An excavator is parked in a clearing opposite a commercial office building in Gujarat. (Photograph: Dhiraj Singh/Bloomberg)

SEBI Allows Mutual Funds To Invest In REITs And InvITs      

In a bid to give a fillip to real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), the board of directors of the Securities and Exchange Board of India (SEBI) has approved their classification as ‘hybrid instruments’, and has allowed mutual fund schemes to invest up to 10 percent of their net asset value into units of the two.

SEBI Board noted that units of REITs/InvITs are hybrid instruments. However, the features are more like equity securities and the concentration and liquidity risks require to be addressed.
SEBI notification

REITs are companies that own and then lease out real estate, whether commercial or residential. Investors in a REIT are given units, similar to those in a mutual fund scheme. The rental income is shared among the investors in a REIT. Units of a REIT are traded on exchanges and provide an investor with an option to quickly exit a real estate investment.

InvITs function in the same manner, except they own infrastructure instead of real estate.

The SEBI board has stipulated that no mutual fund scheme can invest more than 5 percent of its net asset value into the units of a single issuer of REITs or InvITs. Further, no mutual fund under all its schemes should own more than 10 percent of units issued by a single issuer of REITs or InvITs, the regulator said.

“...investment restrictions shall be applicable to all fresh investments by all schemes or an existing scheme,” the capital markets regulator said.

So far, one REIT and five InvITs have been registered, a SEBI official told BloombergQuint.

According to PRIME Database, three InvIT prospectus, by India Grid Trust, IRB Invit Fund, and Reliance Infrastructure Invit Fund, have been filed. The InvITs are looking to raise Rs 9,950 crore.

I don’t think this move in and of itself will be a big game changer. The general fear that these companies have is whether there be appetite for these products. These instruments give long term stable returns without capital appreciation. So, there is unlikely to be a huge appetite from retail investors. Allowing mutual funds to invest will allow these trusts to tap a new set of investors. Also, mutual funds will be able to diversify their investments.
Abhishek Goenka, Partner, PwC

Goenka is of the opinion that next, the Insurance Regulatory and Development Authority must allow insurance companies to invest in the two products.

“I think that if there is a further 100 basis point reduction in interest rates, there will be more interest from retail investors in these products,” he said.

Tightening The Screws On Penalties

The SEBI board has also approved amendments to the Securities and Exchange Board of India Regulations, 2014 to provide for charging interest if companies excessively delay filing applications or payment of settlements.

These amendments, the SEBI said, were being done in a bid to streamline and strengthen the settlement process.

Separately, the SEBI board has also approved the insertion of a clause into the Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2009 to allow stock exchanges to impose fines and suspend trading in the event of contravention of regulations, the SEBI said.

This was done because the board noted that the SEBI’s Listing Obligations and Disclosure Requirements Regulations, 2015 specifically provided for imposition of fines and other penalties by stock exchanges, but the ICDR Regulations did not.