Context:
The Securities and Exchange Board of India (Sebi) has released a consultation paper proposing significant reforms to mutual fund (MF) investment norms in Real Estate Investment Trusts (Reits) and Infrastructure Investment Trusts (Invits). The changes are intended to enhance diversification, increase liquidity, and attract greater capital inflows into these emerging asset classes.
Key Proposals from Sebi’s Consultation Paper
1. Revised Investment Limits
- Single Issuer Limit: Proposed increase from 5% to 10% of a scheme’s Net Asset Value (NAV).
- Overall Exposure Limit:
- For equity and hybrid schemes: Proposal to increase from 10% to 20%.
- For debt schemes: Limit to remain at 10%, due to higher risk and perpetual nature of Reits/Invits.
2. Reclassification of Reits & Invits
- Current Status: Treated as hybrid instruments by MFAC and AMFI due to unique cash flow models and valuation practices.
- Proposed Change: Sebi is seeking public and industry feedback on whether Reits/Invits should be classified as equity instruments, enabling their inclusion in equity indices for MF investment purposes.
3. Rationale Behind the Move
- Global Benchmarking: Internationally, Reits and Invits are often treated as equities and are part of indices like:
- MSCI India Small Cap Index
- FTSE India Index
- Sebi aims to align with global best practices, improve market depth, and allow investors broader access through MFs.
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are both investment vehicles that allow investors to pool funds for large-scale projects, but they differ in their focus and structure. Here’s a comparative overview:
Key Differences Between REITs and InvITs
| Aspect | REITs (Real Estate Investment Trusts) | InvITs (Infrastructure Investment Trusts) |
|---|---|---|
| Asset Focus | Income-generating commercial real estate (e.g., offices, malls, hotels) | Infrastructure assets (e.g., roads, power plants, telecom towers) |
| Revenue Source | Rental income from property leases | Toll collections, tariffs, and user fees from infrastructure usage |
| Regulatory Mandate | Must distribute at least 90% of taxable income to investors | Must distribute at least 90% of net cash flows to investors |
| Liquidity | Generally high, especially if publicly traded | Varies; higher liquidity if publicly listed, otherwise may be limited |
| Investment Risks | Market risks, property value fluctuations, tenant defaults | Project-specific risks, regulatory changes, demand fluctuations |
Both REITs and InvITs offer investors opportunities for regular income and portfolio diversification. The choice between them depends on individual investment goals, risk tolerance, and interest in either real estate or infrastructure sectors.
A Step Towards Enhanced Market Participation Sebi’s proposed reforms could:
- Deepen India’s Reit and Invit markets
- Enable more flexible portfolio construction for fund managers
- Offer retail investors broader real asset exposure via MFs
Public comments have been invited, and the proposal could signal a major shift in how MFs allocate capital across asset classes.
