[Khushi Patel is a 4th year BBA LLB student at Gujarat National Law University, Gandhinagar]
In a move that could significantly deepen India’s capital markets and enhance investor participation in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), SEBI released a consultation paper proposing a critical amendment to the definition of ‘strategic investors’. This proposal seeks to expand the eligible categories of strategic investors by aligning them with the broader definition of ‘qualified institutional buyers’ (QIBs) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).
REITs and InvITs are quickly emerging as integral modes of infrastructure financing and commercial real estate investments but the limited scope of eligible strategic investors under the current framework has constrained its capital raising flexibility. SEBI’s proposal aims to address this gap by introducing a more inclusive and progressive regulatory approach. This post analyses the background and rationale behind the proposal and explores the implications of this change on various stakeholders.
Background
Under the current regulation 2(1)(ztb) of the REIT Regulations and regulation 2(1)(zza) of the InvIT Regulations, strategic investor has been defined as under:
‘“strategic investor” means, –
a. an infrastructure finance company registered with the Reserve Bank of India as a Non-Banking Financial Company;
b. a Scheduled Commercial Bank;
c. a multilateral and/or bilateral development financial institution;
d. systemically important Non-Banking Financial Companies registered with Reserve Bank of India;
e. a foreign portfolio investor,
f. an insurance company registered with the Insurance Regulatory and Development Authority of India;
g. a mutual fund.
who invest, either jointly or severally, not less than five per cent. of the total offer size of the REIT/InvIT or such amount as may be specified by the Board from time to time, subject to the compliance with the applicable provisions, if any, of the Foreign Exchange Management Act, 1999 and the rules or regulations or guidelines made thereunder;’
In spite of being comprehensive, the definition fails to include long-term institutional investors such as public financial institutions, pension funds, provident funds, insurance funds of the government departments and armed forces, alternative investment funds and others. This exclusion curtails the ability of REITs and InvITs to access long-term capital from entities whose investment mandates inherently favour such instruments.
SEBI’s Proposal
SEBI has now proposed to align the definition of ‘strategic investor’ under the REIT and InvIT Regulations with the broader and more inclusive definition of QIB as provided under the ICDR Regulations. Under this proposed amendment, any entity that qualifies as a QIB would become eligible to invest as a strategic investor. However, to maintain regulatory consistency, foreign portfolio investors (FPIs) that are individuals, corporate bodies, or family offices, which are already excluded from the definition of QIBs, would continue to be excluded from the strategic investor category. This expanded definition would significantly widen the pool of eligible strategic investors to include a diverse array of regulated institutional participants such as provident and pension funds with a minimum corpus, state industrial development corporations, the National Investment Fund, insurance funds managed by government entities, and Alternative Investment Funds (AIFs) and Venture Capital Funds, among others. This move will enhance participation from long-term, stable investors whose mandates align with the investment profile of REITs and InvITs.
Implications of the Proposal on Various Stakeholders
The proposed changes would lead to material consequences for capital formation, investor participation, governance and regulatory harmonisation.
Implications for REITs and InvITs
The proposed expansion of the strategic investor definition to include QIBs under the ICDR framework carries significant implications for the fundraising landscape of REITs and InvITs. Most notably, it is likely to bolster capital-raising capacity by allowing a broader spectrum of institutional investors to participate in pre-issue subscriptions. This expanded participation, particularly from entities with long-term investment mandates, can play a stabilising role in the issuance process by reducing the risks associated with under-subscription and reactive price adjustments closer to the offer date. Further, the presence of committed investors at an early stage of the offer is expected to contribute meaningfully to price discovery. By anchoring valuations through diversified institutional commitments, the revised framework may offer particular benefits to newer or less-established trusts that may lack the advantage of sponsor-backed credibility. Importantly, the proposed alignment with the QIB definition under the ICDR Regulations also marks a step towards regulatory coherence. This harmonisation across SEBI-administered instruments helps streamline compliance and reduces the interpretive uncertainty that often arises from fragmented regulatory definitions across different capital market regimes.
