Family arrangements in India: Legal backbone of legacy realignments

What truly defines a family arrangement is its structure as a series of mutual commitments. These may include cash or asset settlements to address valuation mismatches between branches, corporate restructuring (such as demergers, share swaps, or transfers of control), board realignments, and non-compete clauses.

In India’s legacy business families, ownership structures are often deeply intertwined, spanning multiple entities, generations, and business lines. As priorities shift and families grow, internal realignments become inevitable - not to extract value, but to preserve it. In such cases, the legal framework of family arrangements plays a pivotal role.

A family arrangement is far more than a settlement. It is a structured, negotiated blueprint that aligns governance, ownership, cash flow, control, and brand strategy - designed to ensure continuity and harmony - built on mutual promise rather than adversarial positioning. The overarching aim is to preserve collective value while keeping sensitive issues out of courts and the public domain.

One of the unique legal features of a family arrangement in India is its broad definition of ‘family’. Jurisprudence does not limit the term to a Hindu Undivided Family or linear kinship. As long as the parties can establish a shared business interest or ancestral connection - no matter how remote - they may enter into a legally valid arrangement. Courts have upheld such compacts among cousins, distant relatives, and even entities controlled by different wings of the same family, emphasizing commercial substance over rigid genealogy.

What truly defines a family arrangement is its structure as a series of mutual commitments. These may include cash or asset settlements to address valuation mismatches between branches, corporate restructuring (such as demergers, share swaps, or transfers of control), board realignments, and non-compete clauses. In many cases, a shared brand is divided or licensed out under agreed norms—one branch may retain the original name, another may adopt a variant, or usage may be restricted by geography or business line. These covenants are enforceable, measurable, and central to the commercial viability of the arrangement.

Despite being private in nature, family arrangements must navigate India’s regulatory landscape. Under competition law, intra-group restructurings are typically exempt under Schedule I of the CCI Combination Regulations. However, if the transaction involves a change in control - say, one branch ceding joint control to another - Section 5 of the Competition Act may be triggered, requiring notification.

For listed entities, the SEBI Takeover Code applies. Inter-se promoter transfers are exempt from open offer obligations under Regulation 10(1)(a), provided the parties have shared promoter or PAC (persons acting in concert) status for at least three years. Where the realignment involves corporate restructuring—such as mergers, demergers, or issuance of shares—further exemptions under Regulation 10(1)(d)(iii) may also be available, subject to correct structuring and disclosure.

Cross-border elements add another layer of complexity. Where non-resident family members are involved, compliance with the Foreign Exchange Management Act (FEMA) becomes essential. This includes pricing regulations under the Non-Debt Instrument Rules, reporting obligations like filing Form FC-TRS, and RBI approvals in sectors with FDI caps. Proper sequencing and classification—whether the transaction constitutes a transfer of shares or control—can make or break regulatory compliance.

Taxation is another key concern. Historically, questions have been raised over whether family arrangements attract capital gains tax or income tax under the deeming provisions. However, jurisprudence has evolved. Courts have consistently held that where a family arrangement is genuine, seeks to resolve or avoid disputes, and involves reallocation of pre-existing rights, it does not constitute a "transfer" under Section 2(47) of the Income Tax Act, and hence does not trigger capital gains tax.

Further, receipt of shares or assets under such arrangements is not considered a gratuitous transfer under Section 56(2)(x), provided it is backed by valid consideration—such as reciprocal commitments, brand allocations, non-compete clauses, and restructuring obligations. The emphasis is on documenting commercial substance and ensuring all elements of the arrangement are traceable and defensible under scrutiny.

In summary, family arrangements offer a sophisticated legal mechanism for engineering inter-generational realignment without disruption. They enable families to navigate the complexities of succession, governance, and business separation in a way that is collaborative, forward-looking, and shielded from public acrimony.

In an age where litigation can erode legacy faster than market volatility, such arrangements represent a quiet but potent tool for long-term value preservation. When carefully drafted and correctly executed, they are not just instruments of legal planning—they are frameworks of trust, stability, and strategic foresight.

(Binoy Parikh is Partner, Katalyst Advisors, a Mumbai headquartered M&A advisory firm)

Views are personal and do not represent the stand of this publication.