Law of Trusts
Trusts in Capital Markets: Mutual Funds, REITs, InvITs and AIFs
Some of the largest trusts in India are not family settlements but investment vehicles holding lakhs of crores of rupees: mutual funds, real estate investment trusts (REITs), infrastructure investment trusts (InvITs) and most alternative investment funds (AIFs). Each is constituted as a trust under the Indian Trusts Act, with a registered trust deed, and is then regulated in detail by the Securities and Exchange Board of India (SEBI). This note explains why the trust form is used and how the general law and SEBI regulation fit together.
1. Why the Trust Form?
- Segregation: trust property is held separately from the assets of the sponsor, manager and trustee, and is not available to their creditors (Topics 6 and 53).
- Fiduciary protection: the trustee owes the strict duties of Chapter III to investors (unitholders), who are the beneficiaries.
- Pass-through taxation: the trust structure allows income to be taxed in investors' hands rather than at both the vehicle and the investor level, under special provisions of tax law.
- Flexibility: units can be issued and redeemed without the capital maintenance rules that apply to companies.
2. Mutual Funds
Under the SEBI (Mutual Funds) Regulations, 1996, a mutual fund must be constituted as a trust under the Indian Trusts Act, with a trust deed registered under the Registration Act, 1908. The structure has four parties:
Party | Role |
|---|---|
Sponsor | Establishes the mutual fund and contributes initial capital; must meet SEBI's eligibility criteria |
Trustee (trustee company or board of trustees) | Holds the fund's property for unitholders; supervises the asset management company; ensures compliance; a majority of trustees must be independent of the sponsor |
Asset management company (AMC) | Manages investments under an investment management agreement with the trustee |
Custodian | Holds the securities in safe custody |
Investors hold units representing beneficial interests in the scheme. Delegation of investment management to the AMC is authorised by the trust deed and the regulations, fitting within exception (a) of Section 47 of the Trusts Act (Topic 23).
3. REITs and InvITs
REITs (under the SEBI (Real Estate Investment Trusts) Regulations, 2014) and InvITs (under the SEBI (Infrastructure Investment Trusts) Regulations, 2014) pool investors' money to own income-producing real estate or infrastructure, usually through special purpose vehicles.
Feature | REIT | InvIT |
|---|---|---|
Assets | Completed, rent-generating real estate (offices, malls, warehouses) | Infrastructure projects (roads, power transmission, pipelines, telecom towers) |
Form | Trust with registered trust deed | Trust with registered trust deed |
Parties | Sponsor, trustee (a SEBI registered debenture trustee), manager | Sponsor, trustee (a SEBI registered debenture trustee), investment manager, project manager |
Distribution | Most net distributable cash flows to unitholders | Most net distributable cash flows to unitholders |
Listing | Units listed and traded on stock exchanges | Public InvITs listed; private InvITs also permitted |
REITs and InvITs are "business trusts" for income tax purposes, with a special pass-through regime for interest, dividends and rental income received from their special purpose vehicles. SEBI has also introduced a framework for small and medium REITs with lower asset thresholds.
4. Alternative Investment Funds
Under the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF is a privately pooled investment vehicle (venture capital, private equity, hedge funds and others) that may be a trust, company, LLP or body corporate. In practice most AIFs are trusts, with a trustee, a sponsor and an investment manager. Category I and II AIFs enjoy pass-through tax treatment for most income.
⚠ Note Because AIFs are commonly trusts, disputes among investors, trustees and managers raise the arbitrability question discussed in Topic 12. Fund documents often channel disputes through contracts with the investment manager, which may be arbitrable, while disputes under the trust deed itself may not be. |
5. General Trust Law and SEBI Regulation
- Indian Trusts Act as the base: the trustee's ownership, fiduciary duties, disabilities and liabilities apply, except where the trust deed and regulations modify them.
- Regulation as overlay: SEBI regulations prescribe eligibility, investment limits, disclosure, valuation, governance and independence requirements well beyond the general law.
- Investment powers: the regulations, not Section 20 of the Trusts Act, define permissible investments (Topic 16).
- Remuneration: trustees and managers are paid under the deed and regulations, satisfying Section 50 (Topic 24).
- Enforcement: investors have both trust law remedies and the regulatory and grievance mechanisms of SEBI and the stock exchanges.
⚠ Key point Mutual funds (SEBI Mutual Funds Regulations, 1996), REITs and InvITs (SEBI Regulations, 2014) and most AIFs (SEBI AIF Regulations, 2012) are constituted as trusts with registered trust deeds, because the trust form gives segregation of assets, fiduciary protection for investors and pass-through taxation. Mutual funds involve a sponsor, trustee, AMC and custodian; REITs and InvITs a sponsor, a debenture trustee as trustee and a manager. The Indian Trusts Act supplies the base duties, and SEBI regulation overlays detailed governance, investment and disclosure rules. |
6. Related Topics and Provisions
- Trustees in debt and secured finance (Topic 51)
- Trust property in insolvency (Topic 53)
- No delegation (Topic 23): delegation authorised by the instrument
- Trust deed in practice (Topic 12): arbitrability