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 reclassified Real Estate Investment Trusts (REITs) as equity related instruments effective January 1, 2026, through gazette notification SEBI/LAD-NRO/GN/2025/272 dated October 31, 2025. This change amends the SEBI (Mutual Funds) Regulations, 1996, and aims to facilitate enhanced participation by Mutual Funds and Specialized Investment Funds (SIFs) in REITs. InvITs will continue to be classified as hybrid instruments.

Key Points

  • REITs will be treated as equity related instruments for Mutual Funds and SIFs from January 1, 2026
  • InvITs remain classified as hybrid instruments (no change)
  • Existing REIT investments in debt schemes as of December 31, 2025 are grandfathered
  • AMCs are encouraged to divest REITs from debt scheme portfolios considering market conditions
  • AMFI to include REITs in market capitalization classification list
  • Scheme document amendments through addendum will not be considered fundamental attribute changes
  • REITs can only be included in equity indices after July 1, 2026 (six-month waiting period)

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 under Regulation 2(1)(ja). This change aligns REIT investments with equity investment guidelines for Mutual Funds and SIFs.

Compliance Requirements

For AMCs (Asset Management Companies):

  • Issue addendums to scheme documents reflecting the reclassification of REITs
  • Make necessary changes to investment strategies for schemes holding or planning to invest in REITs
  • Encouraged to divest REITs from debt scheme portfolios while considering market conditions, liquidity, and investor interests

For AMFI (Association of Mutual Funds in India):

  • Include REITs in the classification list of scrips according to market capitalization as per para 2.7 of the Master Circular for Mutual Funds dated June 27, 2024

For Index Providers:

  • Defer inclusion of REITs in equity indices until after July 1, 2026

Grandfathering Provision:

  • Existing REIT investments held by debt schemes and investment strategies of SIFs as of December 31, 2025 are grandfathered and need not be immediately divested

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 investments 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:

  • Expected to increase institutional participation in REITs from Mutual Funds and SIFs
  • May enhance liquidity in the REIT market
  • Could lead to rebalancing of debt scheme portfolios currently holding REITs
  • Potential increase in REIT valuations due to expanded investor base

Operational Impact:

  • Mutual Fund schemes will need to realign REIT investments with equity allocation limits
  • Debt schemes may experience portfolio adjustments as REITs are divested
  • Investment strategies and risk profiles of schemes holding REITs will need reassessment
  • Scheme documentation across the industry requires updating

Investor Impact:

  • Investors in debt schemes holding REITs will see portfolio composition changes
  • Equity scheme investors may see increased REIT exposure
  • Scheme fundamental attributes remain unchanged despite the reclassification
  • Enhanced investment opportunities in real estate sector through equity schemes

Impact Justification

Significant regulatory change affecting how Mutual Funds and SIFs classify and invest in REITs, with market-wide implications for asset allocation strategies and scheme classifications.