Trusts in Commerce and Finance: Complete Notes (Part L)

Part L shows the private trust at work in modern commerce: as the vehicle for mutual funds, REITs, InvITs and AIFs; as the holder of security for lenders; in employee benefit schemes; in insolvency; and in family estate planning. This consolidated note covers Topics 50 to 54.

1. Why Commerce Uses the Trust

Across these uses, the trust offers the same advantages: segregation of assets from the sponsor, originator, employer or trustee, so they survive insolvency; a single holder of title for a changing body of investors or lenders; fiduciary duties owed to them; and, in many cases, pass-through tax treatment. The Indian Trusts Act provides the base, and sector regulation (SEBI, RBI, labour and tax law) overlays detailed rules.

2. Capital Markets and Finance

Vehicle	Framework	Key parties
Mutual fund	SEBI (Mutual Funds) Regulations, 1996; registered trust deed	Sponsor, trustee, AMC, custodian
REIT and InvIT	SEBI Regulations, 2014	Sponsor, SEBI registered debenture trustee as trustee, manager
AIF	SEBI (AIF) Regulations, 2012; mostly trusts	Sponsor, trustee, investment manager
Debenture trust	Companies Act, Section 71; SEBI (Debenture Trustees) Regulations, 1993	Company, debenture trustee, holders
Security trust	Security trustee agreement	Borrower, security trustee, syndicate lenders
Securitisation trust	RBI Master Direction, 2021; SEBI 2008 Regulations	Originator, trustee, investors
ARC trust	SARFAESI Act, 2002	ARC as trustee, security receipt holders

3. Employee Benefit Trusts

Provident fund trusts of exempted establishments: employer and employee trustees, prescribed investments, statutory interest rate; now under the Code on Social Security, 2020 (in force 21 November 2025).
Gratuity and superannuation funds: irrevocable trusts approved for tax purposes, often insured.
ESOP and welfare trusts: Companies Act, Section 67(3)(b); for listed companies, SEBI SBEB Regulations, 2021.
Non-deposit of PF deductions is criminal breach of trust (BNS, Section 316, Explanation).

4. Insolvency

Property held on trust for others is not available to the trustee's creditors. The IBC excludes from the liquidation estate assets held in trust for third parties and provident, pension and gratuity fund dues (Section 36(4)(a)), and from the resolution professional's control assets held under trust (Section 18, Explanation); individual bankruptcy similarly excludes trust property. The trust must be genuine and identifiable; mixed funds require tracing (Section 66); settlements to defeat creditors may be avoided. A discretionary beneficiary has no fixed interest for his creditors to seize.

5. Family Trusts

Family trusts serve orderly succession, keeping businesses together, providing for the vulnerable, asset protection, privacy and dispute reduction. Typical features are an irrevocable settlement by registered deed, family or professional trustees, a discretionary or specific scheme, sometimes a protector, and a letter of wishes. Limits include lawful purpose (Section 4), capacity and personal law (Section 7), perpetuity and accumulation rules, registration, stamp duty and the benami law. Tax follows the private trust rules, and foreign trusts raise FEMA and disclosure obligations.

⚠ Key point

Part L in one line: the trust is the backbone of Indian investment vehicles, secured lending, securitisation, asset reconstruction and employee benefit funds because it segregates assets from insolvency, gives one holder of title for many beneficiaries, imposes fiduciary duties and often allows pass-through taxation; the IBC respects trust property, and families use irrevocable discretionary trusts for succession and protection within the limits of lawful purpose, capacity, perpetuity and genuineness.

6. The Topics of This Part

Topic 50: Trusts in capital markets: mutual funds, REITs, InvITs and AIFs
Topic 51: Trustees in debt and secured finance: debenture trustees, security trustees, escrow and securitisation
Topic 52: Employee benefit trusts: provident fund, gratuity, superannuation and ESOP trusts
Topic 53: Trust property in insolvency
Topic 54: Family trusts and estate planning