s privacy. Because the family’s wealth is Their operations and administration are tailored to the
dispersed across numerous generations, each with their demands of their one and only customer. Such Family
own set of needs, there is always a need to strike a balance offices frequently set up their offices in their clients’ homes
between wealth production and family members’ financial or businesses.
needs. A family office assists the family in identifying a
distinct family purpose and in establishing a legacy that ii. Multi Family Offices: Multi Family Offices work for more
will be passed down through the generations. Since family than one wealthy family. These type of family offices
wealth and family businesses are becoming more global, extend their help and management for a many ultra-HNI
family offices are being established primarily to promote clients at the same time.
professionalism.
They have a uniform operation and management system
Therefore, the purpose of setting up of family office is to: in place, as well as common personnel that is used and
deployed according to the demands of the clients. They have
— create a consolidated organisation to safeguard and/or offices in locations where they can serve a growing number
enhance the family’s wealth; of clients.

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ARTICLE Family Offices: A Guide to their Growing Prominence

Identifying the requirements of each family member and the clients’ individual requirements. The following are some
developing a plan for them generally takes time, thinking, and of the functions performed by family offices:
the participation of other family members.
 Investments & Portfolio Management:
Further, the Family Offices are categorized into
administrative family office, hybrid family office, and fully This includes choosing the right fund manager,
integrated family office which are differentiated on the basis creating and implementing a client’s investment
of their purpose and way of managing the wealth for their plan and policy, and managing portfolio returns and
clients. available funds.
 Tax Consultation:
i. Administrative Family Offices: This type of family offices
helps families with tax related work. They hire people to The ultra-HNIs require professional assistance due
help the families with operations such as bookkeeping, to the sectoral and geographical dispersion of many
transactions related to tax, and other administrative work. types of assets, as well as the complexity of the tax
responsibilities emanating from them. As a result,
ii. Hybrid Family Offices: A hybrid family office is where the the tax advice given by family offices is often quite
staff is employed to help the client with legal, administrative beneficial to them.
as well as taxation related advice. But when it comes to
non-strategic functions, they outsource for the same.  Reporting and Record Keeping:
iii. Fully integrated Family Offices: This type of family This service entails the organising of financial
offices deal with all the functions stated above along with papers, such as compliance documents, investment
other core investment related operations and advice. information, and insurance policies, among other
things. It also aids clients in keeping a record of critical
SERVICES AND FUNCTIONS OF FAMILY dates such as upcoming events or key decisions.
OFFICES  Philanthropic Management:

• SERVICES It could entail putting in place a correct organisational

The services family offices provide generally fall under framework for charity trusts and foundations,
four categories – monitoring the investments set aside for them, and
making recommendations on how to best allocate the
funds.
 Wealth Management for Multiple Generations:
Family offices assist ultra-high-net-worth individuals
in passing on their fortune to succeeding generations
in a prudent and tax-efficient manner, in keeping with
Family professional services – These include: Family family values and norms. It also aids in the drafting
governance and succession planning; support for new of wills and other inter-generational asset transfer
family businesses and other projects; concierge services agreements.
and security; family counselling services management;
monitoring of high-value physical assets (e.g. property,  Regulatory and Compliance Support:
yachts, art, aircrafts); entrepreneurial initiatives; education It entails assisting clients in complying with regional,
planning; next-generation mentoring; entrepreneurship; etc. national, and worldwide legal and regulatory
frameworks in relation to their investment portfolios,
Administrative services – These include, Accounts,
trusts and foundations, fund movement, acquisition
bookkeeping, mail handling, IT expenses, and contract
and disposition of moving and non-moving assets,
administration are all things that need to be taken care of.
and so on.
General advisory services – Financial management,  Risk Management & Insurance:
tax planning, trust administration, legal assistance, estate
planning, and insurance plans are all services that can be Some family offices assemble teams of risk
provided. management and insurance professionals to give
professional in-house advising services to clients in
Investment related activities – These involve alternative addition to their other wealth administration services.
investments; investment banking services; risk management;
worldwide custody and integrated investment reports; private  Lifestyle Management & Budgeting:
banking; foreign exchange monitoring; philanthropy, real
estate investments, selection of manager, etc. These clients want expert assistance to organise
their personal lives due to their hectic schedules and
• FUNCTIONS frequent need for visits. This includes support with
travel management, domestic staff management,
The primary purpose of family offices is to satisfy their clients’ party and family union arrangements, holiday
investment management needs. Apart from that, they carry scheduling, and yacht plans, among other things.
out a variety of other tasks based on and in accordance with They must also ensure that their monthly budgets are

