Wealth Management Magazine I VOL 2 I 2009

ECONOMYThe path ahead for the Indian economy

LIFESTYLEThe ballet of bubbles

COVER STORYWealth Transition in the Asian Family Business

Disclaimer:Please note that the opinions expressed in this document are authors’ own and not necessarily that of BNP Paribas. This Publication (Communication) is intended solely for authorised recipients and no one else and BNP Paribas shall not be responsible in case the same is received and/or acted upon by any other person/entity; it shall be the duty and responsibility of the recipient, to ascertain that he is entitled and authorised to receive this Communication and/or to act on it, as per the laws and regulations of the country of citizenship of the recipient and the country of receipt. The information and opinion herein is provided for information purposes only. It does not constitute investment, legal or tax advice nor is it to be relied on in making an investment or any other decision. Please seek relevant professional advice before making any investment decision. Although the information appearing in this magazine was obtained from sources which BNP Paribas considers reliable, we do not guarantee its accuracy and this information can be incomplete or summarized. Reproduction in whole or in part is prohibited without prior permission of BNP Paribas. BNP Paribas (2008). All rights reserved.

Editor’s Note 3

Feedback & Suggestions

gautam.joshi@asia.bnpparibas.com

French Bank Building, 3rd Floor

62, Homji Street, Fort

Mumbai 400 001

The ballet of bubbles See Page 8

Dear Client,

We take great pleasure in presenting to you another issue of Mosaic.

Managing the transfer of family wealth across generations can be a daunting task. Inheritance plans in business families are even more complicated as wealth and worth are often intricately woven into the business. In our cover story, Julie Teo, our MD and Head of Wealth Planning Services, Asia identifies the factors which influence inheritance decisions.

We also have, in this issue, the Ambassador of Champagne in India, Rajiv Singhal, introducing us to the fine world of Champagne and its diverse types.

In our regular column on Economy, Dr. Andrew Freris, our Senior Investment Strategist, Asia looks ahead to the longer term prospects of the Indian and the Asian economies.

As always, through this magazine, we aim to bring to you insights from experts on a broad selection of subjects that may be useful and of interest to you. We hope you will find it interesting reading and look forward to your feedback and suggestions.

Warm Regards,

Gautam Joshim

osai

c I W

ealt

h M

anag

emen

t M

agaz

ine

I VOL

2 I

2009

he Chinese proverb, “Eachfamily has its own difficultscripture (or sutra) to recite”,holds true for all families.Whilst many issues faced by

families in wealth and successionplanning have common underlyingthemes, each is unique, and hencethe solution for each family isdifferent. While underlining thecommon challenges faced byfamily businesses, one should bearin mind that a tailored solution forany family requires an in-depthunderstanding of the family’s owncircumstances. This meanssuccessful wealth transition andsuccession planning needs toaccommodate the family’saspirations and objectives.

The Modern Asian FamilyCharacteristically, the modernfamily is small in size and enjoysgreater affluence. However, smallernuclear families do not under-estimate the need for formalisingwealth transition arrangements.The world today is global innature, be it business relations orfamilial relations. This brings abouta greater need for planning of thenext generation business leadersfor succession or inheritance. InAsia, especially where businessestend to be predominantly family-owned, succession issues andwealth transition are given highpriorities. But similar to theirwestern counterparts, whilst manyare aware of the need to plan, thepercentage of families who planand proceed to implement it areconsiderably low.

Cover Story

Succession planning goes beyond ensuring successful wealthtransition for the family, as Julie Teo elucidates.

Wealth transition in theAsian family business

T

5

Common Observations AboutAsian Family BusinessesAsian family businesses have beenfrequently portrayed as singledecision maker type businessmodel. This is increasinglychanging as the value of engagingprofessional managers, advisorsand the involvement of second orthird generation family members isgaining acceptance. Families,whose businesses began post-World War II, are transitioningfrom first generation to second orthird generation family members.This may involve siblings andcousins, thus creating a set of newand complex family issues, such ashigher number of family membersand added diversity in levels ofbusiness interest and talent.

