Saturday, December 6, 2014

Flexibility for Investments by Trusts

Trusts in India are governed by a colonial-era legislation, the Indian Trusts Act, 1882. This legislation severely restricts the investments that trustees may make out of trust funds. Section 20 of the Trusts Act provides a list of instruments into which the trustees could invest the trust funds. These include securities of the type that were issued in the colonial period, including “promissory notes, debentures, stock or other securities of … the United Kingdom of Great Britain and Ireland”. Some of these provisions have outlived their utility and relevance in more modern times. Apart from its archaic nature, section 20 also limited the options available to trustees – for example, investment in shares of companies is proscribed as a general matter.

The purpose behind the restrictions on investments is understandable. Trustees, while handling beneficiaries’ funds, cannot afford to take decisions that might place those funds at risk. On the other hand, there are a number of countervailing factors as well. Trustees may be hamstrung in making investments with lucrative returns so as to deprive the beneficiaries from those. Also, given that the Trusts Act applies largely to private trusts, the beneficiaries ought to be capable of bearing that risk.

After assessing these matters, the Cabinet has now cleared amendments to section 20 of the Trusts Act to rid it of its obsolescence and also to facilitate the broadening of the types of securities into which the trustees may be allowed to invest. Under this dispensation, either the trust instrument can expressly state the types of securities into which investment may be made, or investments may be made in any securities or class of securities the Central Government may specify by notification in the Official Gazette. This move could result in further flow of investment into the securities markets.


spandan biswal said...

all trust and retention account agreements specify that Section 20 of the Indian trusts act shall not apply. I had just sort of assumed that parties had the right under the trusts act to avoid the applicability of this section. will have to re-read :p

Umakanth Varottil said...

@Spandan Biswal. That is a valid point. Even the existing provisions of section 20 allows the instrument of trust to expressly provide for the securities in which investment can be made. To that extent, the current changes seem more to modernize the provisions.