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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

2 comments

  • 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

  • @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.

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