SEBI Proposes Relaxation of Mutual Fund Investment Limits in REITs and InvITs

The Securities and Exchange Board of India (“SEBI”) has issued a Consultation Paper dated April 17, 2025, seeking public comments on proposed amendments to the regulatory framework governing mutual fund (“MF”) investments in Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”).

The consultation paper aims to enhance investment limits and explore the classification of REITs and InvITs, with the intent of broadening the market base, providing greater diversification, and improving liquidity for mutual fund schemes.

Key Proposals:

Revising Investment Limits:

Single Issuer Limit: SEBI proposes increasing the existing cap of 5% of Net Asset Value (“NAV”) for investments in REITs/ InvITs issued by a single issuer to 10% for equity schemes, aligning it with norms applicable to equity/debt instruments.

Overall Investment Limit: For equity and hybrid schemes, the overall limit may be enhanced from 10% to 20%. For debt schemes, it remains capped at 10%, considering the relatively higher risk and perpetual nature of REITs and InvITs.

Classification of REITs and InvITs:

The paper revisits the earlier 2017 SEBI Board stance classifying REITs/InvITs as hybrid instruments. Given their features—ownership of underlying assets, distribution of net cash flows, unitholder voting rights, and limited obligations—SEBI seeks views on reclassifying them as “equity” for inclusion in equity indices.

Dedicated Mutual Fund Schemes:

While some stakeholders have proposed the creation of dedicated MF schemes for REITs and InvITs, the Mutual Fund Advisory Committee (“MFAC”) currently recommends against such a move due to limited market depth and liquidity.

Deadline for Comments: May 11, 2025

This consultation reflects SEBI’s proactive approach toward expanding investment avenues for mutual funds while balancing risk and investor protection. By potentially reclassifying REITs/InvITs and relaxing current exposure norms, SEBI aims to align domestic mutual fund regulations with global best practices and investor expectations.