Unlike a company, an Infrastructure Investment Trust (Trust/ INVIT) has a multilayered intricate structure involving multiple parties including, sponsors, trustees, Investment Managers (IM) and project managers etc. the roles of each of these parties and their legal relationship with each other lies at the core of successful functioning of an INVIT.
In this feature, we shall try to analyse, whether the relationship between the trustee and IM of an INVIT is that of principal and agent?
Back to basics – Structure of INVIT.
INVIT is a trust registered under the Indian Trusts Act, hence is not incorporated but settled. The settler of this trust is called a sponsor. The sponsor, after settling the trust, hands over the trust assets to the trustee in accordance with the trust deed. Hereafter, the trustee is expected to hold the trust assets in the name of the INVIT, for benefit of the unit holders who are the ultimate beneficiaries of this trust[i]. The trust deed being the charter document of the trust, the trustee is expected to act in accordance with the trust deed.
Hence, as per the clauses of trust deed and the provision under regulation 9(2)[ii] of SEBI (Infrastructure Investment Trusts) Regulations, 2014 (INVIT Regulations), the trustee appoints an Investment Manager (IM) and assigns the rights and responsibilities with respect to management of the INVIT assets, investment of trust fund, conduct of day to day business of the INVIT and other such activities through an agreement called Investment Management Agreement (IMA).
Oversite of IM by trustee.
As mentioned above, the trustee appoints the IM and assigns the role of management of trust assets for the benefit of unit holders. But the role of the trustee does not end there. As per regulation 9(3)[iii] of INVIT regulations, the trustee is expected to constantly supervise the activities of the IM. In this regard, the regulation 9(3) requires the trustee to obtain from the IM, a compliance certificate ensuring that the IM has complied with regulation 10 (rights & duties of IM) of INVIT regulations.
The trustee is also expected to supervise activities like conduct of annual general meeting of INVIT by IM and voting thereat by the unit holders. Also, there are multiple activities which have to be undertaken by the IM in consultation with the trustee, for example, appointment of directors on the board of special purpose vehicles owned by INVITs, appointment of the intermediaries or service providers to the InvIT. Through all these processes, the trustee is expected and enabled to supervise the functioning of IM. Further, the recent amendment in the InvIT Regulations, has also highlighted on the supervisory role and responsibilities of the Trustee for the benefit of unitholders and investors.
Agent principal relationship between IM & trustee.
Looking at the provisions relating to appointment of IM, its functioning and its supervision by trustee, there arises a question that, does there exist an agent principal relationship between the IM and trustee. In order to analyse this better, we must first analyse the concept of agent principal relationship.
Concept of Agent principal relationship.
The concept of agent principal find its meaning in section 182[iv] of Indian Contract Act 1872. As per this section, agent is a person employed to act on behalf of, or represent, another person called principal, before third persons. In other words, agent is a person to whom, the principal delegates his own rights and duties. Further, as per section 226 of the Contract Act, the principal is responsible/liable for the acts of the agent.
In the context of INVIT structure, as discussed above, trustee appoints the IM and delegates its functions to the IM. Also the trustee is required by the virtue of INVIT regulations, to supervise the actions of IM. As per regulation 9(15)[v], the trustee also has right to remove/replace the IM (subject to unit holders’ approval) just like in case of principal and agent. Therefore, looking at the provisions of Contract Act and the INVIT regulations, it can be said that the investment manager appointed by the trustee, acts as the agent of the trustee.
Practical observations.
At the operational level, it is observed that there is a constant tension between the commercial judgment exercised by the IM and the fiduciary oversight exercised by the trustee. Issues such as acquisition, leverage, distribution, etc. frequently require careful balancing. While IMs may consider such matters as purely commercial decisions, while trustees may demand and receive adequate documentation, rationale, and proof of unitholder benefit in respect of such decisions. This dynamic reflects the classical principal–agent relationship, where the agent enjoys freedom in execution but is accountable to the principal.
Regulatory view.
Regulatory interactions also support this agent–principal dynamic. In inspections, queries, and supervisory communications, SEBI often seeks explanations from trustees on how they have supervised the functioning of the IM and how they have satisfied themselves of regulatory compliance. Trustees are expected to demonstrate active supervision, including escalation of non-compliances and corrective action taken. The obligation under Regulation 3(20) of the InvIT Regulations to report non-compliances to SEBI has, in practice, positioned trustees as the first line of regulatory accountability, even where the lapse may have originated at the IM level.
Agent principal relationship as per Indian Trust Act.
Since INVIT is a trust, we must also have a look at the provisions of the Indian Trust Act 1882 (Trust Act). The section 47[vi] of this Act prohibits a trustee from delegating his functions unless, the functions are in the regular course of business, or the trust deed provides for such delegation, or such delegation is necessary, or the beneficiary of the trust (unit holders) being compitant to contract, approve the delegation.
As far as INVIT is concerned, the trust deed of INVIT allows appointment of IM and delegation of functions to it. The functions delegated to IM are also in normal course of business as they relate to day-to-day management of INVIT. Further, in case of removal or reappointment of IM, the approval of unit holders that is, the beneficiary of trust, is also obtained. Hence delegation of functions by trustee to IM falls within exceptions provided under section 47 of Trust Act and hence is allowed.
Conclusion. In light of the above, the relationship between the trustee and the investment manager in an InvIT broadly reflects an agent–principal arrangement. The trustee appoints the investment manager, delegates operational functions, and retains supervisory and fiduciary responsibility under the SEBI InvIT Regulations. Such delegation also fits in the framework provided under Section 47 of the Indian Trusts Act, 1882. Accordingly, while the investment manager manages the day-to-day affairs of the InvIT, the trustee continues to remain accountable to the unit holders.
[i] 9. (1) The trustee shall hold the InvIT assets in the name of the InvIT for the benefit of the unit holders in accordance with the trust deed and these regulations.
[ii] (2) The trustee shall enter into an investment management agreement with the investment manager on behalf of the InvIT.
[iii] (3) The trustee shall oversee activities of the investment manager in the interest of the unit holders, ensure that the investment manager complies with regulation 10 and shall obtain compliance certificate from the investment manager, in the form as may be specified, on a quarterly basis.
[iv] 182. “Agent” and “principal” defined.—An “agent” is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”.
[v] (15) In case of any change in investment manager due to removal or otherwise,–
a. prior to such change, the trustee shall obtain approval from unit holders in accordance with regulation 22 and from the Board;
b. the trustee shall appoint the new investment manager within three months from the date of termination of the earlier investment management agreement;
[vi] 47. Trustee cannot delegate.—A trustee cannot delegate his office or any of his duties either to a co-trustee or to a stranger, unless (a) the instrument of trust so provides, or (b) the delegation is in the regular course of business, or (c) the delegation is necessary, or (d) the beneficiary, being competent to contract, consents to the delegation.