From being a trust to gaining trust: AIFs call for switch to LLP model

Mumbai|New Delhi: Amid India's chase for dollars, the private equity and venture capital lobby is doubling down on the need for a structural change to attract more foreign money and managers. An overwhelming number of these pooled vehicles - alternative investment funds (AIFs) in regulatory parlance - are set up as trusts.

The fund industry is making a strong pitch for smooth conversion of AIF trusts into limited liability partnerships (LLPs) - an entity that overseas investors and managers are more familiar with.

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The AIF industry will put across its views to a joint parliamentary committee that is taking in feedback for ratifying proposed changes in the draft Corporate Laws (Amendment) Bill 2026. Introduced in 2008, LLP has emerged as a popular vehicle with several entrepreneurs.

Ease, Flexibility vs Liability Clarity

It combines the benefits of a partnership with the limited liability protection of a company.

Still, most AIF sponsors prefer to form trusts, which are easier to register, offer operational flexibility, and a degree of confidentiality.

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However, it’s felt that foreign managers running the AIFs — and, in certain cases, even investors — would be more comfortable with an LLP model as a trust, which is not a juridical person and lacks a clear limited liability framework. The manager of an LLP will not face the kind of liabilities that an AIF trustee can be exposed to.

“A migration to LLP would align India with global fund hubs, thanks to the control-liability framework clearly ringfencing liability and lending greater comfort to managers and investors. However, the reform would be incomplete without corresponding changes to the Income Tax Act. Unless tax neutrality is expressly provided, converting an existing trust into an LLP could lead to significant capital gains tax exposure, discouraging such conversions. For this reform to achieve its full potential, corporate and tax laws must evolve together,” said Vishal Gada, founder of Aurtus, a transaction and regulatory consultancy.

According to Siddarth Pai, managing partner and chief financial officer, 3one4 Capital, conversion of AIFs in the form of a trust to LLPs is a long-standing ask of the industry. The Corporate Law Amendment Bill “provides for a conversion framework, with an expectation that a set of rules to cover the operations of such AIF LLPs will come out soon,” he said.

Pai said this gives access to a “globally competitive legal vehicle with parallels across the world,” thereby removing investment vehicle friction for investors.