Investment of Trust Money and the 2016 Amendment (Sections 20, 20A and 40)

When a trust holds money that is not needed at once, the trustee must invest it, and the law has always controlled where. For more than a century Section 20 confined trustees to a short statutory list of safe securities. The Indian Trusts (Amendment) Act, 2016 replaced that list with a modern scheme: trustees may invest in securities authorised by the trust instrument or specified by the Central Government by notification. This note explains the investment duty, the old and new Section 20, the related powers in Sections 20A and 40, and how the prudent person standard governs investment decisions.

1. The Duty to Invest

Idle money loses value. Where trust money cannot be applied immediately or at an early date to the purposes of the trust, the trustee is bound to invest it. A trustee who leaves large sums uninvested without good reason commits a breach of trust and may be charged with interest (Section 23, clauses (c) and (e); Topic 17). The duty is subject to any direction in the instrument of trust, which may widen, narrow or specify the permitted investments.

2. Section 20 as Substituted in 2016

The two sources of authority

• The instrument of trust: securities or classes of securities expressly authorised by the deed or will. An author may give wide powers (for example, any listed equity) or narrow ones.
• Central Government notification: where the instrument is silent, the trustee may invest in the securities the Central Government specifies by notification in the Official Gazette.

The life tenant's consent

The proviso protects an adult beneficiary who is entitled in possession to the income for life (or a greater estate). Because the choice of investment directly affects his income, no investment may be made without his written consent. This is an application of the duty of impartiality between income and capital beneficiaries (Section 17; Topic 15).

"Securities"

The Explanation adopts the definition in Section 2(h) of the Securities Contracts (Regulation) Act, 1956, which covers shares, bonds, debentures and other marketable securities, government securities, units of collective investment and mutual fund schemes, and certain other instruments.

3. The Old List and Why It Was Replaced

Before 2016, Section 20 listed the permitted investments: promissory notes, debentures and other securities of the Central or a State Government; stocks or debentures of certain railway companies; debentures of certain local authorities; first mortgages of immovable property in India (subject to value limits); units of the Unit Trust of India; and any other security expressly authorised by the instrument or by the Central Government. Section 20A, inserted later, allowed purchase of redeemable securities, but subject to a cap on the price paid relative to redemption value.

The list was out of step with modern markets: railway company debentures had little relevance, and trustees could not invest in listed equities, debt mutual funds or index funds that ordinary prudent investors routinely use. The 2016 Act, which received assent on 26 July 2016 and was brought into force on 17 April 2017, replaced the list with the notification mechanism and removed the price cap from Section 20A.

4. The 2017 Notification

The Central Government, through the Ministry of Finance, issued a notification in April 2017 specifying the securities in which trustees may invest. Broadly, it covers:

• Government and guaranteed securities: Central and State Government securities, and securities fully guaranteed by either.
• Debt mutual funds: units of SEBI regulated debt schemes.
• Corporate and bank debt: listed debt with a minimum residual maturity, Basel III Tier I bonds of scheduled commercial banks, and infrastructure debt instruments, generally needing at least an AA rating from two SEBI registered rating agencies.
• Equity: shares of listed companies above a market capitalisation threshold, and equity oriented mutual fund schemes.
• Index products: exchange traded funds and index funds tracking the BSE Sensex or NSE Nifty.

5. Related Powers: Sections 20A and 40

6. Prudence in Investment

Section 20 defines what a trustee may invest in. Section 15 governs how he chooses among permitted investments: as carefully as a man of ordinary prudence would with his own money (Topic 14). In practice this means:

• Suitability: choosing investments suited to the trust's purposes, time horizon and the needs of income and capital beneficiaries;
• Diversification: avoiding concentration in one issuer or sector, which a prudent investor would regard as unduly risky;
• Advice: taking proper advice where the trustee lacks expertise, while retaining responsibility for the decision;
• Review: monitoring investments and varying them under Section 40 when circumstances change, as the illustration on a firm's changed composition in Section 15 shows;
• Impartiality: balancing income yield and capital growth between successive beneficiaries (Section 17).

An unauthorised investment is itself a breach of trust, and the trustee is liable for any loss it causes, however carefully he chose it (Section 23). An authorised investment made imprudently is also a breach, because Section 15 is not satisfied.

7. Related Topics and Provisions

• Standard of care (Topic 14): Section 15
• Impartiality (Topic 15): income and capital beneficiaries
• Breach of trust and liability (Topic 17): interest on uninvested money under Section 23
• Statutory regulation of public trusts (Topic 42): investment rules under State public trust laws