Analyzing the Classification of I-REIT Units as Securities under the Securities Contract Regulation Act, 1956

[By Siddhant Shinde]

The author is a student of MNLU Mumbai.



Real Estate Investment Trusts (‘REIT’) are instruments that allow investors to pool their collective resources and invest in publicly-traded securities, in the form of real estate, without having to make substantial capital commitments. Thus, they provide an avenue for consumers to invest in commercial real estate with regular returns to investors along with long-term capital growth, and an alternate source of funding to developers. Introduced initially in the USA as a way to counter inadequacy of public capital for the real estate industry, it was introduced in India through SEBI (Real Estate Investment Trusts) Regulations, 2014 (‘REIT Regulations’). 

In the first part, the author discusses the basic framework of REITs in India, and juxtaposes the same with the The Securities Contracts (Regulation) Act, 1956 (SCRA), highlighting the ambiguity related to the classification and positioning of REIT units within the SCRA Framework. Following this, the article argues for the inclusion of REIT units within the meaning of ‘securities’.  

I-REIT Framework and SCRA – Locating the Problem 

REITs in India are registered as a Trust with SEBI,1under the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, and regulated by the REIT Regulations, which are amended regularly. Every REIT has various stakeholder; namely, Managers, Trustees, Sponsors, and Unitholders. While managers provide investment management services to the Trust, the Trustee holds the assets, for the benefit of the unit holders (beneficiaries).2 Much like the Board of Directors of a company, even the Trustees have a fiduciary responsibility towards the unitholders, which the managers don’t. Another important stakeholder is the Sponsor/Sponsor Group, who inject their assets into the initial portfolio of the trust and appoint the trustee, and thus play a crucial role in the initial stages of setting up an REIT.  The main purpose of the REIT however is to invest in commercial real estate assets, which are divided into units and traded on stock exchanges. These trusts are established for the benefit of unitholders, who receive rental distributions. 

The Securities Contracts (Regulation) Act, 1956 (SCRA) defines the scope of securities within the Indian regulatory framework. It defines ‘securities’, and intriguingly includes the term ‘units’. However, the SCRA refrains from offering a precise and comprehensive explanation of what these ‘units’ encompass. SCRA’s definition of securities, however, is not exhaustive, and Courts have maintained that the term must be interpreted widely. The lack of a specific statutory definition under SCRA makes it difficult to ascertain if REIT units fall under SCRA’s ambit.  

Making a Case for Inclusion of REIT Units within the Ambit of ‘Securities’ 

The SCRA limits the scope of securities to marketable securities of a ‘company’ or a ‘body corporate’3. The question of classification of REIT is dealt with by two statues. While SEBI Regulations classify REITs as trusts, the Foreign Exchange Management (Non-Debt Instruments) Rules,2019 define REITs as an ‘investment vehicle’4. The SCRA makes no explicit mention of either of these terms, raising the question if trusts or investment vehicles can fall under ‘other marketable securities.  

The marketability criteria purports that an instrument must be freely bought and sold in a market regardless of whether it is listed in a stock exchange. It is argued that the absence of any explicit terms restricting or barring transfer of REITs implies that they are transferrable, and hence marketable. A similar line of argument was accepted by the Court, when it held that OFCDs are marketable. Marketability in this context is closely linked with transferability, and thus the test of marketability implies that an instrument must not only be capable of being sold in the market, but also freely transferrable. REITs can raise capital from investors through issuance of units via initial offer, which is collectively used to invest in real estate assets. Post the initial offer, Regulation 16 mandates REITs to be listed on a recognized stock exchange, where the trade of individual REIT units is governed by the bye-laws of the respective stock exchange. Further, Regulation 19 clearly states that REIT units are fully transferrable. Thus, the absence of explicit restrictions on transfer affirms the marketability and transferability of REIT units. 

In the past, the Court has also considered the purpose of the instrument to decisively determine its nature. Thus, an instrument that is marketable and issued for the purpose of investment falls under Section 2(h). This test purports that the instrument must be issued in an investment context. The definition clause itself explicitly refers to “real estate investment trust” as an investment vehicle. Regulation 13 prescribes the investment criteria for REITs. It specifies that a REIT shall invest in income-generating real estate assets, thus highlighting the core investment nature of REITs. Further, from the unitholder’s perspective too, Regulations 18 and 20 talk about Public Issue Allotment and Minimum Public Shareholding respectively, both of which are typical features of investment offerings.  

Thus, it is argued that because REIT units are marketable, transferrable and issued for the purpose of investment, they are under the ambit of ‘securities’ und thus the SCRA is applicable to REIT units too.  Further, it is also argued that the SCRA is an essential regulatory framework, which cannot be replaced by the REIT Guidelines. The aim of The Securities Contracts (Regulation) Act, 1956 is to prevent undesirable and unethical securities transactions. Though The Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) regulations provide a regulatory framework for REITs in India, and both largely aim at investor protection, they have varied functions. While SCRA regulates stock exchanges, brokers, intermediaries, and various other entities involved in the broader securities market, whereas REIT Regulations focus on the specific structure, governance, and operation of REITs and set criteria for their formation and operation. Thus, given the difference in their purpose and scope, the same is not a case of overlapping legislation or concurrent jurisdiction; it is thus argued that both the SCRA and the REIT Regulations are essential for regulating the REIT framework. 


Similar to investment in stocks as provided by mutual funds I-RIETS too provide a secure way for investors to invest in commercial real estate. The consequent rise in popularity of REITs calls for a well-defined framework. The lack of explicit guidance within the SCRA framework has led to diverse interpretations, with the courts favouring a broad perspective on the definition of ‘securities.’ The case for including REIT units within this ambit rests on their marketability and transferability, coupled with their issuance for investment purposes. Despite the existence of REIT Regulations, the article argues that the SCRA remains indispensable for its specific focus on preventing undesirable and unethical securities transactions. Hence, the article concludes that both the SCRA and REIT Regulations play crucial and non-overlapping roles in effectively regulating the REIT framework in India. 

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