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MONDAY, NOVEMBER 16, 2009, DELHI

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Management
PINK SLIP CONUNDRUM

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the Wall STREET JOURNAL.

3 mistakes to avoid when letting someone go

Management can make the landing softer by ensuring that there are no surprises and no humiliation

iring someone is awful, both for the person doing the firing and, obviously, for the person being asked to leave. Most good managers find the actual deed incredibly difficult. The person being let go might be having the worst day of his career. So how do you manage a parting of ways with as little pain and damage as possible? The answer is pretty straightforward: Managers need to accept that letting people go is a process that they must fully own and pay careful attention to several dos and donts. Usually, the choice to fire someone for non-performance isnt black and white, since precisely who did what and what went wrong in the leadup to the finale can be unclear. For this reason, managers often get firings wrong in one of three ways: 1. Moving too fast: Take the case of a friend who worked at a small but expanding company where, as with many companies that size, mediocre performance was generally tolerated in the name of congeniality. When my friend was promoted to head a 60-person unit, she soon realized that the man in charge of distribution, Richard, could not

WINNING
JACK & SUZY WELCH

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handle the increasingly comIt took my friend around her. Shocked, she reminds you plex logistics. To exacerbate three months to restore equiof all the positive feedback matters, Richard constantly librium and get her unit movyou have given her over the challenged her authority. ing again. years, and ultimately leaves My friend addressed these 2. Not being candid enough: angry and bitter. shortcomingsLog on to www.livemint.com/welchvideo.htm to watch the latest Welch video on may notthe millennials'. you with Richard, to Say youve got a long-time This 'Advice to be the last no avail. Finally, an important employee named Gail, who entrepreneurial, Welch advises the new hear of her. Every employee Calling the current generation of students the most exciting and customer called to complain company things they don't know. who leaves continues to repreemployee to teach the cant reach her sales quotas that his shipment was a week no matter how hard she tries. sent your company. For the late. My friend had had it. Every time you try to tell her next five, 10 or 20 years, they Richard had to go. how badly shes doing, shes will either bad-mouth or To many, including Richard, so cheerful and oblivious that praise your organization. the decision came as a suryou end up hiding your nega3. Taking too long: The third prise. Some staffers felt that tive feelings behind a mixed mistake occurs when a firing he had not been given enough message about working happens too slowly. Everyone warning and they complained smarter. The situation culmi- knows that a person is about that they could no longer trust nates when Gail really screws to be fired, including the pertheir boss or the organization. up, and you impulsively fire son himself, but the boss

waits a long time to pull the trigger. The result is enormous awkwardness in the office that can lead to a sort of paralysis. Why do bosses allow this to occur? Well, firing is so tough that no one likes to do it, and so the event often gets delayed. But sometimes in this situation a manager lets an employee twist in the wind because he wants the victims peers to see the necessity of the decision. In a way its cruel, but most bosses would rather be known as careful than quick on the trigger. If there are so many ways that firing can go wrong, how do you avoid making mistakes? 1. No surprises: Very simply, a good performance evaluation process informs and prepares people for whats ahead in the fairest, most open way possible. If people know where they stand, no one actually gets fired. Instead, when things are not working out, there is eventually a mutual understanding that its time to part ways. In some instances, it can take a couple of years for the endgame to become clear to everyone, but along the way, there will have been many candid conversations about performance and career goals. The possibility of parting ways will have been raised and discussed openly. 2. Minimize humiliation: For a boss, finally delivering the bad news elicits relief. Its over, you tell yourself. I did

it kindly, and now I can focus on other work. However, your employee is probably pretty upset. If youve done everything right, he wont be surprised, but he may still be feeling hurt. The next day and until he departs, you must make sure he doesnt feel like an outcast in a leper colony. Build up his self-confidence. Let him know there is a good job for him out therea job that better matches his skills. You may even help him find it. Your goal for the fired employee is a soft landing wherever he goes. Firings are an unfortunate reality of business. Still, if you handle them right, they can at least be tolerable for the people involved. When its time to let someone go, do it right. No surprises. No humiliation.
2009/THE NYT SYNDICATE

Adapted from Winning (HarperBusiness Publishers, 2005) by Jack Welch with Suzy Welch.)

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GROUND RULES | KETAN DALAL & VISHAL SHAH

Sea Rock judgement

In this case, the shareholders of the assessee company (Sea Rock Investments Ltd) were family members of the Manipal Pai group. There was a dispute among the members, and the dispute was referred to arbitration. According to the terms of the arbitration award, the assessee company had to transfer certain investments (shares in a firm) to certain family members for an agreed consideration. The company argued that the transfer of shares should not be treated as a taxable transfer as the transaction was undertaken pursuant to a family dispute settlement in terms of the arbitration award. The assessing officer did not accept the transaction as family arrangement as the transferee assessee company was separate from it shareholders and it had actually received consideration for the transfer. The high court held that the assessee company was a separate legal entity; thus, even though the shareholders were members of a joint family and the transfer by the company was in settlement of a family dispute, the transfer cannot be said to have been pursuant to such a family arrangement as the shareholders did not have a direct legal right on the investments held by the assessee company, which were the subject matter of the transfer. Further, the assessee company, having received consideration for the transfer, should be held liable for the capital gains. It seems that had the transfer been by the family members, the transfer would not have been liable to capital gains. Incidentally, in this case, the taxpayer had also argued that it had not received any consideration (which aspect is not very clear) and, hence, on that point,

