The Securities and Exchange Board of India (Sebi) has introduced a significant regulatory change that will reshape how mutual funds and specialized investment funds approach Real Estate Investment Trusts (REITs). In a landmark decision, the market regulator has announced that investments in REITs will be classified as equity-related instruments starting January 1, 2026.
What Changes for REIT Investments?
The regulatory shift was formalized through an amendment to the Sebi (Mutual Funds) Regulations, 1996. The circular issued on November 28 clearly states: "With effect from January 01, 2026, any investment made by Mutual Funds and SIFs in REITs shall be considered as investment in equity-related instruments."
This reclassification represents a fundamental change in how these real estate-backed securities will be treated in investment portfolios. The move is strategically designed to encourage broader participation in the REIT market, which has been growing steadily since its introduction in India.
Transition Period and Grandfathering Provisions
Sebi has provided a structured transition timeline to ensure smooth implementation. REITs will become eligible for inclusion in equity indices from July 1, 2026, allowing a six-month adjustment period for market participants.
In a significant relief to existing investors, Sebi has included grandfathering provisions for current holdings. All REIT investments held by debt schemes of Mutual Funds and SIF strategies as of December 31, 2025, will be protected from immediate compliance requirements. This means current portfolios won't face forced restructuring due to the new classification.
Impact on Debt Schemes and Market Development
While existing investments are protected, Sebi has actively encouraged Asset Management Companies (AMCs) to gradually reduce their REIT exposure in debt schemes. This divestment should consider market liquidity conditions and prioritize investor interests throughout the process.
It's important to note that Infrastructure Investment Trusts (InvITs) will maintain their current classification as hybrid instruments for both Mutual Funds and Specialised Investment Funds, distinguishing them from REITs in the new framework.
The regulator emphasized that these changes align with Sebi's core mission to protect investor interests while promoting healthy development of securities markets. This strategic reclassification is expected to bring more transparency and standardized treatment to REIT investments, potentially attracting more institutional and retail participation in the real estate investment trust ecosystem.
