Indian Trust Act – A Corporate Perspective

By Madhavi Swaroop

5^th Year, B. A. LLB, Symbiosis Society's Law College, Pune

The Indian trust act was passed in the year 1882, the act enables any and everyone to enforce what is otherwise a mere ‘moral obligation’ arising from a relationship of pure’ personal confidence ‘ or ‘trust’ of one in the other in day to day social transaction.

For the purpose of our discussion it is vital for us to know and understand the terms ‘trust’, ’trustee’, ’settlor’ and ‘beneficiary’ which form the crux of any discussion relating to the formation of trusts.

S 3 of the Indian trust act is the Interpretation Clause[1]:-

(a) trust – is an obligation annexed to the ownership of property , and arising out of a confidence reposed in and accepted by the owner , or declared and accepted by him , for the benefit of another , or of another and the owner.

(b) trustee – the person in whom confidence is reposed is called the ‘trustee’ the confidence is in respect of an obligation annexed to the ownership of the property that the obligation shall be discharged faithfully for the benefit of the cestui que trust.

(c) settlor – the person who declares confidence in respect of his property the ownership of which he vests in a person for the benefit of another person or another person and himself. He is also known as the’ author of the trust’ and it is the author / settlor who indicates the purpose of the trust , the beneficiary , the use of the property by the terms specified in the instrument of trust which he signs.

(d) beneficiary (cestui que trust) – the person who is entitled to the benefit of the trust property, the subject matter of the trust, even though the control, management or possession of the property is in the hands of the trustee to whom the property is transferred in confidence. He has the power to enforce the obligation to which the trustee is subject, as owner of the property.

The underlining scheme behind the creation of a trust was for the purpose of setting up charitable public trust for the benefit of the public by philanthropic individuals as well as creation of private trusts in the form of wills for the benefit of a few ascertainable beneficiaries.

But the concept of trusts has come a long way from being just used for charity or devolution of estate in the form of wills or even for tax evasion.

The concept of trust is being utilized by corporate houses in present days to set up various funds and schemes generally open ended [2]or close ended[3]that hold, manage, lease, develop and/or maintain the property for the benefit of beneficiaries /contributors and the beneficiaries/contributors are entitled to get the benefit in the form of dividends as per their contributions.

In India though the concept of trust as vehicle of commercial transaction is still in its infancy, the governing Act for the setting up of trusts is not a purely commercial Act like in U.S.A or the U.K. but an Act which is closely related to the personal laws of the country The Indian Trusts Act 1882, this Act though does not provide much head way into the commercial point of trust with which we are concerned at the moment , it does give us an insight into the setting up of a trust , parties to a trust as well as the rights , duties and obligations of the parties to a trust. Though the trusts which are being set up in the commercial arena are relying towards the intricate details of the SEBI Act the basic backbone remains as envisaged under the Indian trust act, 1882.

The concept of Mutual Funds is the closest to the concept of trust; mutual funds are also known as collective investment schemes[4] every mutual fund which comes out in the market is based on a trust deed complete with a sponsor/settlor, trustee, beneficiary (ies) and an asset management company. The mutual funds so released are subject to the guidelines and regulations of the SEBI. The schemes so launched by various companies are both in the nature of open ended as well as close ended schemes. While the benefit of investing in a mutual fund is that it is a relatively safer option not prone to much market fluctuation another benefit also is that Mutual funds enable investors to pool their money and place it under professional investment management. The portfolio manager trades the fund's underlying securities, realizing a gain or loss, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. Like the trust the beneficiary/ investors in a mutual fund known as unit holders are periodically /as may be the scheme are given the share of the dividend or interest income as per their initial contribution.

In the west especially the United States and many developed European countries Real Estate Investment Trusts (REIT’s) have come up as the next big thing .The concept is simple, these are generally open or close ended companies / trusts that hold, manage, lease, develop and/or manage properties for investment purposes .REIT invests in real estate directly through properties or mortgages or indirectly through subsidiaries. An investor purchases units/shares in REIT, this entitles him to participate in the property ownership by REIT and the related income stream, without having to fund the entire property value himself. Globally, a REIT is required to be organized as a trust/company with a tax exempt or fiscally transparent structure. In India too an attempt has been made at introducing the concept of REIT’s in the form of Real Estate Mutual Funds (REMF’s) though the concept is still at the conception stage, the Securities and Exchange Board of India has come out with draft regulation for the same.

Looking at the global perspective of trust in the west especially United States of America,

The Securities And Exchange Commission (SEC); recognizes apart from mutual funds (which are separate from collective investment schemes in USA) the SEC recognizes close ended funds and unit investment trusts[5] (UIT) as investment companies; all the three types of investment companies are regulated by the SEC guidelines and regulations under the Investment Company Act, 1940, Securities Act, 1933 as well as the Securities Exchange Act, 1934 .The UIT like the trust formed in India under the Indian trust Act 1882 is formed under the Trust Indenture Act 1939, by a document called as the trust indenture , the trust indenture is drafted by the sponsor of the fund/settlor and names the trustees as well as the evaluator. The sponsor selects and assembles the securities to be included in the fund. The trustee keeps the securities, maintains unit holder records, and performs all accounting and tax reporting for the portfolio.

