Description

SEBI reclassifies Real Estate Investment Trusts (REITs) as equity related instruments to facilitate enhanced participation by Mutual Funds and Specialized Investment Funds, effective January 1, 2026.

Summary

SEBI has reclassified Real Estate Investment Trusts (REITs) as equity related instruments for Mutual Funds and Specialized Investment Funds (SIFs) effective January 1, 2026. This change, notified through Gazette notification SEBI/LAD-NRO/GN/2025/272 dated October 31, 2025, amends SEBI (Mutual Funds) Regulations, 1996 to facilitate enhanced participation in REITs. Infrastructure Investment Trusts (InvITs) will continue to be classified as hybrid instruments. Existing REIT holdings in debt schemes as of December 31, 2025 are grandfathered, though AMCs are encouraged to divest considering market conditions.

Key Points

  • REITs reclassified from hybrid to equity related instruments for Mutual Funds and SIFs effective January 1, 2026
  • InvITs remain classified as hybrid instruments
  • Existing REIT investments in debt schemes as of December 31, 2025 are grandfathered
  • AMCs encouraged to divest REITs from debt scheme portfolios based on market conditions and liquidity
  • AMFI to include REITs in market capitalization-based scrip classification
  • REITs can only be included in equity indices after July 1, 2026 (six-month waiting period)
  • Scheme document amendments required but not considered fundamental attribute changes

Regulatory Changes

SEBI has amended the SEBI (Mutual Funds) Regulations, 1996 through Gazette notification no. SEBI/LAD-NRO/GN/2025/272 dated October 31, 2025. The key regulatory change is the reclassification of REITs from their previous classification to equity related instruments specifically for investments by Mutual Funds and SIFs. This aligns REIT treatment with equity instruments for portfolio composition and investment limit purposes.

Per para 2.7 of the Master Circular for Mutual Funds dated June 27, 2024, AMFI is now required to include REITs in the list of classification of scrips based on market capitalization, similar to equity stocks.

Compliance Requirements

For Asset Management Companies (AMCs):

  • Issue addendum to scheme documents reflecting REIT reclassification as equity instruments
  • Make necessary changes to scheme documents without treating it as fundamental attribute change
  • Encouraged to divest REITs from debt scheme portfolios considering market conditions, liquidity and investor interests
  • Ensure proper classification of REIT investments as equity related instruments from January 1, 2026

For AMFI:

  • Include REITs in the market capitalization-based classification list of scrips

For Index Providers:

  • Any inclusion of REITs in equity indices must be done only after July 1, 2026

Applicable to:

  • All Mutual Funds
  • All Asset Management Companies (AMCs)
  • All Trustee Companies/Board of Trustees of Mutual Funds
  • Specialized Investment Funds (SIFs)
  • Association of Mutual Funds in India (AMFI)
  • Registrar Transfer Agents (RTAs)

Important Dates

  • October 31, 2025: SEBI Gazette notification issued (SEBI/LAD-NRO/GN/2025/272)
  • November 28, 2025: BSE circular issued
  • December 31, 2025: Cut-off date for grandfathering existing REIT holdings in debt schemes
  • January 1, 2026: Effective date for REIT reclassification as equity related instruments
  • July 1, 2026: Earliest date for inclusion of REITs in equity indices (six-month waiting period)

Impact Assessment

Market Impact:

  • Enhanced participation by Mutual Funds and SIFs in REIT market expected
  • Potential increase in liquidity and trading volumes for listed REITs
  • Debt schemes holding REITs may need to adjust portfolios, potentially creating selling pressure
  • Equity schemes and balanced funds can now include REITs in their portfolios more seamlessly

Operational Impact:

  • AMCs must update scheme documents and investment classification systems
  • Portfolio management systems need reconfiguration to treat REITs as equity instruments
  • Debt schemes with existing REIT holdings have grandfathering protection but face divestment pressure
  • Fund managers of equity-oriented schemes gain new investment avenue

Investor Impact:

  • Investors in equity schemes may see REIT exposure in their portfolios from January 2026
  • Debt scheme investors with grandfathered REIT holdings may see gradual divestment
  • Potential for better diversification in equity-oriented funds through real estate exposure

Regulatory Impact:

  • Aligns REIT treatment with equity characteristics for investment classification
  • Maintains differentiation between REITs (equity) and InvITs (hybrid)
  • Six-month buffer period for index inclusion allows market adjustment
  • Grandfathering provision provides transition period for existing debt scheme holdings

Impact Justification

Major regulatory reclassification affecting investment strategies of Mutual Funds and SIFs with REITs now treated as equity instruments. Requires scheme document amendments and portfolio adjustments for debt schemes holding REITs.