Thursday, December 27, 2007

Expanding Investment Horizons for Trusts

Historically, investment avenues for funds held by trusts have been limited. This is on account of Section 20 of the Indian Trust Act, 1882 which contains very specific instruments in which trusts can invest. These are in the nature of risk-free instruments such as government securities, bank deposits and the like, and does not include risk instruments such as stocks and derivatives. Of course, there is the overall enabling provision in Section 20(f) that enables the trust instrument to specify any other types of investment. This avenues has recently been used by drafters of trust documents to widen the scope of permissible investments by trust. Apart from this, Section 20(f) also enables trusts to make other investments as may be authorised by the Central Government by notification in the official gazette, or by any rule prescribed by the High Court in this behalf. These may be cumbersome as the process involved could be time consuming.

By a recent Government decision, there is a proposal to allow trusts to invest in the stock markets. The Union Cabinet has decided to amend Section 20 of the Trust Act, and an amendment is expected to be moved in the Budget Session of Parliament. The reports:

The government on 24 December allowed all trusts to invest in securities, including shares and bonds of listed companies, a move that would further boost the booming market.

For this purpose, an amendment in the Indian Trusts Act, 1982 will be moved in Parliament in the next session to enable the government notify a class of securities as eligible for investment by trusts, said a government statement issued after the meeting of the Union Cabinet here.

A Finance Ministry official told PTI that after the amendment to the Act, the government would allow all trusts set up under the Act, which include private and public trusts like educational trusts, to invest in shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities.

Also, see report in the Economic Times.

This is a welcome move as it not only provides fresh avenues for trust investments but would also result in growth of the stock markets as moneys invested in fixed deposits and government securities would now flow into the stock markets.

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