By Gaurav Bhagat, Founder, Gaurav Bhagat Academy
India is all set to experience the largest ever wealth transfer in the history of this country from one generation to another. The total amount of family wealth to be transferred to the next generation during the coming ten years is estimated to be somewhere between 1.3 and 1.5 trillion dollars, which constitutes 70 per cent of the country’s family wealth and over 30 per cent of its GDP.
Although many think that the matter of succession planning involves only extremely wealthy families, it is important to remember that every family, regardless of their financial status, that has any sort of assets, be it real estate, stock, business or anything else, is concerned with the proper distribution of their possessions among the next generation.
Current state of succession planning in India
Family firms in India hold a crucial economic position, yet are far less ready for succession when compared to those outside India. According to the 12th Annual Global Family Business Survey conducted by PwC, 36% of family business organisations in India do not have a clear succession plan as opposed to the global average of 28%. In addition, only 15% of these firms have strong succession plans, whereas others depend on family discussions. The survivorship statistics show even more significant disparities. While 30% of family businesses around the world survive into the second generation, 12% into the third generation, and 3% into the fourth generation and beyond, in India, it was shown that 20-30% of family firms reach the second generation, 12-15% the third generation, and 5% the fourth generation. Thus, only 20-30% of Indian family firms can be considered successful since 70-80% do not succeed past the founder or second generations due to a lack of planning.
Wealth Transfer in Scale
India is generating billionaires at an incredible pace, yet with USD 1.5 trillion of wealth expected to be transferred and only 15% of the country having wills, the potential risks are significant. Approximately USD 1.3 trillion in family wealth is expected to be transferred to the next generation over the coming decade, accounting for around 70% of India’s family wealth. Such wealth consists of billions of rupees held in terms of business assets, real estate, investment assets, and personal assets.
Cost of Parting with Money
Parting with one’s wealth costs much more than anticipated by most people. Disputes related to property and familial relationships make up 76% of all disputes in India, with property disputes contributing 66%, and family disputes constituting 10% of these cases. Only less than 15% of Indians have completed their estate plans, leaving many at risk of expensive court battles. 46.7% of the surveyed individuals never discussed the subject of wills or inheritance, while only 21.8% had extensive talks regarding succession and estates. Moreover, 79.8% of those expected to receive property in inheritance had not yet drafted a will.
Why is Succession Planning Difficult for Indian Families?
There are four unique cultural issues faced by Indian families that make successful succession difficult:
• The first issue is that of the patriarch and power play, where the founder holds dual roles as head of both the firm and family and treats succession as relinquishing control. The uncertainty ends only with the death of the leader and becomes a cause of disagreement between all stakeholders involved.
• Secondly, the Indian culture of peace keeps the founder secretive regarding his business affairs so that there is no family quarrel, but this uncertainty lasts until the death of the founder.
• The third issue is that of the cultural mindset in Indian society, where any discussion involving the death of an elderly member and property division is seen as disrespectful.
• The final issue concerns the monetary disincentives, such as expensive processes for asset division and paying stamp duty, among others.
Economic Consequences
The significance of family firms in India cannot be overstated. Eighty per cent of Indian enterprises are family-run, contributing 75% to India’s GDP, which is expected to increase to 80-85% by 2047. Family-owned enterprises are responsible for 75% of employment, have a market capitalisation of 71%, and out of thirty firms of the SENSEX, seventeen firms are family-controlled. However, despite such importance, only fifteen per cent of family firms in India have a well-documented succession plan. Further, only 63% of family businesses in India have formal governance procedures that include shareholder agreements, family constitutions, and wills.
Creating a Legacy: How Indian Families Can Tackle Succession Issues
Here are five things that Indian families should do to successfully tackle succession issues:
• Write Up Your Succession Plan in Advance: Begin planning for succession 5-10 years ahead of time. While only 15 per cent of family enterprises in India have an established plan, writing one up will ensure better survival chances. Make your leadership plan, ownership structure, succession criteria, and timeline clear.
• Consult External Advisers: Seek Advice from External Parties– Experts will provide objective views in the mediation of internal conflicts, structuring, providing legal advice, and opinions on choosing future leaders within the family. They help families go through the processes in an emotional manner.
• Challenge Cultural Stigmas: Eliminate the stigma associated with the discussion on how to divide family assets and the death of an elderly family member. The founder should gradually delegate authority, rather than making things too secretive. Thus, small disputes will not escalate into rifts separating family and business interests.
• Practice Competency-Based Accountability: Don’t hire people due to nepotism, but rather hire the most competent individual for any role within the company. Prepare performance scorecards to make sure everyone is being judged by how well they are doing.
• Generation Alignment with Vision: The outgoing and the incoming leaders have to agree on the future of the business. It will be important for the family to define its core values and its core focus in line with its long-term vision.
The cost of procrastination cannot be higher. There are 85% of people in India who don’t have a will, and only 20–30% of family businesses that transition smoothly. The clock is ticking.