India’s private equity and venture capital industry is ramping up pressure on the government to allow Alternative Investment Funds (AIFs) to seamlessly convert from private trusts into Limited Liability Partnerships (LLPs). The move is viewed as a critical structural change to attract more foreign capital and boost investor confidence.
Currently, more than 95% of India’s pooled vehicles operate as trusts. However, foreign institutional investors and global fund managers find the trust structure restrictive, largely because it lacks a clear, universally recognized limited liability framework.
Why the Industry is Demanding the Shift
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Global Familiarity: Overseas investors are far more comfortable with corporate or partnership-driven setups like LLPs, which mirror structures commonly used in international fund hubs like Delaware or the UK.
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Liability Ringfencing: In a trust model, the fund relies heavily on the contractual competence of the trustee, who can face significant personal exposures. Moving to an LLP model establishes a strict statutory barrier protecting the personal assets of both managers and investors.
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Eased Compliance burdens: The proposed changes aim to eliminate cumbersome paperwork around real-time filings whenever new partners join or leave the fund.
The Legislative Status and the Tax Hurdle
The AIF industry is preparing to present its case before a joint parliamentary committee reviewing the Corporate Laws (Amendment) Bill 2026. While the draft bill introduces a conversion path (Section 57A) allowing trusts to transition into LLPs if three-fourths of investors agree, experts warn that the reform is currently incomplete.
The biggest roadblocks remaining are:
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Capital Gains Tax Risk: The Income Tax Act does not yet expressly state that converting an existing trust into an LLP is a “tax-neutral” event. Without this clarity, funds migrating to an LLP could face massive capital gains tax liabilities.
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The “Trustee-as-Partner” Clumsiness: Current draft rules suggest that only the existing trustees can become the initial partners of the new LLP, creating a transitional headache when onboarding the actual fund managers and investors later.
For India to hit its ambitious target of an ₹100 lakh crore AIF market by 2030, industry experts emphasize that corporate laws and tax laws must evolve hand-in-hand.
