Sebi Considers Raising MF Limits in Reits, InvITs; Plans To Treat Them As Equity Instruments

The Securities and Exchange Board of India (Sebi) has proposed new rules that would allow mutual funds to invest more in real estate investment trusts (Reits) and infrastructure investment trusts (InvITs).

Reits and InvITs are investment vehicles that allow investors to participate in large-scale real estate and infrastructure projects.

Under the existing regulatory framework, mutual fund schemes are allowed to invest up to 10 per cent of their net asset value (NAV) in Reits and InvITs. 

Now, the capital markets regulator, through a consultation paper dated April 17, 2025, has proposed to raise this limit to 20 per cent for equity and hybrid schemes. 

For debt schemes, however, Sebi said the cap will remain unchanged at 10 per cent owing to the relatively higher risk profile and “perpetual” nature of these investment vehicles.

The regulator has also proposed to increase the single-user exposure limit for equity schemes to 10 per cent of the NAV, doubling the current limit of 5 per cent. This would bring it in line with limits applicable to investments in equity or debt instruments.

Should Reits And InvITs Be Treated As Equity?

Sebi asked in its consultation paper that as Reits and InvITs combine the features of both equity and debt instruments and thus,  is there a merit in classifying such securities as “equity” and their consequent inclusion in equity indices for the purpose of investment by mutual funds.

Incidentally, back in 2017, during a board meeting, Sebi had classified Reits and InvITs as hybrid instruments because of their “unique” features. 

However, the regulator has since received representations from stakeholders to review its classification.

The stakeholders had drawn Sebi's attention towards the following “unique” features of these instruments:

• Unitholders actually own the underlying assets

• 90 per cent of the net cash flow is distributed to unitholders, though this isn’t guaranteed and depends on the performance

• Unitholders have voting rights in material transactions

• There’s no obligation on unitholders to repay principal amounts

• There are restrictions on borrowings by REITs and InvITs

Sebi further noted that in some countries, Reits and InvITs are treated as equity instruments and are included in equity indices. Sebi added that India-based Reits are already a part of some of the global equity indices such as MSCI India Small Cap Index, FTSE India Index, etc.

Given these considerations, Sebi said it has discussed this matter with the Association of Mutual Funds in India (Amfi) and the Mutual Fund Advisory Committee (MFAC). 

However, after reviewing the features of Reits and InvITs, both Amfi and MFAC argued that these instruments should continue to be classified as hybrid securities, rather than being placed under equity or debt "due to difference in the structure related to their cash flows, dividends, half-yearly NAV calculation based on valuation, voting rights limited to certain operational decisions etc, it said.

MFAC also debated whether including Reits and InvITs in equity indices would be appropriate and fair for investors in mutual fund schemes that track such benchmarks.

Dedicated Schemes for Reits and InvITs?

Amfi has recommended that a dedicated scheme for investing in Reits and InvITs could be explored in the medium-to-long term. 

However, MFAC suggested against introducing such a scheme as of now, considering the limited universe of Reits and InvITs and the lack of liquidity offered by such instruments listed on the exchanges.

As of December 31, 2024, mutual funds had invested Rs 20,087 crore in Reits and InvITs across equity, debt, hybrid and solution-oriented schemes. This represents only 2.3 per cent exposure of the total assets under management (AUM) of such mutual fund schemes.

Sebi Invites Public Comments

Sebi has now invited public comments, by May 11, 2025, on the following matters:

• Whether Reits and InvITs should be classified as equity and included in equity indices for the purpose of investments by mutual funds.

• Whether the proposed relaxations in investment restrictions in Reits and InvITs for mutual fund schemes are appropriate.