In the United Kingdom, the Financial Services Authority regulates the Unit Trusts[6] under their CIS (Collective Investment Schemes) Rules. A Unit Trust is a form of collective investment constituted under a trust deed Unit trusts are open-ended investments; therefore the underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Each fund has a specified investment objective to determine the management aims and limitations. Investment Trusts [7]investor’s money is pooled together from the sale of fixed number of shares a trust issues when it launches. The board will typically delegate responsibility to a professional fund manager to invest in the stocks and shares of a wide range of companies. Investment Trust usually have no employees only a Board of Directors comprising only non executive directors. However in recent years this has changed especially with the emergence of both private & equity groups and commercial property trusts both of which use investment trusts as a holding vehicle.

Like real estate, art has become another source on which various trusts / funds are being set up. Funds dealing in art and artifacts are being set up much on the same lines as REIT’s. The concept of trust complete with settlor, trustees and beneficiaries are being is being utilized for the creation of such funds. Though corporate houses are twisting the concept of trust to suit their own needs , with the investor bringing in property to form the corpus of the trust fund and taking it away complete with the profit earned as well as the principal brought in initially.

Corporate houses as well as financial companies dealing in the Stock Exchanges are coming out of various schemes which per se resemble Mutual Funds but in reality are somewhat different primarily in the nature of regulatory control of the SEBI, the SEBI to promote and protect investor demands stringent rules of disclosures. To circumvent the intricacies of the guidelines laid down by the SEBI, many financial houses are utilizing the concept of trust as mentioned under the Indian trust act, 1882 expressly to form trust funds dealing in various different specified themes (technology, health care ), funds are often selected on the basis of these specified investment aims

In recent years the concept of dealing in Art has undergone a radical change, gone are the days when possessing Art was only the prerogative of the elite, more and more people are keen to invest in the growing Art industry. It is here that the concept of an Art Fund/Trust comes into the picture. Like the REIT’s which allow small time investors who would not be able to invest in property as a totality invest and own property, in the case of an Art Fund/Trust also the Corporate/Financial houses come up with various schemes regarding the type of Art form, Artists etc and people invest in such schemes becoming beneficiaries to such schemes deriving benefits in the nature of regular dividends, bonuses, purchase and dispose of property in the nature of Art held by them.

In the age of alternative investments , when the equities as well as the commodities market is saturated and at an all time high, all over the world people are waking up to the value of Art, appreciation level has increased and people have found a new object to invest their money in. Russians have woken up to Russian Art in which they are now investing heavily, in the United States of America art forms like Graffiti have captured the interest of the Art industry .the trend has changed in the recent years, earlier Art Funds were created which only focused on the works of masters but now Art houses are looking at emerging amateur artists for newer concept etc. several art galleries are floating “amateur art funds” to support emerging artists. The fund being so set up is similar to “small cap fund” in the equities market the fund so created would create a bank of artwork by selected emerging artists and then value them. Investors to the fund (through banks and broking institution) would be given catalogues of these artists and they would require investing a specified amount of money to create a decent portfolio.

The concept behind an Art Fund is to get investors to put in their money and buy artwork and based on their growing market value, investors can reap the interest. An Art Fund where the investors holds a unit of the fund similar to a mutual fund, aim to deliver returns to its investors by investing in a well diversified portfolio of select works by leading artists. The Art Funds so launched are either closed ended funds or open ended funds, currently in the Indian alternative investment markets two Art Funds which are vying for attention are the Crayon Capital Fund and the Copal Art Fund. The Art Funds so launched will be funded through private placements or by invitations. In case of a close- ended Fund the fund shall buy and sell art works in order to deliver value to its investors and the fund would operate for a specific period of time. While in case of an open – ended fund the corpus of the fund will keep getting rolled. Some funds offer to its investors the benefit of owning art also. The investor gets a painting based on his contribution and artist preference. This painting shall be sold through galleries; exhibitions etc and the gains will be distributed accordingly.

With the mushrooming of Art Funds all over the country and art becoming a major source of alternative investments, art portfolio management services are coming up in a big way, with all major financial institutions as well as banks incorporating the same in their wealth management services.

The concept of trust as envisaged under the Indian Trust Act, 1882 does not talk about the amount of the corpus of the trust fund being changed as per the need of the trust. Another area forming part of the grey area is also the fact whether a valid trust can be created when the very subject matter is uncertain or is to be created by the bringing of property / matter the same being a future or an uncertain transaction. These areas among others need to be delved into by the legislatures and suitable amendments need to be brought into the Act to suit the needs of the changing times.

[2] These are mutual fund schemes which donot have a fixed maturity period and are available for subscription and redemption on an ongoing basis.

[3] These are mutual fund schemes which have a stipulated maturity period wherein the investor can invest directly in a scheme at the time of the initial issue and thereafter units can be bought or sold on the stock exchange where the scheme is listed.

[4] Is a way of investing money with other people to participate in a wider range of investments than may be feasible for an individual investor and to share the costs in doing so.

[5] A UIT does not actively trade its investment portfolio. That is, a UIT buys a relatively fixed portfolio of securities (for example, five, ten, or twenty specific stocks or bonds), and holds them with little or no change for the life of the UIT. Because the investment portfolio of a UIT generally is fixed, investors know more or less what they are investing in for the duration of their investment. Investors will find the portfolio securities held by the UIT listed in its prospectus

[6] Private individuals pool their contributions with others, which combine to form a large fund. The fund invests in a spread of different assets to minimize the risk of loss. Also known as collective/pooled investments or investment funds. Unit trusts can be both single and dual priced.

[7] Investment trusts are companies that invest in the shares of other companies for the purpose of acting as a collective investment