RBI's Trust concerns stall wealth transfer plans of India's rich families

Time of India

02-07-2025

Mumbai: A 'trust deficit' between the regulator and several rich Indian families is stalling plans to ring-fence wealth and put in place a
succession strategy
for the nextgen.
Many promoter families hold shares of the companies they own as well as portfolio investments in other securities and listed non-group entities through closely-held non-banking finance companies (NBFCs). Family patriarchs have often preferred transferring their-and other family members'-ownerships in such NBFCs to a trust which holds the investments and distributes the earnings to the trust beneficiaries.
This family blueprint to preserve wealth now faces a challenge. The Reserve Bank of India (
RBI
), which regulates NBFCs, is questioning the transfer of ownership of at least four families to discretionary trusts due to the opaque structure of trusts, persons familiar with the subject told ET. If an
NBFC
holds a substantial stake in any listed entity, an
ownership transfer
of the finance company also requires the approval of the Securities & Exchange Board of India, under the takeover code.
"Perhaps, RBI could take a cue from the approach adopted by
Sebi
vide its 2017 circular, to consider prescribing conditions for addressing policy concerns over future changes or control structure in a trust," said Moin Ladha, partner at the law firm Khaitan & Co. "In any event, most families would retain the control and only a contractual obligation in the nature of trust is created for achieving continuity and succession planning. So, the eligibility and fit and proper status isn't impacted by the settlement to trust," said Ladha.
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Some believe that RBI's reservations may also stem from the fact a promoter giving guarantee to a group company to enable it borrow at a lower interest rate or carry out certain other transaction, may isolate the shares by setting them aside in a trust if the guarantee is invoked. RBI, however, does stall the shift in ownership as long as the NBFC in question is a 'core investment company' holding and managing investments in group companies. Also, core companies which have not raised money from public investors or through bank borrowings, may not need a go-ahead from the regulator.
While RBI did not respond to ET's queries, the regulator, sources said, is likely to harbour the view that unlike long-term, strategic holdings in group companies, an NBFC's investments in shares of non-group companies are in the nature of short-term, portfolio investments. Since the latter kind of NBFCs is considered to be dealing in financial securities, RBI does not want them to be controlled by trusts.
A discretionary trust is formed by the settlor (who is often the head of the family who transfers the assets), immediate family members are named as beneficiaries, and independent professionals or a trusteeship company serve as the trustees responsible for distributing the earnings of the trust from cash inflows like interest, rent, and capital gains to the beneficiaries in proportions that are not prefixed.
"It's sometimes perceived that the RBI is trying to reduce the number of NBFC licence holders. Any transfer of ownership or management application ends in denial. It seems the regulator wants to focus on a few players who do proper compliance. We have seen cancellation of licences for failing to file annual returns or not maintaining adequate capital," said Rajesh Shah, partner at the CA firm Jayantilal Thakkar & Co.
Any change in NBFC shareholding resulting in acquisition or transfer of 26% or more of its paid-up capital requires prior RBI approval. "The process is stringent, with RBI empowered to seek additional information during its due diligence. When the acquirer is a trust, KYC compliance extends to both trustees and beneficiaries, posing greater complexity in discretionary trusts where ownership is undefined. Notably, RBI regulations do not prescribe a specific timeline within which such approvals must be granted, making the overall process both document-intensive and time-sensitive for investors and promoters alike," said Isha Sekhri, partner at Isha Sekhri Advisory LLP, a CA firm.
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