As the next generation businessleaders take over the reins, we arealso witnessing an evolution incultural norms, both globally andin Asia. For example, families havebecome more democratic in thedecision-making process byinvolving more family members;and there is increased focus onmerit and abilities, rather thanmerely on birth order and genderin wealth transition.

The current business environmentis more competitive and fast-moving. So families can no longerbe complacent, and expect thattheir businesses will survive thestewardship of family memberswho are not as qualified asprofessional managers. As theyounger generation takes on moreresponsibilities, there is a greaterneed for families to plan ahead forbusiness succession. Familialrelations have taken a globalperspective as members of theyounger generation receive foreigneducation, thereby creating socialnetworks beyond their homeground. This creates the need toconsider cross-cultural and cross-jurisdictional perspectives. Allthese developments havecompelled families to be morefocused in strategising andpreparing the family for businesssuccession and wealth transition.

Transition of Wealth & FamilySuccession through GenerationsDescribed below is a broadframework of the transitionthrough generations for familyowned and managed businesses.

In a culture where a handshake seals the deal, challengesare faced by both the first generation wealth creators and

the second or third generation family members.

mos

aic

I Wea

lth

Man

agem

ent

Mag

azin

e I V

OL 2

I 20

09

Cover Story

5. MISSION STATEMENT

Nowadays, most families are encouraged to prepare itsmission in a statement of purpose with the objective ofproviding an opportunity to think and express what it wants asa family. The family must decide what it wants the business tobe, what are the values, what to expect in terms of growthand return on investment, etc.

THE TRANSITION PROCESS

Some steps to managing generationalfamily business, in particular the second and third generation succession:

3. DIVERSIFICATION

The family must understand the risks of having itsassets committed to a single business, and it shouldexamine if they are sufficiently diversified. Oftenwhen the business reaches the third generation,there is an increasing need for diversification.

The TransitionIn successful Asian family-ownedbusinesses, there is often a strongbond between the first and secondgeneration. The second generationfamily members typically enter thebusiness at a young age and mayeven participate in growing thebusiness into a successful venture.Those who are not involved in thebusiness may be aware of theirparents’ strong commitment to thefamily business, and havedeveloped emotional ties to thebusiness which they canunderstand and appreciate.

The second generation familymembers are usually siblings,which means the bloodline andemotional bonds tend to bestronger, regardless of personaldifferences. The third generation’sperspective is different as they arethe grandchildren of the patriarchor founder, and usually would havelittle or no awareness of thebusiness in its formative years.They may not feel as strongly asthe earlier generations.

Third generation family members, who include cousins, are usuallymore diverse in their interest,background and talent. Theperception is cousins are rarely asclose as siblings and this distance,in reality, often increases as thirdgeneration members forge closerelationships with their spousesand friends.

1. FAMILY STRUCTUREIt is important tounderstand theperspectives of thesuccessive generationsas family membersmay view the familyand business asdifferent components. This isnot the case with the firstgeneration where their family andbusiness is considered as one.While business celebrates talentand achievement, in a family themembers expect respect.

mos

aic

I Priv

ate

Bank

ing

Mag

azin

e IV

OL

2 I 2

009

7

ConclusionFamily unity is the underlyingtheme for wealth transition. There are three broad principlesthat apply to family unity across cultures:

The “Three Pillars of Family Unity” The first is an appropriate balancebetween ‘structural’ and ‘process’solutions. Creating the rightplatform for family unity involves abalancing of the right structurethat binds the members of thefamily to certain ways of doingthings and creating the rightatmosphere for the family to workproductively together. The‘structural’ element refers tosetting up a family trust and thelatter, “process” means familygovernance and family advisory.

The second “pillar”, a moreprocess oriented subject, is theextent to which the familyfunctions as a community ofinterest. The long-term well-established successful families weknow often create an environmentin which there is a sharedunderstanding of the family’smission and strategy and an open forum for communicationabout issues.

