Introduction.
Infrastructure Investment Trust is a pooled investment vehicle registered and regulated by Infrastructure Investment Trust (regulations) 2014 (‘INVIT regulations’). Since this investment vehicle is a trust, it is created and governed by an instrument of trust (trust deed).
The trust deed has a clause which talks of the main purpose of the INVIT being investing in infrastructure projects. Other than that, the trust deed also contains various clauses which facilitate smooth functioning of the INVIT. Comparing the same with companies act 2013 [‘the act’] it is similar to object clause of the memorandum of association of a company. Also the master circular on INVITs issued by SEBI states that, while referring to ILNCS regulations memorandum of association should be read as trust deed. Therefore, just like MOA of the company, the trust deed can be considered as the charter document of the INVIT. In this article, we shall see if any activity/transaction is undertaken by Invit which is outside the scope of trust deed, will such an activity/transaction be considered as void ab initio?
Charter document of INVIT.
Multiple regulations under INVIT regulations requires the INVITs to consider the clauses of trust deed while undertaking compliance. regulation 4[i] of the INVIT regulations, which provides for pre-conditions for registration of trust as INVIT, says that the trust deed should have its main objective as investing in infrastructure projects and the registration remains valid only if this clause continues to be complied with. In addition, regulation 9(20)[ii] prescribes that it is the responsibility of the trustee to ensure that activities of INVIT are conducted as provided in trust deed and if any discrepancy in this regard is noticed, it should be informed to SEBI by trustee immediately.
Consequence of Transactions ultra vires to trust deed.
Even though INVIT regulations require the parties to INVIT to act as per the clauses of the trust deed, the INVIT regulations are silent about the consequence of violating the clauses of trust deed or undertaking activities which are ultra vires to the trust deed. Therefore, reference must be made to other applicable laws and judicial pronouncements.
Since INVIT is a trust, when we talk of other applicable laws, we must refer to laws governing the working of trusts in India. such laws mainly include the Indian Trust Act 1882, Which governs the formation and working of private trusts, and the Bombay Public Trusts Act 1950 which govern the working of public trusts. Both these Acts provide that, it is the responsibility of the trustee to adhere to the trust deed. The Acts also provide for the actions that may be taken against the trustee in case he undertakes any activity ultra vires to the trust deed. For example, section 41D[iii] of Bombay Public Trust Act provides for removal of trustee. Whereas, different sections of Indian Trust Act 1882 provide for monitory penalty on trustee.
Other than this, there are various judicial pronouncements which clearly state that, the activities ultra vires the trust deed are null and void. one such pronouncement was made by the honorable MADRAS HIGH COURT in the matter of A.R.Rengaraj @ A.R.R.Raju vs Aranamanai Raman Chettiar Chathiram through its judgment dated 15 March, 2018. In this case, a trustee of a public trust had delivered the possession of trust property to a third party through an exchange deed. which was not permissible as per the trust deed. in this regard, The Court held that,
“if any transaction contrary to the trust deed is executed, the same is to be declared as null and void and the properties should be handed over to the possession of the public trust. At no point of time the properties belonging to the trust can be dealt with in contravention to the deed. Any such act or any other act are to be done only by obtaining proper orders from the competent Court of law. Therefore, the exchange deed as stated by the respondents of the year 1970 has no sanctity in the eyes of law. The exchange deed cannot be treated as valid deed in the eye of law. Such execution between one of the trustees and his wife with the managing trustee cannot be considered as a valid transaction.”
This pronouncement makes it adequately clear that the transactions which are ultra vires to the trust deed, are void and cannot be given effect.
A practical example of such a situation in case of an INVIT can be seen when an INVIT is trying to diversify its investment in multiple infrastructure projects. An INVIT has to make investment as per the investment objectives prescribed in its trust deed and as discussed above, if investment is not in alignment with trust deed, it would be considered as void. now, if the investment objective as mentioned in trust deed says that the INVIT can invest in infrastructure projects relating to construction of roads and highways and the INVIT now proposes to invest in telecommunications related infrastructure project, then such investment will become ultra vires the trust deed as it allows investment only in highway/road construction projects which do not include telecommunications projects. However, if the investment objectives in the trust deed does not specify any particular type of project and simply states the objective as investment in all types of infrastructure projects, then the INVIT can invest in any type of project as long as it can be classified as infrastructure project as per INVIT regulations.
Conclusion
Looking at the judicial pronouncements and the other laws governing the INVITS and other trusts, it can be seen that trust deed is the foundation document of any trust and it cannot go beyond the same. Even if any activity is so undertaken, then it is treated as void and non-enforceable. Other than the activity being considered void, there are provisions under Trust Act, contract Act and other laws of the land under which action can be taken against the person (usually the trustee) violating the trust deed. Such actions can include, imposition of compensation, demanding specific performance or even removal of the concern person from his office.
[i] (b) the trust deed has its main objective as undertaking activity of InvIT in accordance with these regulations and includes responsibilities of the trustee in accordance with regulation 9;
[ii] (20) The trustee shall ensure that the activity of the InvIT is being operated in accordance with the provisions of the trust deed, these regulations and the offer document or placement memorandum and if any discrepancy is noticed, shall inform the same to the Board immediately in writing.
[iii] (1) The Charity Commissioner may, either on application of a trustee or any person interested in the trust, or on receipt of a report under section 4lB or suo motu suspend, remove or dismiss any trustee of a public trust, if he—
(a) makes persistent default in the submission of accounts, report or return
(b) wilfully disobeys any lawful orders issued by the Charity Commissioner, under the provisions of this Act or rules made there under by the State Government;
(c) continuously neglects his duty or commits any malfeasance or mis-feasance, or breach of trust in respect of the trust;
(d) misappropriates or deals improperly with the properties of the trust of which he is a trustee ; or
(e) accepts any position in relation to the trust which is inconsistent with his position as a trustee;
(f) is convicted of an offence involving moral turpitude.
This article is published on Taxmann.