SEBI’s Initiative to Enhance REITs and InvITs: A New Era for Strategic Investors

The Securities and Exchange Board of India (SEBI) has taken a significant step to broaden the investor base for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). By proposing to allow foreign investors and Qualified Institutional Buyers (QIBs) as strategic investors, SEBI aims to boost inflows and instill greater confidence in these investment vehicles.

Understanding Strategic Investors

The introduction of the ‘strategic investor’ category in the REIT and InvIT Regulations serves a dual purpose: it not only facilitates investments prior to the public offering of units but also enhances the overall credibility of these trusts. The rationale behind this initiative is to attract institutional investors who can provide a stabilizing influence in the market, thereby encouraging retail investors to participate.

Strategic investors are allocated units before the public offering opens, ensuring that a certain level of investment is secured in advance. They are required to invest a minimum of 5% of the total offer size, with the possibility of increasing their stake to 25%. This arrangement is designed to create a safety net for other investors, as the presence of strategic investors can signal confidence in the underlying assets of the REITs and InvITs.

Moreover, these investors enter into binding agreements with the trusts, and their subscribed units are subject to a lock-in period of 180 days from the date of listing. This lock-in period is crucial as it prevents early exits, thereby stabilizing the market for these investment trusts.

The Role of Foreign and Institutional Investors

SEBI’s proposal also emphasizes the importance of foreign and institutional investors in the REIT and InvIT landscape. According to SEBI, details regarding unit subscriptions must be disclosed in the draft offer document. This includes the names of each strategic investor and the number of units they intend to subscribe to.

However, the definition of a strategic investor is somewhat restrictive. It currently excludes many institutional investors such as public financial institutions, insurance funds, provident funds, and pension funds, which are also significant players in the REIT and InvIT markets. These investors typically align with a long-term investment strategy focused on stable, income-generating assets.

SEBI has clarified that Foreign Portfolio Investors (FPIs), which include individuals, corporate bodies, or family offices, do not qualify as QIBs under the Issue of Capital and Disclosure Requirements (ICDR) Regulations. This exclusion raises questions about the potential for broader participation from foreign entities, which could otherwise enhance the liquidity and attractiveness of REITs and InvITs.

Proposed Amendments to the Definition of Strategic Investors

In light of these considerations, SEBI has proposed amendments to the definition of strategic investors within the REIT and InvIT Regulations. The revised definition would include:

• Infrastructure finance companies registered with the Reserve Bank of India (RBI) as Non-Banking Financial Companies (NBFCs)
• Scheduled Commercial Banks
• Multilateral and bilateral development financial institutions
• Systemically important NBFCs as recognized by the RBI
• Insurance companies registered with the Insurance Regulatory and Development Authority of India (IRDAI)
• Mutual funds

This expanded definition aims to attract a wider array of institutional investors who can contribute to the stability and growth of REITs and InvITs.

Conclusion

SEBI’s proposals represent a proactive approach to enhancing the attractiveness of REITs and InvITs in India. By allowing foreign investors and QIBs to participate as strategic investors, the regulatory body aims to create a more robust investment environment. The proposed amendments are currently open for public comment until August 22, 2025, inviting stakeholders to share their insights on these significant changes.

As the landscape for REITs and InvITs evolves, the inclusion of a broader range of strategic investors could pave the way for increased capital inflows and greater investor confidence, ultimately benefiting the real estate and infrastructure sectors in India.