A proposal by mutual funds to float realty schemes has split the board of the Securities and Exchange Board of India.

According to sources familiar with the development, some board members have argued that since real estate is fairly illiquid and not securitised, mutual funds should not be allowed to invest in such assets.

Realty plans by mutual funds have been hanging fire for more than two years now.

Late last year the regulator had told the mutual fund industry to script a comprehensive scheme for real estate funds before giving its approval.

While the Sebi board has already given an in-principle approval for the launch of such schemes, final clearance is awaited.

Industry sources said the clearance is being stalled by certain members of the board who are not convinced on the feasibility of the product.

Since real estate is not as liquid as equities or debt, such types of schemes have to be of a longer duration -- as much as ten years or more.

While fund houses have been pointing out that illiquidity would not pose a problem where investments in real estate are concerned, concerns about the unregulated nature of the real estate sector have been voiced, sources said.

Last year, a committee headed by HDFC Mutual Fund chief Milind Barve submitted a report on real estate funds patterned on the Real Estate Investment Trusts operating in the US.

This committee had recommended that the schemes should be on the lines of a mutual fund scheme -- a typical interval fund for such schemes could be a three-year closed-ended scheme which could open at the end of every quarter for the sale of fresh units based on the quarterly net asset value calculation and remain open for a minimum period of 15 days.

Investments of the real estate scheme can be in equities, debentures and bonds of listed companies that deal in properties and also undertake property development.

In fact, the Sebi board is likely to allow this kind of a scheme rather than direct investments in real estates.

However, asset management companies are not very satisfied with this.