January 19, 2017

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Amendment To The Indian Trusts Act

- Rishabh Shroff, Partner [ Cyril Amarchand Mangaldas ]
- Kunal Savani, Principal Associate [ Cyril Amarchand Mangaldas ]

Rishabhshroff, Kunalsavani

The Indian Trusts Act 1882 (the “Act”) is the only Indian legislation that regulates private trusts (“trusts”) in India. This archaic, 234-year-old legislation, which was passed in colonial times, was finally amended in 2016 by the Indian Trusts (Amendment) Act (“Amendment Act”), but unfortunately, the scope of the amendment was narrow and confined to only one aspect.

An archaic, 234-year-old legislation was finally amended this year; however, the amendment pertains only to one aspect...

Section 20 of the Act outlines the manner in which surplus funds of a private trust may be invested for future use of the trust. Before the amendment, the Act listed seven categories of securities in which trust money could be invested, including promissory notes, debentures, stocks or other securities issued by prescribed authorities. Such authorities comprised some pre-Independence references, including securities issued by the United Kingdom. In principle, these categories permitted investment only in securities or debt instruments that had explicit or implicit government guarantee on their creditworthiness.

The 8th category provided an overall enabling provision that allowed investments by trusts in securities that were (i) expressly authorized by trust deeds, (ii) authorized by the Central Government in notification in the official gazette or (iii) authorized by any Indian High Court by a prescribed rule in this respect. In case trust deeds were silent on the kind of security in which trustees could invest, the process of obtaining approval from the Central Government was on a “case to case” basis, and we understand rarely ever given, if at all. Importantly, the Central Government was only permitted to give approval for investment in securities as requested by the trusts and not to notify the securities or class of securities by itself.

This article provides a brief, critical assessment of the recent 2016 amendment to the archaic Indian Trusts Act, 1882. It explores whether the amendments provide the trustee with greater flexibility to take decisions on the investment of trust money and also questions if the amendment was a wasted opportunity to undertake more substantial reform to this outdated legislation.

In pursuance of the long-pending recommendation of the 17th Law Commission Report 1961, the Amendment Act was passed to amend Section 20 of the Act with the intention to provide trustees with greater autonomy and flexibility to take decisions on the investment of trust money; enable the Central Government to notify securities or class of securities for investment by trusts and remove outdated provisions. The Parliament removed the first seven categories, retaining only the amended version of the said 8th category. Section 20 now provides that trustees can invest the surplus trust money “in any of the securities or class of securities expressly authorized by the instrument of trust or as specified by the Central Government, by notification in the Official Gazette”. Moreover, with the perspective that Indian high courts may not be best positioned to authorize investments for trusts and with the intention of obtaining uniformity, the Amendment Act has omitted their power to authorize investments in securities.

The Amendment Act has been seen as an enabler for the Central Government to notify a class of securities as eligible for investment in trusts. It is a major move to facilitate trusts to invest in securities, mainly listed shares and specified debt securities. This is a welcome step, especially when Indian family businesses are increasingly looking to set up dynastic trusts to hold their business assets. Though well-drafted trust deeds generally specify permissible investments, most trusts are silent on this aspect. Hence, the Amendment Act will provide clarity and flexibility in such cases when trust deeds are silent.

As mentioned, this amendment only touches upon one narrow aspect of the outdated Act. All other provisions do not reflect changes that have occurred in both law and practice over the last century. As the use of trusts becomes more prevalent in India, with both substantial personal wealth and large companies being housed in trusts, the government should look at either substantially amending or replacing this legislation to bring it on par with modern 21st-century trust law principles and market practice. Given the time taken to amend just the said section, one remains eternally hopeful of when these changes may occur.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

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