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Awaits clarity on tax for stake distribution
July, 02nd 2010

The GMR Group has decided to keep on hold an agreement on distribution of promoters stakes among family members till it studies the impact of changed tax and corporate law regulations on various group companies.

The decision will not have an impact on the groups succession plan, said a person familiar with the development. It was a family decision to review the transfer, said GMR Infrastructure finance director A Subba Rao, without giving details.

The withdrawal of share transfer has been notified according to Sebi norms, he added. A GMR Group spokesperson too refused to elaborate. The GMR Group, led by the Rs 5,000-crore GMR Infrastructure, has interests in urban infrastructure, highways, energy, airports and agri-business.

Earlier this month, GMR Projects Private, an unlisted engineering, procurement and construction company, owned by the family, decided not to acquire the shareholding of chairman GM Rao in GMR Industries. The acquisition was mentioned in the family constitution, a document drawn up in 2007 which describes the role of various family members.

Among the probable reasons for holding the transfer of shares is the revised Direct Tax Code, said a legal expert, who did not wish to be named. If one of the companies within the group is earning income that is not liable to be taxed, then any expense this company incurs on growing that income will be disallowed, which could be one reason for the group taking a closer look at the agreement.

The decision may also have been triggered by the business relationship among group companies, according to a person involved in the Family Office business, which manages the wealth and future sharing of re-sponsibilities among family members.

In several groups, various subsidiaries are dependant on a single company for their core functions. If this situation is altered due to a change in shareholding, then the family might want to review such a decision, said a legal expert who is associated with various large business families.

For instance, in the case of the Munjal family, which recently agreed on a family settlement outlining responsibilities, flagship company Hero Honda holds the key to the business relationships among various subsidiaries.

GMR was among the first Indian business families to draw up a family constitution in 2007. The agreement was aimed at avoiding bitter family spats or ownership issues among heirs. Among other things, it lays out each group companys shareholding.

But since it is a private document, the extent of family members stake in group companies is unclear.
The constitution also outlines the selection of a successor and the qualifications that family members must have to enter the business.

It also talks about the process involved in case a family member wants to branch out. The responsibility to chart out functions for the group rests with the centralised decision-making unit, GMR Holding board, and is led by the group chairman, the corporate chairman and the business chairman, which are different functions that have been outlined by the groups constitution. The board prepares strategic initiatives, approves business and annual operating plans, besides preparing the succession plan.

In this case, GM Rao is the group chairman, while GBS Raju is corporate chairman. Mr Raju is responsible for human resources, strategic finance, corporate and strategic planning and corporate communications.

He is also responsible for the international business division, the Sabiha Gocken airport and other corporate functions such as corporate IT and corporate integration. Apart from Mr Rao and Mr Raju, other members of the GMR Holding board include K Balasubramanian, Srinivas Bommidala, BVN Rao, Kiran K Grandhi and Prasad Kumar.

Mr Bommidala is chairman of urban infrastructure and highways, and played an important role in setting up the groups power business. Mr Grandhi is the chairman of the airports business and heads the groups airport business development.

A family constitution is a voluntary initiative to bring in governance practices among members, said K Ramachandran, associate dean and Thomas Schmidheiny, fellow of family business & wealth management at the Indian School of Business, Hyderabad. It is driven by family values and peer pressure. Individual members have to make adjustments and be flexible in terms of their code of conduct and behaviour, he added.

Families should visualise multiple scenarios that may emerge with reference to each element of the constitution. Such an approach is likely to bring out most of the contentious areas and members will evaluate implications of any of their decisions on the contents of the constitution, he said.

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