Proposed changes to the LLP Act could reshape how AIF (Alternative Investment Funds) in India are structured, aligning more towards global fund standards and enabling more foreign inflows. After the 2026 Union Budget, Economic Affairs Secretary Ajay Seth indicated during a conference that the government is looking to amend the Limited Liability Partnership Act, 2008 so that LLPs become a more attractive and suitable form for AIFs.
What are AIFs?
AIFs are pooled investment vehicles catering to sophisticated institutional investors, with a minimum ticket size of ₹1 crore, subject to certain exceptions for accredited investors. According to SEBI, AIF means “…any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.” AIFs can invest in a range of asset classes and funds, including real estate, infrastructure, private equity, venture capital, hedge funds, start-ups, and other alternative asset classes.
How AIFs are structured currently
AIFs can be legally set up in multiple forms under SEBI rules.
- Trust
- LLP (Limited Liability Partnership)
- Company
- Body corporate (in the form of a company or LLP)
At present, almost 97% of AIFs in India are structured as trusts (as per the Indian Trusts Act of 1882), largely because trusts are easier to form and have a lower compliance burden. Trusts are simpler and cheaper to set up and maintain, as they do not require board or shareholder meetings or extensive statutory filings. They are not subject to capital maintenance or solvency requirements, making it easier for fund managers to call capital, distribute returns and structure exits in line with the fund’s investment cycle.
From a tax perspective, trusts align enjoy tax pass-through available to Category I and Category II AIFs, ensuring that income is taxed only in the hands of investors rather than at the fund level. In addition, trust deeds offer greater confidentiality compared to corporate structures, where ownership and governance details are publicly disclosed. These features make trusts the preferred structure for AIFs in India because they combine flexibility, lower costs and tax efficiency in a way that companies and LLPs do not.
Limitations of the trust structure for AIFs
While trusts are flexible, simple, and low on compliance, they also have some drawbacks.
- Legal status: A trust does not have a separate legal personality and must act through its trustee. This means all legal ownership of fund assets rests with the trustee, making the fund dependent on the competence, integrity and continuity of the trustee and its team.
- Global standards and foreign investment: Trusts are less aligned with international fund structures. This makes the fund less familiar to international investors, particularly those accustomed to corporate or partnership vehicles in other jurisdictions. Trusts may also be less flexible under foreign investment rules compared with corporate forms like LLP.
- Compliance clarity: Trust law doesn’t clearly address key features such as limited liability and investor transparency that modern pooled funds often need. The absence of a detailed statutory governance framework (unlike the Companies Act), means investor protection relies heavily on how the trust deed is drafted and other contractual arrangements, rather than on mandatory corporate law safeguards.
What AIFs could look like after the proposed LLP Act tweaks
The government is proposing to amend the Limited Liability Partnership Act, 2008 so that LLPs become a more attractive and suitable structure for AIFs and are better aligned with the needs of sophisticated pooled investment vehicles. This may make compliance easier, enable more foreign capital inflows, and strengthen ease of business for AIF managers and global investors alike.
- Legal framework: The proposed changes seek to align the LLP framework more closely with the functional and regulatory needs of pooled investment vehicles. LLPs LLPs clearly limit an investor’s risk to the amount of money they invest in the fund, protecting their personal assets and making Indian fund structures similar to the limited partnership models commonly used by global funds.
- Ease of documentation simpler compliance: The proposed amendments may reduce documentation and compliance burdens, particularly around partner entry, exit, and ongoing regulatory filings, which are currently seen as cumbersome for fund structures.
- More clarity and transparency: The changes are intended to provide greater clarity on investor roles, liabilities, and reporting requirements, making LLPs more suitable for institutional and foreign investors. Plus, the LLP structure provides greater transparency through statutory disclosures of partners and financial information, improving governance standards and boosting investor confidence.
Why this matters
These proposed changes matter because legal structure plays a critical role in how capital is raised, protected, and deployed. By making LLPs more compatible with the needs of AIFs, India would be moving closer to globally accepted fund structures that offer clearer liability protection, stronger governance, and greater transparency.
Sources
Alternative Investment Funds Comparative Guide – – India
SEBI (Alternative Investment Funds) Regulations, 2012