Mutual fund disclosure norms spoil REITs index inclusion party

Industry seeks special dispensation from regulator

The move to allow real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) to become part of equity indices has been stonewalled by mutual fund (MF) disclosure norms.
 
Sources say as REITs and InvITs are not considered equity instruments, preventing passive funds and exchange-traded funds (ETFs) from investing in them. This technicality led to the National Stock Exchange (NSE) putting on hold its decision to include them in its indices.
 
On August 23, NSE Indices, an arm of NSE responsible for index compilation and licensing, said it would include Brookfield India REIT, Embassy Office Parks REIT, Mindspace Business Parks REIT, and IRB InvIT Fund in several of its indices, including the Nifty 500 and Midcap 150.
 
Last week, NSE Indices said the decision on indices had been revoked.

“(A) Few stakeholders…have raised certain concerns regarding inclusion...These are being examined and a final decision regarding inclusion of REITs/ InvITs will be taken post completion of review and discussions with stakeholders,” it said in a communication.
 
Industry sources said the so-called scheme information document (SID) of index funds only allows them to invest in equity-oriented instruments, while REITs/InvITs are considered to be hybrid instruments.
 
“A big purpose for forming these indices is to allow index funds to buy the underlying stocks. While allowing REITs/InvITs to be pure-play equity indices was a welcome step, it caught some fund houses on the wrong foot. The issue was promptly highlighted to the NSE. Hopefully, there will be a resolution to this soon,” said a senior official with a domestic fund house.

Industry players said they have also reached out to Sebi seeking a special dispensation.
 
“To be eligible to invest in REITs/InvITs, these index funds will have to amend their SID, which will entail giving newspaper advertisements and an exit option to existing investors of the fund. Instead, we are awaiting any special relaxation from Sebi. Globally, equity funds are allowed to invest in REITs and InvITs. The same should be done here,” said another industry official citing the example of Embassy REIT, which is part of FTSE global indices.
 
Shares of Brookfield REIT and Embassy REIT have reacted negatively to the NSE’s stay. 
 
Market players said some players had built long positions ahead of potential buying by passive funds.
 
The inclusion was to become effective from September 30.
 
 The NSE’s decision to put on hold the index inclusion has also disappointed REIT/InvIT players who are banking on favourable policy changes to make these instruments mainstream investment vehicles like stocks.
 
“Globally, REITs/InvITs are a widely accepted instrument and included in major benchmark indices. Indian REITs/InVITs have come a long way and have seen a number of positive regulatory changes, which have made them accessible to a wider set of investors. We remain confident that Indian REITs/InvITs will continue to attract a broader set of investors, including passive sources of capital, looking to participate in the Indian real estate and infrastructure growth story,” said an REIT player.
Last month, exchanges reduced the trading lot size for REITs/InvITs from around 200 units to 1 unit, to make them easily accessible, particularly to retail investors.