Recently, the cabinet approved the proposal to amend the Indian Trust Act, 1882, which would enable the Union government to permit trusts to invest in the stock market (this was made public by a press release dated 24 December).
Ground Rules | Ketan Dalal
Stock market sentiments were positive about this move. The expectation is that a huge flow of trust money will add greater depth to the capital market. However, it seems that the impact of this amendment would be much smaller than perceived.
The preamble to the Trust Act restricts its scope to private trusts, which reads as “the Act to define and amend the law relating to private trusts and trustees.” Thus, the Act applies to private trusts and deals with the creation and operation of such trusts. This leaves the public and charitable trusts to be governed by personal laws of different communities and respective state laws (for example, The Bombay Public Trust Act, 1950, which applies to the state of Maharashtra).
Section 20 of the Trust Act outlines permissible investments briefly as below: —Promissory notes, debentures, and so on of the state or Union government, or where guaranteed by the government;—Debentures or other securities issued under the authority of Central or state Acts by any municipal body,?port trust, and so on;—Units of the Unit Trust of India;—Any other securities authorized by the trust deed or notified by the Union government or prescribed under a high court rule (clause (f)—residual clause).
It must be borne in mind that the Trust Act was framed in 1882. Clearly, the fact that 125 years later, no amendment has been made shows the need for such an amendment, given that some clauses (not mentioned above) are irrelevant and an anachronism under the current circumstances.
Private vs public
Since the Act is applicable to private trusts only, the distinction between private trust and public trust assumes importance. Public trusts are for the benefit of public or a considerable proportion of it answering a particular description. To this class belong all trusts for charitable purposes, and indeed public trusts and charitable trusts may be considered in general as synonymous expressions.
While in “private trusts” the beneficial interest is vested absolutely in one or more individuals or entities who are, or within a reasonable time may be, definitely ascertained, a “public trust” has a body of uncertain and fluctuating beneficiaries, and the trust itself is of a permanent and indefinite character and is not confined to the framework relevant to a private trust.
This distinction between private and public trusts is also important from the perspective of Income-tax (I-T) Act, which provides for exemption from I-T toincome from properties of the trusts held for charitable or religious purposes on fulfilling certain conditions, which includes the application of such income for charitable purpose.
At present, Section 20 of the Trust Act does not prohibit the investment in any manner if the instrument of the trust (that is, the trust deed) permits the same. However, where the trust deed is silent, the trustees are bound to invest the trust money only in securities specified under Section 20 and no other. As stated above, clause (f) of Section 20 of the Trust Act is a residuary clause which provides that the trustee can invest the trust money in such other securities expressly authorized by the trust deed or by the Union government by a notification, or by any rule which the high court may from time to time prescribe in this behalf. The proposed amendment to clause (f) enables the Union government to specify the “class of securities” in which trusts would be able invest; accordingly, the Union government may permit the trusts to invest in securities listed in the stock market.
Recent press reports seem to suggest that the amendment would help all trusts set up under the Act, including private and public trusts, to invest in shares, bonds and debentures, and this would lead to the flow of significant amounts of money into the capital market.
However, the impact of the proposed amendment may not be as significant as it is perceived. To begin with, the trust deed may itself have provided a power to invest various securities, including in the capital market. Second, as explained above, the Indian Trust Act, 1882, applies only to private trusts; public trusts are governed by respective state Acts (including investment restrictions therein). Accordingly, the trustees would have to invest in avenues such as deposits with scheduled banks, postal savings bank account, approved cooperative banks, and so on. Hence, public trusts may not be able to invest in the capital market, unless the respective State Public Trust Acts are amended. Third, there are investment restrictions under Section 11 of the I-T Act which prohibits the public trust from investing in securities other than those specified in the section (and a violation of such restrictions entails withdrawal of tax exemption). Further, in the case of private trusts where the trust deed prohibits investment in the stock market, the proposed amendment would not have an impact, unless the trust deed is amended.
Thus, only those private trusts would be benefited by the proposed amendment where the trust deed does not prohibit investments in listed shares, debentures, and so on. Public trusts (both charitable and religious) would usually not benefit from such an amendment. Consequently, the amendment may not cause a significant flow of funds in the capital market, contrary to recent press reports.
Ketan Dalal is executive director of PricewaterhouseCoopers. Your comments and feedback are welcome at firstname.lastname@example.org