Promoters go for ‘asset protection trusts’ fearing default – The Economic Times

lipped from: https://economictimes.indiatimes.com/news/company/corporate-trends/promoters-go-for-asset-protection-trusts-fearing-default/articleshow/82298238.cms

Synopsis–Many companies have seen profitability crash or even entire business models facing major disruption due to Covid pandemic driven demand slump. The fear is that once the lenders come out of the “moratorium mode”, the defaults will start mounting and bankruptcy would be a step away.

Fearing that their businesses will face further stress due to the second Covid wave, a large number of Indian promoters are creating asset protection trusts and transferring their assets to stop lenders and investigating agencies going after these in case of a default.

Many companies have seen profitability crash or even entire business models facing major disruption due to Covid pandemic driven demand slump. The fear is that once the lenders come out of the “moratorium mode”, the defaults will start mounting and bankruptcy would be a step away.

Before that, many promoters are ring fencing a portion of their assets in special trusts that are legally impenetrable. “In last one year, post the breakout of the pandemic many businesses got adversely affected. The fear of default drove many businesses to think of asset protection trusts,” said Sandeep Nerlekar, managing director at Terentia Consultants, one of India’s leading players managing family trusts.

Covid-19 default

Take the case of a New Delhi based family that is into the restaurant business. The family runs several restaurants across India and was on an expansion spree till 2019, but has been badly hit in the last two years due to Covid pandemic. In March this year, the family created a trust and will be transferring some real estate and certain other shares (not related to their business) in it, a person close to the development said. Many others are following suit, say industry experts. “It has been over a year now but these fears still loom over the leveraged business communities and their search for such structures still continues,” said Nerlekar. Industry experts say that in many cases two separate trusts are being created.

“HNIs prefer to create two separate trusts, one each to manage their Indian and foreign holdings, which is also advisable. We have seen a substantial increase in the number of promoters and HNIs creating family trusts since 2020 largely due to the Covid pandemic,” said Prem Rajani, managing partner at Rajani Associates, a law firm.The trusts are structured in a way where the promoter would not be a trustee and hold only about 5-10 per cent stake in the family trust. The fear is that banks will go after their personal assets if they default on loans.

Industry experts say that Covid pandemic has caused a lot of disruption and some of the mid-scale and small companies may never be able to recover from it.

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