Description

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

Summary

SEBI has issued a circular reclassifying Real Estate Investment Trusts (REITs) as equity related instruments for Mutual Funds and Specialized Investment Funds (SIFs), effective January 1, 2026. This follows Gazette notification SEBI/LAD-NRO/GN/2025/272 dated October 31, 2025. The change aims to facilitate enhanced participation by Mutual Funds and SIFs in REITs. Infrastructure Investment Trusts (InvITs) will continue to be classified as hybrid instruments.

Key Points

  • REITs will be classified as equity related instruments from January 1, 2026
  • InvITs remain classified as hybrid instruments
  • Existing REIT holdings in debt schemes as of December 31, 2025 are grandfathered
  • AMCs encouraged to divest REITs from debt portfolios considering market conditions
  • AMFI to include REITs in market capitalization classification of scrips
  • REITs can only be included in equity indices after July 1, 2026
  • Scheme document changes via addendum will not be considered fundamental attribute changes

Regulatory Changes

SEBI has amended 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 category to equity related instruments for investment purposes by Mutual Funds and SIFs. This amendment to Regulation 2(1)(ja) is designed to protect investor interests and promote securities market development.

Compliance Requirements

For Asset Management Companies (AMCs):

  • Must treat all new REIT investments from January 1, 2026 as equity related instruments
  • Should make efforts to divest existing REIT holdings from debt scheme portfolios, considering market conditions, liquidity, and investor interests
  • Must issue addendums to scheme documents reflecting the classification changes
  • Cannot treat these addendums as fundamental attribute changes

For AMFI (Association of Mutual Funds in India):

  • Must include REITs in the classification of scrips based on market capitalization as per para 2.7 of the Master Circular for Mutual Funds dated June 27, 2024

For Index Providers:

  • Can only include REITs in equity indices after July 1, 2026 (minimum six-month waiting period)

Important Dates

  • October 31, 2025: SEBI Gazette notification issued (SEBI/LAD-NRO/GN/2025/272)
  • November 28, 2025: Circular issued date
  • 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 including REITs in equity indices

Impact Assessment

Market Impact:

  • Enhanced participation by Mutual Funds and SIFs in the REIT market expected
  • Potential increase in liquidity and demand for REIT units
  • Debt schemes will need to gradually exit REIT positions (grandfathered until divested)
  • Equity schemes and balanced schemes can now invest in REITs more freely

Operational Impact:

  • AMCs must update internal investment guidelines and portfolio management systems
  • Risk management frameworks need adjustment to treat REITs as equity exposure
  • Scheme documentation requires updates through addendums
  • Portfolio rebalancing may be required for debt schemes holding REITs

Investor Impact:

  • Debt scheme investors may see gradual changes in portfolio composition as REITs are divested
  • Equity scheme investors gain access to a new asset class within equity allocation
  • Scheme risk profiles may change slightly due to reclassification

Industry Impact:

  • REIT market likely to benefit from expanded institutional investor base
  • Distinction between REITs (equity) and InvITs (hybrid) creates different treatment paths
  • Index composition changes possible after July 1, 2026

Impact Justification

Major regulatory reclassification affecting how Mutual Funds and SIFs can invest in REITs, with significant implications for portfolio management and scheme categorization across the industry.