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From the Viewpoint of FDI, Trust Structures Are Essential

    7 June , 2021         Fdiindia

From the Viewpoint of FDI, Trust Structures Are Essential

In India, where most businesses are family-owned, trust structures become increasingly popular for wealth and succession planning. Moreover, increased global business opportunities have prompted business families, particularly the younger generations, to travel to foreign nations and gain residency status. In such a scenario, it is necessary to analyze the features of the Foreign Exchange and Management Act, 1999 (FEMA), notably those about foreign direct investment (FDI) as included under the FEMA (Non-Debt Instruments) Regulations, 2019 (NDI rules).

In a family-owned firm, the settlor (typically the family patriarch) may seek to transfer shares in the company to a trust for the benefit of family members (who may be resident or non-resident). Trustees are usually older family members, who might be either residents or non-residents. As a result, it is critical to determine whether NDI laws permit the vesting of Indian firm shares in trust with non-resident trustees or beneficiaries.

Trusted residence status

The NDI laws, in general, prohibit receiving investment from a person who is not a resident of India unless otherwise specified. According to FEMA and NDI standards, trust is not included in the definition of a person. Furthermore, unlike a corporation (which is an artificial person), courts have decided that a belief is not a person but rather an obligation/confidence vested in trustees to use trust property to benefit the beneficiaries. As a result, it's becoming increasingly difficult to provide the trust any independent residential status. As a result, the trustees' and beneficiaries' residence status may need to be investigated to determine residency.

Whose residence status is essential?

The trustee is empowered under the Indian Trust Act of 1882 to manage and administer the trust property as if it were it is own. As a result, the trustee is understood as the legal owner of the shares because he or she can exercise voting and other rights related to the stakes. Because the trustee cannot profit from the trust's assets, any dividends and buyback gains must be transferred to the beneficiaries. In some ways, a beneficiary's position is comparable to that of a beneficial owner of the shares.

According to NDI guidelines, if a declaration under the Companies Act, 2013 is made about a "beneficial interest" owned by a person living outside India, the investment is considered foreign investment, even if a resident causes it. It means that the beneficial owner's residence matters more than the legal owner's residence regarding NDI rules.

However, under the Companies Act, 2013, "beneficial interest" (as defined in section 89(10)) includes the authority to exercise other rights in addition to dividend/other proceeds entitlement. As a result, the NDI laws' emphasis on beneficial interest may not be rigidly applied to trust beneficiaries. As a result, the NDI laws make it difficult to say definitively whether the trustee's or beneficiary's residential status is relevant.

Approval is required

Courts have found that trust property constitutes a gift given by the settlor (donor) to both the trustee and the beneficiary (done(s)) while interpreting the terms of the Gift Tax Act of 1958. The beneficiary is the beneficiary of the gifted property, which the trustee holds. A resident's gifts of stock instruments to a non-resident are subject to Reserve Bank of India permission under the NDI Regulations.

This approval is more likely to be required if a trust is established with a non-resident trustee or beneficiary. However, obtaining such consent appears appropriate because the NDI rules do not expressly authorize the vesting of shares in trust with non-resident trustees or beneficiaries.

The lack of clarity in provisions might be an obstacle to employing trust arrangements for wealth and succession planning in today's globalized world. To clear up any doubt over trust structures, the government could consider issuing the necessary explanation under the NDI guidelines.