Amendment To The Indian Trusts Act

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.

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.

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for investment by trusts and remove outdated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.