Market Regulator Redefines REIT Classification
The Securities and Exchange Board of India (Sebi) has announced a significant reclassification of Real Estate Investment Trusts (REITs), moving them from hybrid instruments to equity-related instruments. This fundamental shift will take effect from 1 January 2026, marking a new era for how these instruments are treated in the Indian financial markets.
Transition Period and Existing Investments
In a circular issued on Friday, the market regulator provided crucial relief for existing investments. All current REIT holdings as of 31 December 2025 will be exempt from the new classification rules. This grandfathering provision ensures a smooth transition for existing portfolio holdings.
The regulator has specifically advised asset management companies to begin the process of divesting REITs from debt schemes. However, this should be done considering market conditions, liquidity, and investor interests, indicating a pragmatic approach to implementation.
Aligning with Global Standards
This reclassification decision follows Sebi's earlier move on 12 September, where REITs were officially moved from their previous "hybrid" categorization. Interestingly, Infrastructure Investment Trusts (InvITs) will retain their hybrid instrument status despite this change.
The strategic move is designed to achieve multiple objectives: deepening the market, bringing India closer to international classification norms, and potentially boosting demand for REIT instruments. Industry experts believe this could significantly increase allocations from both active equity schemes and passive funds.
Index Inclusion and Market Impact
The inclusion of REITs in equity indices is expected to commence by 1 July 2026, creating new opportunities for fund managers and investors alike. Deepak Shenoy, Chief Executive of Capitalmind Mutual Fund, commented on the development: "Classification of REITs as equity is good because they are related to the price of a property. It opens up opportunities for equity mutual funds and SIFs."
Shenoy further elaborated that while REITs might not immediately qualify for large benchmark indices due to their current size, they could find place in specialized indices like dividend yield indices. The final decision on index inclusion will be determined by index providers in July.
Operational Changes for Mutual Funds
Sebi has directed the Association of Mutual Funds in India (Amfi) to begin treating REITs like regular equity stocks for market capitalization classification. This means REITs will now feature in Amfi's periodic lists categorizing securities as large-cap, mid-cap, or small-cap based on their market value.
Mutual fund houses will need to update their scheme documents to reflect this new equity classification for REITs. Importantly, these updates can be made through a simple addendum and won't be treated as a "fundamental attribute change." This procedural ease means funds won't need to seek investor approval or trigger exit windows, simplifying the compliance process.
The reclassification represents a significant step toward market maturity and could potentially unlock new investment avenues while providing clearer guidelines for portfolio construction in the evolving Indian financial landscape.
