India's Alternative Investment Funds (AIFs) are lobbying for a regulatory shift from trust structures to Limited Liability Partnerships (LLPs). The proposed change in the draft Corporate Laws (Amendment) Bill 2026 aims to simplify legal frameworks and attract more foreign capital.
What Happened
India’s Alternative Investment Funds (AIFs) are actively pushing for a significant change in how they are legally structured. Currently, most of these funds are registered as trusts. The industry is now urging the government to allow a transition to the Limited Liability Partnership (LLP) model. This request is part of ongoing discussions regarding the draft Corporate Laws (Amendment) Bill 2026, which is currently under review by a joint parliamentary committee. By moving to an LLP structure, the industry hopes to resolve long-standing legal uncertainties that have made Indian funds less accessible to certain international investors.
Why The Trust Model Is Challenged
For years, trusts have been the default choice for AIFs due to their straightforward registration process and operational flexibility. However, trusts in India do not have the status of a separate legal entity, known as a juridical person. This creates a critical risk: fund trustees can be held personally liable for the fund's obligations. International fund managers and global investors, who are accustomed to the clear liability protections found in their home markets, often view this lack of protection as a significant barrier. The LLP model is designed to provide that missing "limited liability" shield, which protects the personal assets of those involved in the fund management.
The Tax Neutrality Hurdle
While the prospect of moving to an LLP model is popular, experts have highlighted a major potential roadblock: taxes. The current legal proposal focuses on corporate law, but for the change to work, it must be paired with changes in the Income Tax Act. Without a clear rule to ensure the conversion is tax-neutral, funds moving from a trust structure to an LLP could face immediate capital gains tax. This would essentially penalize the funds for making the switch, likely defeating the purpose of the reform. Industry stakeholders have stressed that corporate and tax laws must evolve in tandem for this to be a practical solution.
Aligning With Global Standards
This push for structural reform is part of a broader goal to make India a more competitive destination for global private equity and venture capital. By adopting a framework that mirrors structures commonly used in major global financial hubs, India hopes to reduce "investment vehicle friction." Essentially, this means making it easier and less confusing for foreign investors to deploy capital into Indian assets. If implemented with the necessary tax safeguards, the move could provide more clarity for fund managers and potentially encourage more international capital to enter the domestic market.
What Investors Should Track Next
Investors and those following the financial sector should watch for the final version of the Corporate Laws (Amendment) Bill 2026. The key monitorable is whether the government provides specific exemptions or rules that allow for a tax-neutral conversion from trusts to LLPs. Additionally, follow-up notifications from the regulator regarding operational guidelines for these new AIF-LLP vehicles will be critical to understand how the transition would actually work in practice.