Settlor

Most Indian AIFs are trusts, and a trust has to be created by somebody. That somebody is the settlor, also called the author of the trust.

The settlor's act is small and one-off: execute the indenture of trust with the trustee and convey an initial sum of money, which becomes the trust's first asset. After that the settlor disappears from the operating structure. The trustee holds, the manager manages, the contributors put in the money that actually gets invested.

The reason the role is examinable is that it is the legal starting point of everything else. No settlement, no trust; no trust, nothing for the trustee to be trustee of, and no party to sign the Investment Management Agreement with the manager.

The sequence in Chapter 8 is exact, and questions follow it in order:

1. A sponsor decides to form the fund.
2. A settlor settles the trust — executing the trust indenture with the trustee and conveying the initial sum.
3. The trustee enters into an Investment Management Agreement with the manager, delegating management and administration of the AIF.
4. The fund applies to SEBI for registration, through a merchant banker.
5. Investors commit capital under Contribution Agreements signed with the contributor, the trustee and the manager.
6. The fund invests in investee companies.

The trust deed must be registered, and it has to be drafted to two specific standards that decide the fund's tax position:

• Irrevocable. In a revocable trust the property can revert to the settlor; in an irrevocable trust the ownership of the property is permanently vested in the trust. The AIF needs the second, so that the corpus is genuinely the fund's.
• Determinate. In a determinate trust the share of each beneficiary is clearly demarcated; in an indeterminate trust the trustee allocates benefits as it sees fit. AIFs achieve determinacy by dividing the corpus into unit capital and allotting each investor a specific number of units representing a determinate share.

An "irrevocably settled, determinate trust" is the structure the workbook calls appropriate for an AIF, and the reason given is clear tax treatment under the Income Tax Act, 1961. A trust has no separate legal personality, which is exactly why the documentation has to be this precise.

Two things the settlor is not. It is not the sponsor's skin-in-the-game: the sponsor or manager's continuing interest is a separate, continuing capital commitment that stays locked in until investors are paid out in full. And it is not the trustee: settling a trust and administering one are different acts, done by different parties, under the same deed.

In an LLP the equivalent constitutional act is the LLP agreement between the managing partners, registered with the Registrar of Companies; in a company it is the memorandum and articles. Neither has a settlor. The role exists only because of the trust form.

Aurum India Growth Trust is set up as a Category II AIF targeting Rs 300 crore of commitments.

The settlement itself is nominal — it exists to create the trust, not to fund it. The money that matters arrives at step 5.

Now the numbers that sit on top of that structure:

Target corpus                              Rs 300.00 cr
Minimum scheme corpus required             Rs  20.00 cr
Minimum ticket, non-accredited investor    Rs   1.00 cr

Sponsor / manager continuing interest, Category II:
  2.5% of corpus  =  2.5% x Rs 300 cr  =  Rs 7.50 cr
  or Rs 5 crore, whichever is LOWER    =  Rs 5.00 cr

So the sponsor must put in and keep in Rs 5 crore — as a fresh cash investment in the scheme, not a waiver of management fees and not a transfer of stock. It cannot be withdrawn until distributions to investors are complete: the sponsor is the first money in and the last money out.

The settlor, meanwhile, has done nothing since the day the deed was signed. Its contribution to the Rs 300 crore is nil. Conflating the two — treating the settlement as the sponsor's commitment — turns a Rs 5 crore regulatory obligation into a rounding error, which is precisely the error the question is built to catch.

Chapter 8 (Alternative Investment Fund Structuring) covers the permissible legal structures, the determinate and irrevocable trust requirement, and Figure 8.1 showing the settlor at the head of the fund structure. Chapter 13 (Legal Documents and Negotiations), section 13.2 covers the trust indenture as the document executed between settlor and trustee. Expect an ordering question — who appoints whom, and in what sequence — and a recall question on why an AIF trust must be irrevocably settled and determinate.

• The settlor is not the trustee. The settlor creates the trust; the trustee holds and administers it. The deed is executed between them.
• The settlor is not the sponsor's continuing interest. The initial settlement is nominal and one-off; the continuing interest is 2.5% of corpus or Rs 5 crore (whichever is lower) for Category I and II, 5% or Rs 10 crore (whichever is lower) for Category III, locked in until investors are paid out.
• "Whichever is lower" for Category I, II and III; "whichever is higher" for angel funds (0.5% of the amount invested or Rs 50,000). The direction flips and the question knows it.
• Irrevocable and determinate are two separate requirements. Irrevocability is about whether the property can revert to the settlor; determinacy is about whether each beneficiary's share is demarcated. An AIF needs both.
• A trust has no separate legal personality. An LLP and a company do — which is why they have no settlor and a different constitutional document.
• The trustee, not the settlor, signs the Investment Management Agreement. The settlor's role ends at settlement.