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ARTICLE
in line with their existing income and wealth, as well interaction model than the traditional one. They want
as their long-term asset preservation goals, while quick information delivered digitally and instant access to
doing all of this. data when needed, but they also want a personal, tailored
service experience. Leadership, scope, people, solutions,
 Education and Training: and technology all face strategic problems as a result of
Family members must be kept informed and this transformation. SFOs who have navigated this trend
educated in a time of changing rules and regulations, successfully have recognised the interconnected nature
new financial products and practises, and new of these decisions. It is critical, for example, to have the
opportunities for profitable investments so that they proper CEO who can adapt the SFO’s platform and, more
can appraise the advise of their family offices more significantly, its culture to meet this new need. However,
objectively. It may also assist the younger generation this leader’s ability to serve this new shift will be hampered
in adopting a more conservative approach to earning, if the technology platform is not addressed.
saving, investing, and asset management.
• Investment Pivot
Furthermore, not all family offices offer all of the
services mentioned above. This is determined by Over the previous decade, active managers, even
the client’s needs, the cost structure of the services alternatives like hedge funds, have struggled to keep
supplied, the extent of competition among family up with relevant benchmarks. SFOs have shifted their
offices, and the existing regulatory environment. focus and begun to deploy bigger portions of their
portfolios to private assets, including both private equity
FAMILY OFFICE TRENDS and real estate. In addition, there has been an increase
in demand for creative, economically priced, and tax-
The Single-family offices have become a more preferred efficient solutions across traditional asset classes. The
types of family offices globally. Below mentioned are some necessity for expense/tax-efficient traditional equity
trends of family offices: allocations is being met by sophisticated unified managed
account structures, allowing the SFO to focus on private
• Single Family Office Leadership investments. As a result, there is a higher demand for
transaction flow and detailed reporting on the growing
The leadership of single-family offices (SFOs) is changing.
amount of private investments.
Many SFOs are headed by an elderly family member or
a trustworthy professional who is nearing retirement. This • Impact Investments
change necessitates a number of managerial options. A
good place to start is by addressing the family’s service The Impact space has progressed. Solutions are
needs and their generational vision of success. Clarity now available for all asset classes. The concept of
on these macro-objectives will aid in informing the family compromising returns can now be supported by empirical
about the incoming leadership’s required, experience evidence. SFOs must now either explore this space
and cultural congruence. Developing long-term budgets on their own or collaborate with a provider that offers
that include new leadership costs and involving industry a comprehensive solution set. Measurement is the
experts in executive searches are examples of best most recent advancement in this field. The portfolio’s
practises. By starting this exercise as soon as feasible, prospective “effect” can now be examined.
existing leadership will have enough time to shift without
affecting operations. A growing number of SFOs are INVESTMENTS BY FAMILY OFFICES
exploring outsourcing critical service areas to reduce the
burden and cost of hiring new leadership. INVESTING IN A STARTUP SPACE
• Tax Efficiency Family offices in India have historically been wary about
taking risks. Compared to American and European family
Concerns about prospective tax law changes and
offices, Indian family offices significantly underinvest in start-
strategies to increase tax efficiency are at the forefront
ups.
of people’s minds. What options should be examined in
light of potential changes in income/estate rules and does Things, though, are changing. Family offices are gradually
the SFO have the right fact pattern to establish a for-profit becoming a valuable source of capital for startup businesses.
management company structure, are some questions Many people want to invest in the technological ecosystem’s
that arise. Increased income tax rates, higher capital gain ever-expanding potential, but they often don’t know how to
rates, the elimination of the estate step-up in basis, and choose the correct venture capitalist (VC) to manage their
a reduction in the lifetime estate tax exemption are all money.
possible tax changes. These will have a huge influence
on the families that SFOs serve. SFOs are proactively Previously, wealthy Indian business houses wanted to invest
brainstorming planning options with tax and estate experts considerable portions of their own wealth in traditional asset
to handle these anticipated developments. Modelling the classes such as real estate. Until recently, India’s super-
benefits of specific techniques under various scenarios is wealthy families simply passed down their fortunes (both
the best approach. personal and commercial holdings) from generation to
• Shifting Service Demand generation. However, the tendency has shifted. The modern
generation who has completed education overseas, are more
The majority of SFOs serve several generations. The conscious of global practises. As a result, they look for new
younger generation is demanding a totally different and inventive ways to invest their family’s wealth.

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ARTICLE Family Offices: A Guide to their Growing Prominence

The evolving trend in India’s startup ecosystem has started to on the prohibition of revealing of any information. NDA
draw more and more funding from family offices. Due to their guarantees protection to both the parties and serves as
long-term investing approach, brand image, and worldwide a safeguard between them since it protects the party’s
networking, startups also select family offices as safer important information dealing with the ideas, finances,
venture sources. trade secrets, etc.