Family arrangements: outside the tax net?

mint COLUMN
along with management rights. While mere reallocation of management rights should not give rise to tax implications, a reallocation of ownership in the family property, say, shares or immovable property, could involve a transfer and, hence, act as a potential tax trigger. Under the Income-tax Act (I-T Act), a transfer of capital asset gives rise to capital gains in the absence of a specific exemption. While transfers pursuant to inheritance or will are specifically exempt, the I-T Act does not specifically exempt transfers under a family arrangement. However, Indian courts have consistently taken a position that a bona fide family arrangement should not be regarded as a transfer but a mere working out of the rights of the family members in the common family property, which always existed. In a recently reported judgement of the Karnataka high court, in the case Sea Rock Investment Ltd (317 ITR 253), involving a family arrangement of the Manipal Pai group, the issue again came up for consideration.

the case had been sent back to the tax tribunal for a fresh adjudication.

Conclusion
Indian courts have consistently held a family arrangement to merely represent the working out of the rights in the common property, between the family participants and, hence, not a taxable transfer. The Sea Rock judgement, while acknowledging the above principle, held that since the realignment was effected for a consideration through the groups holding company, which is a separate legal entity from the shareholders, it would not fall within the ambit of a family arrangement. Now, it is not uncommon for promoter groups to hold investments through private holding companies. A realignment of ownership under a family arrangement may thus entail transfer of shares of such a holding company by the individual participants between themselves or transfer of investments by the holding company itself. Undoubtedly, even the latter transfer is, in substance, part and parcel of, and to give effect to, a family arrangement and, respectfully, should also be out of the tax net. The Sea Rock judgement, to that extent, merits reconsideration on this principle. Interestingly, the proposed direct tax code (DTC) has widened the definition of the term transfer to include any disposition, settlement or an arrangement; it remains to be seen whether DTC would overturn the settled judicial thinking on the subject. Ketan Dalal is executive director and Vishal Shah is associate director, PricewaterhouseCoopers. Your comments and feedback are welcome at groundrules@livemint.com

ndian businesses have, typically, been family-owned. The ownership and, in most cases, even the management of these companies are often in the hands of family members. Obviously, as one generation paves the way for the next, there arises a need to work out the rights of the respective family constituents. This takes the form of a family arrangement. Family arrangements have not been defined under any law. Typically, this involves the working out of the management and/ or ownership rights in the common family property, either following or in anticipation of a dispute or to maintain harmony. Given various (in)famous precedents, a family arrangement is generally documented in a formal contract or a memorandum of understanding. At times, a friendly intermediary takes up the onus, in a fiduciary capacity, to arrive at the distribution plan as regards the common family property and, thereafter, distribute the same among the respective family constituents. The actual realignment could take one of two formsmere separation of management rights with common ownership, or separation of ownership

Realignment of ownership may involve transfer of shares from a holding co; this should be exempt
ed three ingredients: family, property and dispute. Family: A family arrangement necessarily needs to be among family members, and not with outsiders. The term family has not been defined under any law. However, the courts have generally held that the term has to be understood in a wider connotation. A common tie of relation is enough to bring a person within the fold of a family. Also, the existence of legal/succession right to the family property is not a prerequisite to determine whether a person is a family member. Property: The family arrangement should be for working out the rights in the family property. Typically, common property or joint property in the family is considered for the purpose of family arrangement. Individual or self-acquired properties are generally not considered unless antecedent title, claim or interest in the property is shown to be in existence. In essence, an antecedent title of the participants in the subject property is the guiding factor for evaluating

a bona fide family arrangement. It is, however, not necessary that every party taking benefit under the arrangement must necessarily have, under the law, a claim to the property. It suffices if the parties are related to one another and have a possible claim to the property or a claim or even semblance of a claim on some other ground such as, say, affection. Dispute: Normally, a dispute is a prelude to a family arrangement. However, a pre-existing dispute is not always necessary. So, a bona fide arrangement in anticipation of a plausible dispute and to maintain harmony has also been held to be a valid family arrangement.

Not a gift
A family arrangement needs to be distinguished from a voluntary transfer without any consideration, that is, a gift. Thus, the Gauhati high court in Ziauddin Ahmeds case (102 ITR 253) had held that a receipt of family property at less than adequate consideration, pursuant to a family arrangement, cannot be taxed under the erstwhile gift tax law, which sought to deem such receipt otherwise as a taxable gift. Interestingly, the recently amended section 56 of the I-T Act seeks to tax similar receipt of property (including shares) for nil or less than adequate consideration (a la gift) in the hands of an individual. While receipt from relatives is not covered, family arrangements, per se, should also not fall within the ambit of section 56, relying on the above case.

Key ingredients
The courts have held that under a family arrangement, there is no transfer of property by one member to another and it is just an arrangement by which each member takes the share of family property by virtue of his/her antecedent title. As to whether a transfer falls within the ambit of a family arrangement (and, therefore, out of the tax net), the courts have consistently evaluat-