The third “pillar” is the “publicpurpose” of a family seeking toleave a long-term legacy. Familieshave important private purposes,but those that stay together forgenerations also find a purposethat looks outside the family. Forexample, the family becomesinterested in its business assetsnot only for return on investmentsbut for the good the businesses dofor all their communities:employees, suppliers, customersand the cities in which thebusinesses reside. Another aspectof public purpose is the family’sinterest in social development andengagement in philanthropy.

For most families, the transitionfrom a hierarchical familydominated by first or second-generation entrepreneurs to acommunal environment is one thatinvolves a substantial commitmentand a lot of hard work as well asthe general mirth found in familyinteraction. Not every family wantsto, or can, create itself as acommunity; those that do notusually end up selling or dividingtheir business assets.

Julie Teo is currently ManagingDirector & Head of Wealth Planning Services, Asia of

BNP Paribas Wealth Management. Sheis responsible for managing the bank's

wealth planning services, businesscovering trust and estate planning,

insurance, family office & familyadvisory and strategic philanthropy

2. FAMILY VALUESThe family should review and discuss the values that havemade it successful over the years, and how it canpreserve those values. Since the family’s financial capitalis important, it should consider intellectual and humancapital to be equally important for it to thrive. In thiscontext, intellectual capital refers to competence in themanagement of family matters and human capital refersto the family’s functioning as a community of interest.

4. FAMILY MISSIONThe family should decide what its missionshould be as a family-owned business anddetermine if it is realistic and desirable for it tocontinue to own and manage it. The familyshould decide whether its mission shouldinclude diversifying its holdings and setting upa family office to manage its financial assets orto fund educational opportunities or financeentrepreneurial projects for family members.

6. DECISION MAKING

The family must decide how it will make decisions aboutfamily matters; for example whether a governing oradvisory council should be constituted, how will familymembers be kept informed and given responsibility formaking and carrying out family objectives, etc.

7. STRATEGYThe family must develop astrategy for accomplishingits succession goals; forexample, how will youngerfamily members betrained to take onresponsibility, who willguide and evaluate them?How will their assumingresponsibility affectprofessionals working inthe business who are notmembers of the family?

Family gatherings are frequent; family members do notalways agree about decisions but the spirit is such thatthey will support family decisions once made.

A loud pop and bubblesrushing from the bottle ina stream of celebrationidentify Champagne, themost famous sparklingwine in the world. Here’s aquick introduction to itsvarieties.

The ballet of bubbles

Lifestyle

adame Lilly Bollinger famouslyconfessed “I drink it when I’mhappy and when I’m sad.

Sometimes, I drink it when I’malone. When I have company, I consider it obligatory. I trifle withit if I am not hungry and drink itwhen I am; otherwise I never touchit – unless I’m thirsty.”

It was Champagne, the sparklingwine that comes from the finestvineyards in the northernmostwine growing region of France,where in the 17th–18th century,the Benedictine monk DomPerignon lent the masterstroke ofeffervescence to a long standingwine making tradition.

M

9

Champagne is the unique andcustomary symbol of festivity,rendezvous, celebration andromanticism; and an indispensablecompanion to intense, glorious orquiet moments. The wine of thekings and celebrities, Champagnehas celebrated triumph!

A second fermentation in the bottleand ageing on lees, becamedefining characteristics ofChampagne. This wine is a result ofthe harmony that is achieved by the master winemakers between the very challengingclimate, chalky limestone terroir,choice of only three grapes(Chardonnay, Pinot Noir and PinotMeunier) which for good measuremust only be hand harvested, andadhering to benchmark regulationsto create a treat for the senses –and a perfect drink for any of LilyBollinger’s moods.

The magic of Champagne can neverentirely be captured in words.

