Sebi’s REIT Reclassification: Analysis of Regulatory Intent, Market Impact & Outlook

SEBI’s 2025 REIT Reclassification: A Comprehensive Analysis of Regulatory Intent, Market Impact And Future Implications

INTRODUCTION

Recently, Securities Exchange Board of India (SEBI), in its circular dated 28^th November 2025, has introduced a major regulatory change by reclassifying Real Estate Investment Trusts (REITs) as an equity instrument for Mutual Funds (MFs) and Specialized Investment Funds (SIFs), which will come into effect from 1^st January 2026. Through this reclassification SEBI has tried to deepen the India’s Real Estate Capital Market by bringing REITs within the ambit of equity related instruments. REITs have been treated in a varied manner under different mutual funds schemes such as Equity schemes were not very eager to invest in them, they were considered as an income-generating assets under debt schemes and hybrid schemes were not having any standard way to classify them. SEBI through this notification has resolved a big issue by classifying REITs as an equity like instrument aligning India with Global Convention.

This notification also says that the mutual funds which are already invested in REITs through debt schemes can keep those investments under the old system which is also known as grandfathering. SEBI has also instructed AMFI (the association of mutual fund) to update the way different funds classify such investments and requires making small changes or updates to their scheme documents. In addition to this REITs won’t be added to major stock exchange market for at least six months ensuring that this cooling off period gives market time to adjust to these changes. Collectively, these changes will help in ensuring the protection to the investors, maintain stability and help in attracting more investments into REITs.

This article analyses this circular by examining the regulatory context behind the reclassification, operational implications for the MF and SIF ecosystem, transitional mechanisms and risk mitigation frameworks and broader policy rationale behind SEBIs move. The evolving landscape of India’s real estate and capital markets, offering insights into how this reclassification may influence future investment behaviour, market liquidity, and regulatory design.

BACKGROUND AND REGULAOTRY RATIONALE

SEBIs 2025 circular must be taken into consideration by viewing it considering the long-standing confusion as to how mutual funds and Real Estate Investment Trusts in India should be treated. Although REITs are structured as an equity like instruments which are also listed on exchanges, are sensitive to market fluctuations and offers both income and capital gains then also they are not uniformly classified under the mutual fund ecosystem. Equity schemes often treat REITs as part of special theme under real estate because REITs behaves like an equity, but some debt schemes also invest in REITs due to its steady payout nature, which it itself creates inconsistency and confusion. As we know debt schemes are supposed to invest in safe, fixed-income assets, not in products that behave like equity. When debt schemes hold something that is equity like it mixes two very different types of investments. This makes it harder to clearly classify as to what the scheme is investing in. This also becomes detrimental for the investors who often gets mislead while buying debt schemes as they might think they are investing into something safe, while the scheme they are investing in is holding risk.

This new notification endeavours to correct these infirmities by classifying REITs under the category of equity related instruments. SEBI keeps InvITs in the hybrid category because InvITs are linked to the infrastructure projects, have more stabilized cash flows and carry a different set of risk and return ratio. Since the concept of REITs is still new in India and much smaller as compared to the other foreign countries, SEBIs belief that more mutual funds should invest in them is the step in right direction as it will help in making REIT grow faster and become stronger at the same time.

IMPACT ON DEBT SHCEMES AND GRANDFATHERING MECHANISM

SEBIs circular introduces the phased transition for debt schemes that already uses REITs. To avoid the sudden disruption, SEBI is allowing these schemes to keep their existing REIT units. This process is called grandfathering which means to keep what you already have, but you should not buy more of the same. Therefore, SEBI mandates to release all REITs units held as of now under the grandfathering mechanism after 31^st December 2025. SEBI is also of the view that these debt schemes should sell the REITs slowly because these REITs acts as an equity which opposes the nature of debt funds which are usually safe and fixed incomes.

SEBI is avoiding the debt schemes to sell everything immediately because that could create a big problem. If too many REITs are sold at the same time, then too many REITs would enter the market, prices would fall sharply, market would become unstable and debt fund investors would suffer losses as NAVs drops. SEBI uses the phrase it “endeavours to digest” which means SEBI wants that REITs should be sold in market gradually when it feels that market is quite comfortable.

Debt schemes usually focus on stable, interest rat linked returns, low volatility and fixed income securities. REITs do not fit into this profile because they behave partly like shares as their value fluctuates. Narrowing the ambit of these schemes by removing REITs makes them more consistent with what investors expect from a debt fund. Grandfathering mechanism balances REITs and investor’s confidence which help in preventing sudden chock to NAV. This ensures that the new rules do not harm current investors or disrupt the market.

INDEX INCLUSION FRAMEWORK AND MARKET CONSEQUENCES

It is clear from the SEBIs circular that REITs can be included in the equity instruments only after 1^st July 2026, creating a six-month buffer period. It is much needed because the index providers like NSE and BSE are required to update their rules for the smooth inclusion of REITs into their existing index structure. This delay also gives time for the REIT to settle as mutual funds to treat REITs as equity instruments. Once REITs finally enters this market as indices, several important factors will follow. Firstly, passive inflow will rise which means that debt funds and ETFs must buy whatever is included in an index. So as soon as these REITs are inculcated into these indices then these funds will automatically start buying them, creating steady demand and helping the market grow. Secondly, increase in liquidity will be noticed in which more institutional buying and selling will narrow down the bid ask spreads and increase trading volumes. This makes it easier and safer for large investors to enter and exit the REIT positions. Lastly, the mutual funds holding REITs will finally have benchmarks that include REITs, making performance comparison fairer and clearer.

Thus, we can draw an inference from that index-inclusion framework is considered as an important link between SEBIs new classification and real market acceptance. It helps in the balanced inclusion of REITs into the mainstream equity market in a stable and balanced way, without any fluctuations in index structures. Similarly, greater investor participation is encouraged which in turn supports the long-term growth of India’s REIT market within the broader equity market.

BROADER MARKET AND POLICY IMPLICATIONS

SEBIs reclassification of REITs as equity related instruments has several other important effects on India’s financial fora. This reform helps in strengthening the real estate capital market by encouraging more participation from the mutual funds and institutional investors. When more funds invest in REITs, the market becomes deeper and more liquidated that are essential for the long-term growth. This move also brings India’s regulatory approach closer to international standards. Globally, REITs are treated as equity instruments because of their trading behaviour and return patterns. SEBIs decision helps in aligning the India with the global norms, making the domestic market more comparable and easier for foreign investors to understand. For equity investors also this notification offers them the diversifies option to invest. REITs provide exposure to real estate without directly owning property, and they offer both income and potential price appreciation. This inclusion of REITs allows investors to access an additional asset class within mutual fund structure. Debt schemes will now no longer hold equity like instruments, reducing the risk that investors misunderstand the level of risk in their investments. This classification also helps in reducing mislabelling and ensuring that equity and debt schemes reflect their true nature. SEBI also has taken a balanced approach with respect to its implementation. The transition has been managed by using the phased steps grandfathering existing debt scheme holdings, delaying index inclusion, and avoiding forced liquidation. Therefore, we can say that the Indian REIT market is still concentrated mainly around the commercial assets and limited liquidity. For the market to grow further, more REIT listings such as in warehousing, retail and hospitality will be necessary. Increased diversification and broader participation will be key to sustaining long-term institutional interest.

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Author Details:

– Devesh Sharma, Second Year Law Student, Chanakya National Law University, Patna

– Abhinav Raghuvanshi, First Year Law Student, Chanakya National Law University, Patna