The investment made by a family office is for a longer • Valuation of the Start-Up
period of time and has no set maturity date. The primary
difference between family offices and venture capitalists is Valuation of the company is one of the essential steps
their investment horizons. VCs are looking to build a portfolio before investing in a company. It should be done by
of early-stage growth enterprises with an investment period a certified Charted Accountant (CA) to give more
of 10-12 years. On the contrary, because family offices do clarity and transparency into the key elements of the
not deal with investment horizons, the capital provided by company.
them might be viewed as a perpetual source of capital. This
is advantageous for start-up founders because they are not • Due Diligence Report
under pressure.
Due Diligence is a process used to study and examine
Another aspect is that venture capitalists contest for the overall value of the company. It is performed by
agreements with a flurry of public initiatives that draw a firm to have a better and thorough understanding
attention to themselves. Family offices, on the other hand, of the company and its prospect. Thus, it helps the
frequently bring confidentiality and caution to the table. investor to seek a clearer overview of how the company
Industry experience, Indian market expertise, and a well- is going to work, invest, operate, etc., before funding
rounded network are further advantages of family offices, all them.
of which are critical for the development of a new business.
• Term-sheet
PROCESS OF INVESTMENTS IN
The term-sheet is a document which is enshrined with the
STARTUPS terms on which the investor provides the company with the
Funding is like a spirit for any start-up or company which investment either in a way of shares or convertible notes,
requires money to begin with. It is necessary for the company’s or any other form of funding. It is a non-binding agreement
survival as well as growth. The key to their development and which makes sure that the duties and responsibilities of
success is ‘finance and money,’ which is frequently a source both the sides are being followed.
of difficulty for these entrepreneurs as they are already new
in the market. • Share Subscription and Shareholder’s Agreement

Family offices investing in a start-up has been blooming Share subscription agreement deals with issuance of
lately. The new generations coming are well versed with shares of the company to the investor in consideration
the idea of investing and growing their family wealth handed of an amount, which is decided upon the company’s
down to them by their elders. The evolving trend in India’s valuation. It reads out the rights an investor holds as per
start-up arena has begun to draw more and more funding the shares being issued to them.
from family offices. Due to their long-term investing approach,
brand recognition, and worldwide networking, start-ups also Shareholder’s agreement on the other hand lays down
select family offices as safer venture sources. the elements and terms relating to the working of the
start-up. It deals with how things will be managed, how
Turning a business idea into a money-making machine, on
the process of transfer of shares would take place, etc.
the other hand, needs a significant amount of time, effort,
professionalism, and capital. Here are the documents which
are required by the Family Offices to make investment in
start-ups:
• Research Work
Before investing in any project, company, or idea, it is
advisable to do proper research work in the same area.
An investor before funding such projects should know the
fundamentals of the business. When it comes to attracting
investment, a business plan and other documentation are
critical tools for communicating about the start-up as an
investment opportunity that investors should not overlook,
especially given the high volume of investment requests
they will get.

• Non-Disclosure Agreement (NDA)

A non-disclosure agreement is a contract which reads

out the duties, obligations and other rules which focus

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• Exit Strategy

In the event of an emergency, there should always be

a backup plan. No one wants a company to go out of Family offices investing in a start-up has
operation, but if it does, the liabilities and assets must be
allocated to creditors and shareholders/investors. Thus, it been blooming lately. The new generations
is important to make sure that there is a provision which coming are well versed with the idea of
should state what will happen if the firm is dissolved, investing and growing their family wealth
merged, sold, or otherwise disposed of. And as stated in
the agreement, each party shall receive their fair share handed down to them by their elders. The
and carry the weight of debt equitably. evolving trend in India’s start-up arena
has begun to draw more and more funding
STRUCTURE OF FAMILY OFFICES from family offices. Due to their long-term
STRUCTURED (IN TRUST, LLP, COMPANY) investing approach, brand recognition, and
The High Net-worth Individuals can make investments worldwide networking, start-ups also select
through a corporation, LLP, Private Trust, or a HUF. The family offices as safer venture sources.
decision to make such investments depends upon a number
of factors:

• Taxation:

Individuals, HUFs, and trusts pay a headline tax rate of • Secure interest of passive family members: 
30% (with an effective tax rate of 35-43 percent due to Visibility on economic ownership becomes obvious
appropriate surcharges and cess), while businesses to family constituents who may not have any active
pay a base tax rate of 22%. (Translates to effectively 25 involvement in the actual business as beneficiaries of a
percent, including surcharge and cess). With MAT no trust. Without a trust, such members would end up with
longer in effect, there is an arbitrage to retain investments a direct share or interest in the company, LLP, which can
(particularly income-producing instruments) in a obstruct commercial operations.
corporate structure where family members do not have
personal liquidity needs and the money pooled under • Regulatory requirements: 
the corporate are typically redeployed. Regardless of
the corporate structure, there is a double taxation layer, Any financial activities that are conducted in a firm must
and any payout from a corporation will result in an adhere to the RBI’s NBFC or CIC criteria (in terms of
additional tax on dividends. It may be more efficient to registration, minimum net-owned funds, concentration
hold listed stocks or mutual funds in a trust, LLP, or even norms etc). Furthermore, an LLP may not be mainly
as individuals or HUFs if the investment portfolio includes engaged in financial activities or have investing goals. A
listed equities or mutual funds aimed at producing family trust and a HUF do not need to be registered or
capital gains that are taxed at special rates (10-15%), adhere to NBFC requirements.
due to a number of reasons discussed in the following
points.
HOW IS A TRUST STRUCTURE BETTER?
• Succession Planning: 
As previously mentioned, there are several choices for
Trust is possibly the most adaptable mechanism for establishing family offices in India (for example, a private
ensuring a smooth transfer of wealth from one generation corporation, a LLP, or a trust).
to the next. This has been widely employed by successful
However, because of the flexibility it provides, trust structures
families all around the world. Due to constraints in governing are often favoured over alternative structures. Appointing a
legislation, other entity formations have inherent limits in trustee can also be done in a variety of ways. The Private
adequately addressing succession needs, segregation Trust Company is one of the most well-known. A PTC is a trust
of economic interests, and governance. A trust can also formed by family members with the sole aim of functioning as
protect you from future estate or inheritance taxes. the trustee for a trust-based family office. Because a company
has its own legal personality, having a PTC as trustee
• Ring-fencing and asset protection:  has several advantages, including the ability to ring-fence
potential liabilities arising from a trustee’s breach of fiduciary
In most cases, business owners offer a personal duties, the flexibility to onboard independent professional
guarantee for bank loans since some contracts (both managers for trust management (as PTC employees), and
corporate and personal) subject owners to significant the family members’ overall control over the PTC’s operations
personal obligations. As a result of all of this, family wealth in their capacity as shareholders. In addition to the above,
and personal assets may be vulnerable to claims and family members may opt for independent PTC who can act as
disputes. While retaining personal and corporate assets Trustee of the Trust and comply with the Trust Deed.
in separate legal entities is vital, trust usually achieves
the ring-fencing for asset protection against claims more Family trusts serve as a vehicle for transferring assets to
efficiently. future generations. The most essential reasons for adopting

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ARTICLE Family Offices: A Guide to their Growing Prominence

a Trust are wealth protection, family succession planning,  Protection of unique children’s interests and transfer
and asset transfer primarily for the benefit of family members, of assets to the third or subsequent generation over
both during and after the settlor’s lifetime. the course of their maturation.
• Benefits of a Trust structure are- CONCLUSION
 Create a proper framework for effective and easy Family offices are multifaceted and play an important part
asset administration via the trust route in order to in establishing a strong family governance system. Family
meet the needs of family members; offices, when used properly, become true extensions of the
 Asset consolidation for simplicity of operation; family and custodians of a family’s important heritage. They
serve as an enterprise which serves and works the same as
 Provide for the most efficient and progressive transfer a private bank or an investment agency but keeping in mind
of assets to family members; the needs and wants of the family.
 Create a workable balance between family business There is going to be a significant shift in the way the world’s
governance and ownership; wealthiest families handle their money in the coming
 Protect the family from liabilities that may develop years. Indian family offices are expected to catch up to
as a result of an unexpected incident (asset ring their international counterparts. While establishing a family
fencing); governance structure is the first smart step, business families
must be aware of the obstacles that such arrangements
 Reduce the likelihood of any family disagreements or would entail. There are several complexities to negotiate as
conflicts inside the family. Family trusts can be used well as numerous dangers to avoid.
to form family arrangements/family settlements over
various assets, including company assets, avoiding Consulting a family office can be fruitful for wealthy or ultra-
potential disputes among subsequent generation rich families as it can be seen and observed that these
family members; families while expanding their business and areas of work
 Administrative ease of use and management of tend to invite a couple of complexities like planning of their
assets following the death of a significant family business, organizing their assets, directing the manner of
member, particularly where beneficiaries are located allocation of the funds, winding up of various liabilities they
all over the world; hold, etc. to resolve in an efficient manner.

 Beneficiaries from various tax jurisdictions can With the graph going up in the investment sector, rise in the
benefit from tax optimization; opening and setting up of Family Offices will provide for a
better insight as to how family wealth can be managed with
 Protection from marital disputes;  proper instructions and directions which will not only help the
 Will (testament) provides protection from any legal present generation but also the coming future generations of
disputes and claims over assets; the family.  CS

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