It must be experienced.

mos

aic

I Wea

lth

Man

agem

ent

Mag

azin

e I V

OL 2

I 20

09

Brut NV, a classic offering andrecognised style of the house. A unique blend of base wines frommany years – its notes are notsupposed to change over the years.Aged for atleast 15 months, thisusually makes up the chunk of bottlesresting in the fabled cellars. Tastesdivine with pakodas.

Rosé, the path breaking offer of the20th century, has a distinct pinkcolour, which is a result of blending astill red wine from the region or byallowing a prolonged contact(masceration) with the red grapeskins. Rose, is the unrivalled wine ofromance, if you have to have it withfood, try it with desserts.

Blanc de blancs, is made 100% fromthe white chardonnay grapes.Intensely refreshing, it is an interplayof floral and mineral overtones. Blancde blancs is a small treasure andrepresents the elegance and finesse ofchardonnay. An excellent aperitif!

Blanc de noirs, made from eitherpinot noir or meunier grapes or a mixof two. The black (red) grapes give awhite wine, as no contact of the grapeskin with the juice is permitted whilepressing. This champagne is powerfuland rich in aroma and would perfectlycomplement a nice tender steak.

Demi Sec, a variant of the Brut NV, isessentially a dessert time wine. Theaddition of some sugar as dosage(which soothes it through its healing

period after the stressfuldisgorgement) gives medium sweetflavour to it. If you like gulab jamunsand jalebis, this is just the right onefor you.

Extra Brut, is thought to be therevolution of the 21st century – againbased on the variation of the dosage.With no addition of sugar, this is “bone-dry” and is presented “pure”. Itcan fully express its delicate aromaswithout being masked by sugar.

Vintage, the wines of one singleharvest that is one year. InChampagne, the house declares avintage only if they believe that it wasan exceptional year. These wines areaged longer than their non-vintagecousins. These are wines with greatcharacter and complexity.

Brut MV, is an undated offering with a twist. The wines for the assemblage(blending) are chosen only from the vintage years declared by thehouse. It would be unfair to club themwith as non-vintage, so the multi-vintage was born. Enjoy withoysters and foie gras.

Cuvee Prestige, is the pinnacle of itsproduction. Usually made in smallquantities, it is its rarity that ensuresa cult following. It is a symphony ofthe best reserve wines at thecommand of the winemaker, aged aminimum of 3 years. Some houses arejust releasing their 1996 and 1997.

Champagne types are diverse, each with its own inimitable style andflavour. Some of the more widely produced styles are differentiatedby ageing, grapes, dosage or harvests. Each Champagne is preparedto satisfy the different palates. In order to be savoured, the foodserved with the Champagne must compliment it.

Rajiv Singhal is a consultant tointernational luxury products and

Ambassador of Champagne in India

Economy

The rest of 2009 and all of 2010 are likely to be uneventful for theIndian economy; the likelihood of higher interest rates should raisecautiousness among investors approaching the Indian equity market.

Summary• With the economies registeringlow growth in 2010, the recovery of the G3 economies (The UnitedStates, European Union and Japan)will be slow and measured.

However, the Asian macro prospectsremain significantly brighter,because Asian economies, includingIndia, did not experience anybanking or credit crisis but insteadbore the economic impact of theslowdown in the G3 economies.

• It is important to emphasise atthe outset that the longer termprospects of the Indian economywill remain encouraging. However,in the short run, the performance of the financial markets is notnecessarily correlated with that of the real economy.

• The key concern for the Indianeconomy is the likelihood of a risein interest rates, reflecting thenormalisation policy of the RBI andthe sharp rise in the fiscal deficit.Re-acceleration of WPI inflation willnot help either.

• The view of Wealth Managementon equity investment remainsconstructive. In Asia the outlook forSouth Korea and China is promising,despite the chances of tighteningthe monetary policy in the latter. In the case of India, the position isneutral because of above-averagevaluations, the worsening macroand interest rate outlook.