Implications for Institutional Investors
From the perspective of institutional investors, the proposed expansion of the strategic investor category represents both an opportunity and a regulatory inflection point. First, by extending eligibility to a wider range of entities whose investment mandates are typically aligned with stable, long-term cash-generating assets, the amendment offers access to a new asset class under relatively favourable terms. REITs and InvITs, by design, present a risk-return profile conducive to such institutions, and their formal inclusion as strategic investors allows for greater portfolio diversification within a regulated framework.
Second, institutional investors designated as strategic investors are entitled to certain disclosure rights in the offer document, including pre-specified details of unit allocation and subscription terms. The ability to invest prior to the public issue and benefit from early allocation, coupled with enhanced transparency, contributes to improved governance outcomes and more informed investment decision-making.
However, the inclusion of pension and provident funds is not without its challenges. Given the relatively illiquid nature of strategic investments and the statutory lock-in requirements, there may be legitimate concerns surrounding fiduciary obligations and prudential oversight. Sectoral regulators such as the Employees’ Provident Fund Organisation (EPFO) and the Pension Fund Regulatory & Development Authority (PFRDA) may need to issue clarificatory guidance or prescribe additional safeguards to ensure that such investments remain aligned with the risk appetite and obligations of these institutions. In this regard, the amendment not only widens participation but also necessitates a concurrent review of supervisory norms to ensure regulatory coherence.
Implications for Foreign Portfolio Investors
With respect to FPIs, the proposed amendment retains a degree of regulatory conservatism. The continued exclusion of FPIs that are individuals, corporate bodies, or family offices from the definition of strategic investor preserves SEBI’s stated objective of preventing concentrated ownership structures and mitigating the risks of short-term, speculative capital flows. While this exclusion aligns with the treatment of such entities under the ICDR Regulations, it may have the unintended consequence of curtailing early-stage foreign capital participation in REIT and InvIT issuances, particularly from sophisticated offshore investors operating through family office structures.
This has given rise to a broader debate on whether a more nuanced approach might be warranted. Stakeholders have argued for differentiated treatment of excluded FPIs based on objective parameters such as investment track record, ticket size, or willingness to adhere to enhanced lock-in and disclosure norms. In that context, SEBI may consider a calibrated framework that allows certain family office FPIs to qualify as strategic investors, subject to elevated compliance thresholds. Such an approach could strike a balance between investor protection and capital market development, particularly in an environment where global capital pools are increasingly structured around non-institutional entities with long-term mandates.
Implications for Retail Investors
For retail investors, the inclusion of regulated institutional players as strategic investors is likely to boost confidence in REIT and InvIT offerings. The presence of such investors can serve as a positive market signal, encouraging retail participation. Additionally, retail investors may benefit indirectly through mutual funds, insurance schemes, or pension products that gain early access and favourable terms, thereby enhancing the overall value passed on to end investors.
Conclusion and Way Forward
SEBI’s proposal to align the definition of ‘strategic investor’ with that of a QIB under the ICDR Regulations represents a significant shift in the REIT and InvIT framework. By expanding eligibility to a wider range of regulated institutional investors, the reform addresses a key gap in capital mobilisation while reinforcing SEBI’s aim of improving institutional depth and market resilience. However, its implementation will require coordination with sectoral regulators to ensure fiduciary safeguards for entities such as pension and insurance funds. Similarly, while the exclusion of certain FPIs remains justified, a calibrated framework for long-term family offices may be worth future consideration.
In furtherance of this regulatory initiative, SEBI may also consider introducing complementary measures to support market participants. These may include the issuance of standardised subscription agreement templates for strategic investors, the prescription of enhanced disclosure norms for pre-IPO commitments, and the establishment of a regulatory sandbox to assess the feasibility of expanding the strategic investor category to other investor classes on a pilot basis.
In conclusion, the proposed amendment represents a well-calibrated and forward-looking step towards fostering a more inclusive and institutionally anchored REIT and InvIT ecosystem. Its effective implementation, coupled with harmonised regulatory oversight, has the potential to materially strengthen investor participation and deepen India’s capital markets in a manner that is both sustainable and resilient.
– Khushi Patel