Trust Structures In Floating Alternative Investment Funds: The Arbitration Conundrum

A critical examination of why trust remain the preferred structure for floating AIFs in India, and why disputes arising out of them cannot be arbitrated under current law.

Key Takeaways:

• Preferred Route: Trust structures dominate Indian AIFs due to tax pass-through efficiency, operational flexibility, minimal compliance burdens, and the ability to create multiple schemes with ring-fenced assets under a single framework.
• Categorical Non-Arbitrability: The Supreme Court's decision in Shri Vimal Kishor Shah v. Jayesh Dinesh Shah 2016 SCC OnLine SC 825 (decided on August 17, 2016) limits arbitration of disputes arising out of the trusts and the Indian Trust Act, 1882 as beneficiaries are non-signatories to the trust deeds. The Indian Trust Act, 1882 confers exclusive jurisdiction to the civil courts over fiduciary matters.