REITS Move Into The Equity Fold: SEBI’s New Investment Framework Explained

Introduction

SEBI (the Securities and Exchange Board of India) has classified Real Estate Investment Trusts (REITs) as equity instruments, creating an investment framework for mutual funds and Specialized Investment Funds (SIFs). This development will enable increased participation in REITs through Circular No. HO/24/13/12(1)2025-IMD-POD-2/I/157/2025, issued by SEBI on November 28, 2025.

The reclassification of REITS as equity instruments is part of a larger change in relation to the SEBI (Mutual Funds) Regulations, 1996, as detailed in Gazette Notification No. SEBI/LAD-NRO/GN/2025/272, dated October 31, 2025. This regulatory change will establish a more defined investment framework for both Mutual Funds and SIFs with respect to investing in REITS and allow for greater participation by both Mutual Funds and SIFs within SEBI’s regulatory framework.

Investment Trusts and Hybrid Instruments in the SEBI Circular

The Circular issued by the Securities and Exchange Board of India (SEBI) is designed to protect the interests of investors and further the orderly growth and regulation of the Indian Securities Market. This Circular is applicable to all Mutual Funds, Asset Management Companies, Trustee Companies, the Boards of Trustees of all Mutual Funds, the Association of Mutual Funds in India (AMFI), and the Registrars and Transfer Agents (RTA) of Mutual Funds.

There are changes to interpret REITS with their evolving position in the Securities Market and to provide for the continuity and stability of existing investments in REITS by the Mutual Funds and SIFs.

Aspects of the Circular

A major component of the Circular is the reclassification by SEBI of the REIT investment products from an asset class to an equity-related instrument class. As of 1 January 2026, all Mutual Fund and SIF investments in REITS will be treated as equity-related instruments.

While SEBI has established a separate classification framework for REITS, as defined in the Circular, it has not included InvITs in this classification framework, thereby not amending the existing regulatory framework for InvITs and maintaining their classification as hybrid instruments for Mutual Fund and SIF investments.

Grandfathering existing REIT investment

The reality that some individuals will want stability and continuity is why SEBI has created a grandfathering provision for existing REIT investments. All investments made by Mutual Fund debt schemes or SIF investment strategies on December 31, 2025, will be grandfathered. Protection will be in place against any regulatory changes made after the Effective Date regarding the reclassification of REITS by regulation. In addition, SEBI has encouraged Asset Management Companies (AMCs) to encourage their REIT debt scheme portfolios to actively divest their REITS as market conditions permit and with consideration for investor liquidity and interest.

SEBI directed AMFI to include the Market Cap classification for REITs

As of June 27, 2024, SEBI has required AMFI to include REIT as part of the classification of Scrips when determining the Market Capitalisation of a security per paragraph 2.7 of the Mutual Fund Master Circular. This will create consistency and increase clarity around the market capitalization classification of REITS and thereby increase market participants’ understanding of how to classify REITS accordingly.

Amendments to Scheme Documents

As a consequence of the circular’s provisions regarding disclosures/documents, the AMCs must file an amendment to their scheme document with SEBI. The amendment will outline the updated classification of REITS pursuant to PMG’s Classification of REITS as equity related instruments.

SEBI also states that amending a scheme does not change the fundamental characteristics of the scheme. The clarification is intended to allow for a smooth transition to the new classification without triggering the requirement of following the procedures necessary to make changes to the fundamental attributes of the scheme.

Inclusion of REITS into equity indices

The circular states the timeline for REITS to be included in equity indices. As detailed by SEBI, the inclusion of REITS into equity indices shall occur only after a period of 6 months from when the real time trading is allowed on the exchanges.

Therefore, all REITS can be added to equity indices beginning July 1, 2026. The phased approach allows for adequate time for index providers and market participants to adapt to the changes created by this new classification framework.

Authority to Issue Circular

The Circular has been issued by way of the powers granted to SEBI under Section 11(1) of The Securities and Exchange Board of India Act, 1992, and Regulation 2(1)(ja) of The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. The primary purpose for issuing this Circular is the protection of investors’ interests in securities as well as the development and regulation of the securities market.

Conclusion

With the reclassification of REITS by SEBI to be considered as equity-related, it creates a framework that will provide a structure for Mutual Funds and SIFs to invest into REITS. This framework promotes both greater investor participation and grandfathers existing investors while allowing for a phased implementation of the rules for a clearer regulatory environment and greater levels of investor protection during the transition to the regular securities market in India.