Description

SEBI reclassifies REITs as equity-related instruments effective January 1, 2026, to facilitate enhanced participation by Mutual Funds and SIFs, while grandfathering existing debt scheme holdings.

Summary

SEBI has reclassified Real Estate Investment Trusts (REITs) as equity-related instruments effective January 1, 2026, to facilitate enhanced participation by Mutual Funds and Specialized Investment Funds (SIFs). This change follows amendments to SEBI (Mutual Funds) Regulations, 1996 via Gazette notification SEBI/LAD-NRO/GN/2025/272 dated October 31, 2025. Infrastructure Investment Trusts (InvITs) will continue to be classified as hybrid instruments. Existing REIT holdings in debt schemes as of December 31, 2025, will be grandfathered.

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 considering market conditions, liquidity, and investor interests
  • AMFI to include REITs in market capitalization-based scrip classification list
  • AMCs must issue addendum to scheme documents (not considered fundamental attribute change)
  • Inclusion of REITs in equity indices permitted only after July 1, 2026

Regulatory Changes

Investment Classification: With effect from January 1, 2026, any investment made by Mutual Funds and SIFs in REITs shall be considered as investment in equity-related instruments. This represents a shift from the previous classification where REITs were treated differently.

Grandfathering Provision: Existing investments in REITs held by debt schemes of Mutual Funds and investment strategies of SIFs as on December 31, 2025, shall be grandfathered, allowing these positions to remain without immediate forced divestment.

Market Capitalization Classification: AMFI is required to include REITs in the list of classification of scrips as per their market capitalization, in accordance with para 2.7 of the Master Circular for Mutual Funds dated June 27, 2024.

Index Inclusion Timeline: Any inclusion of REITs in equity indices shall be carried out only after a period of six months from the effective date, i.e., July 1, 2026.

Compliance Requirements

For Asset Management Companies (AMCs):

  • Issue an addendum to make necessary changes in scheme documents (not considered a fundamental attribute change)
  • Make efforts to divest REITs from debt scheme portfolios considering market conditions, liquidity, and investor interests
  • Ensure compliance with new equity-related instrument classification from January 1, 2026

For AMFI:

  • Include REITs in the list of classification of scrips as per market capitalization as per Master Circular para 2.7

For Index Providers:

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

Important Dates

  • October 31, 2025: Gazette notification SEBI/LAD-NRO/GN/2025/272 published amending SEBI (Mutual Funds) Regulations, 1996
  • November 28, 2025: Circular issued
  • December 31, 2025: Cut-off date for grandfathering existing REIT investments in debt schemes
  • January 1, 2026: Effective date for reclassification of REITs as equity-related instruments
  • July 1, 2026: Earliest date for inclusion of REITs in equity indices (six-month waiting period)

Impact Assessment

Market Impact: This reclassification is expected to facilitate enhanced participation by Mutual Funds and SIFs in REITs by allowing equity-oriented schemes to invest in these instruments. This could potentially increase liquidity and demand for REIT units in the secondary market.

Portfolio Management: Debt-oriented Mutual Fund schemes and SIF strategies will need to reassess their REIT holdings. While existing positions are grandfathered, AMCs are encouraged to divest over time, which may lead to gradual portfolio rebalancing.

Scheme Documentation: AMCs will need to update scheme documents through addendums to reflect the new classification, though this administrative change does not constitute a fundamental attribute change requiring unitholder approval.

Index Impact: The six-month waiting period before REITs can be included in equity indices (until July 1, 2026) provides a transition period for market participants to adjust to the new classification.

Operational Impact: The reclassification affects how Mutual Funds calculate their equity exposure for various scheme categories, potentially allowing greater flexibility in portfolio construction for equity and equity-oriented schemes while restricting new REIT purchases by debt schemes.

Impact Justification

Major regulatory change affecting classification of REITs across all mutual fund schemes and SIFs, impacting investment strategies and portfolio compositions with significant compliance implications for AMCs.