Interest ratesOfficial interest rates in the G3 economies are most likely tostay unchanged through 2010, the difficulties in establishing anexit policy which does not kill-offthe nascent and weak recovery.However, in the case of the US,longer term bond yields will comeunder pressure to rise because ofthe US fiscal deficit and the need tomaintain an expansive fiscal policy.

The path ahead for the Indian economy

3M INTERBANK RATE 2Y GOVERNMENT BOND 10Y GOVERNMENT BOND

%

3456789

101112

SEP-09MAY-09JAN-09SEP-08MAY-08JAN-08SEP-07MAY-07JAN-07SEP-06MAY-06JAN-06

FIG 1: INDIA–3M INTERBANK & GOVERNMENT BOND RATES, 2006-09

mos

aic

I Wea

lth M

anag

emen

t M

agaz

ine

IVO

L 2

I 200

9

11

Following the recent 2009-10 Union Budget of India, it becameclear that the borrowingrequirement of the Indiangovernment would increaseconsiderably as the fiscal deficit for FY10 is expected to rise to 6.8% of GDP.

As Fig.1 illustrates, the marketsreacted to the wider deficit byaccentuating the rising tendency of medium and longer termgovernment bonds yields while theshorter term rates remainedrelatively flat or mildly rising. Itmust not be forgotten that the RBIhad embarked on a program ofaggressive cuts in interest ratesstarting in October 2008 and endingin April 2009 with a total of 325 bpscuts. In the context of the creditand banking crisis in the G3economies, these moves made asense and it helped to cushion theIndian banking system, although interms of systemic and marketmovements the impact of the creditcrisis was minimal. However, theRBI in its last credit review statedclearly that it would look tonormalise the rates at some stage.

The economy and inflationThe prospects of a poor monsoonfor 2009 is likely to cap the GDPgrowth rate for 2009-10 but theperformance of the economy so farhas been strong with the GDPgrowing at 5.8% and 6.1% on a year-on-year basis respectively,during the first and second quartersof this year. The economy couldachieve a 6% GDP growth rate for2009 and possibly for 2010.

As shown in Fig.2, inflation,however, presents a differentpicture. After falling to deflationlevels in 2009, primarily due to thehigh base effect of 2008, WPI inflation is now reacceleratinginto a positive territory, pushedalong by the rising food prices.

If the monsoon turns out to be poor,it can push food prices higher up inwhich case the costs of foodsubsidies will also rise at the timewhen the budget deficit is widening.As indicated, the RBI has signalledits desire to hike rates in order,among other reasons, to keepinflationary expectations down. This in itself will make the growingfiscal deficit worse. For example,the interest rate payable on thenational debt is expected to rise as percentage of all revenues, fromabout 35% in FY09 to nearly 37% in FY10. Over a third of revenues,instead of being spent oninfrastructure or productiveprograms, are used to service a growing national debt

The balance of payments willremain relatively stable as oil prices (oil representing nearly one-third of all imports) are notexpected to rise significantly, if atall, from current levels, and thepace of economic growth in Indiamay not justify a strong spurt ofimports growth. The modestrecovery of the G3 economies willnot lead to an exports boom. The INR is also expected to remainrange bound although the weaker dollar could support it atstronger levels.

In sumThe rest of 2009 and all of 2010 are likely to be uneventful for the Indian economy, although the likelihood of higher interestrates should raise the degree ofcautiousness by which investors approach the Indianequity market.

The key concern for the Indian economy is thelikelihood of a rise in interest rates, reflecting thenormalisation policy of the RBI.

Dr. Andrew Freris is SeniorInvestment Strategist, Asia,

BNP Paribas WealthManagement. He is with the

Bank since 2000 and hasheaded research for leading

global banks. He has taught atLondon Metropolitan University

and at the City University ofHong Kong,

and is the author of numerousbooks and articles

on economy and finance.

WPI MAIN INDEX WPI FOOD

-202468

101214

May-09Jan-09Sep-08May-08Jan-08Sep-07May-07Jan-07Sep-06May-06Jan-06

%

FIG 2: INDIA - WPI, 2006-09