Arnav Roy & Rushan Sami Mansoori
Summary: The article analyses SEBI’s major reforms between November 2025 and March 2026 that significantly reshape the regulatory framework for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The reforms reclassify REITs as equity instruments for mutual fund investments while retaining InvITs as hybrid instruments, expanding investment opportunities for equity and hybrid schemes and freeing mutual fund capacity for InvITs. SEBI also introduced operational relaxations allowing InvITs to retain SPVs beyond concession expiry, extended greenfield investment eligibility to privately listed InvITs, increased borrowing flexibility, and relaxed investment norms for temporary surplus funds. The article notes that these changes align India with global practices and address long-standing operational challenges. However, it highlights unresolved concerns, including the absence of a structured exit mechanism for grandfathered REIT investments, increasing regulatory divergence between REITs and InvITs despite converging asset profiles, and the lack of clarity on insolvency treatment of InvIT structures under the Insolvency and Bankruptcy Code.
I. Introduction
As of February 2026, REITs and InvITs together commanded a combined assets under management of approximately Rs. 9.5 lakh crore, with 24 InvITs and 5 REITs listed on Indian exchanges. Twelve years after their introduction under the SEBI (REIT) Regulations, 2014 and SEBI (InvIT) Regulations, 2014, SEBI has undertaken what amounts to the most substantive recalibration of the framework since its inception, all within a span of four months.
The first intervention is the circular dated November 28, 2025 reclassifying REITs as equity instruments for mutual fund investment purposes (Reclassification Circular). The second is the package of operational relaxations approved at the SEBI board meeting of March 23, 2026 (March 2026 Board Meeting). This post examines both reforms, analyses their consequences for the mutual fund and debt capital markets, and identifies the gaps that remain. These include the asymmetry between REITs and InvITs that the reclassification has now formalised, as well as the unresolved interface between the InvIT structure and the Insolvency and Bankruptcy Code, 2016 (IBC).
II. The Equity-Hybrid Classification: Origins of the Ambiguity
REITs and InvITs were structurally borrowed from the United States and Australian markets but adapted for Indian conditions. Their hybrid character was apparent from the outset. Unitholders are beneficial owners of the underlying assets, distributions are pegged to net distributable cash flows, and units trade on recognised exchanges, all features consistent with equity. At the same time, the mandatory payout requirement under Regulation 18(6) of both Regulations (90% of net distributable cash flows), the half-yearly NAV calculation, and the debt-heavy SPV architecture impart a fixed-income flavour.
The hybrid classification was formalised by SEBI in 2017 when units of REITs and InvITs were brought within “alternative securities” for mutual fund investment. The classification subjected REITs and InvITs to a combined investment ceiling and was applied inconsistently across scheme types. The cumulative effect was systemic underexposure. As of December 31, 2024, mutual fund holdings in REITs and InvITs aggregated only Rs. 20,087 crore, representing 2.3% of the AUM of eligible schemes. The April 2025 Consultation Paper initiated the formal reconsideration, followed by SEBI Board approvals of September 12, 2025 which the Reclassification Circular operationalised.
III. The Reclassification: REITs as Equity, InvITs as Hybrid
The basis for the distinction is that REITs in India predominantly hold completed commercial real estate such as office parks, logistics warehouses and retail properties, with exchange-traded units, established price discovery and return profiles that track equity markets. Indian REIT units are already constituents of the MSCI India Small Cap Index and FTSE India Index. The reclassification aligns India with the United States, the United Kingdom, Australia and Singapore. InvITs, by contrast, hold toll roads, transmission lines, gas pipelines and renewable projects whose cash flows are annuity-based or tariff-regulated, with materially lower secondary market liquidity.
The Reclassification Circular has three operative consequences. First, debt mutual fund schemes are prohibited from making fresh investments in REIT units from January 1, 2026. Existing holdings as of December 31, 2025 are grandfathered, with SEBI “encouraging” but not requiring AMCs to wind down such positions. Second, equity and hybrid schemes may now invest in REIT units even without specific mention in the offer document, provided it permits investment in equity-related instruments generally. Third, the existing combined ceiling now applies exclusively to InvITs. REIT exposure is subsumed within equity investment limits, creating de facto additional capacity for InvIT exposure.
The reclassification was followed by the September 2025 Amendments, which harmonised the definition of “qualified institutional buyer” with ICDR Regulations, and expanded the “strategic investor” category to include pension funds and IRDAI-regulated insurance companies.
IV. Implications for Mutual Funds and Debt Capital Markets
1. Reconfiguration of the REIT investor base. Debt funds have been a consistent and yield-anchored category of REIT unitholders. Their withdrawal will require absorption by equity-oriented buyers. Whether equity schemes will absorb this transition at scale remains an empirical question turning on offer-document flexibility, fund-manager appetite and retail familiarity.
2. Effect on SPV-level debt issuance. REITs raise debt principally at the SPV level, and the equity reclassification does not directly affect NCD issuance mechanics. An equity-dominated unitholder base may push managers towards lower SPV-level leverage. Conversely, the imperative to sustain competitive distribution yields may sustain or expand NCD activity. The net direction is indeterminate ex ante.
3. Spread compression for InvIT NCDs. The freeing of mutual fund capacity for InvIT exposure should deepen secondary market participation. Greater institutional ownership typically translates into tighter pricing on debt issued at the trust and SPV level, which is materially significant for InvIT sponsors refinancing operational assets through periodic NCD issuances.
V. The March 2026 Operational Reforms
1. Holding of SPVs Beyond Concession Expiry. Under the existing framework, the 80% operational asset requirement under Regulation 18(5) effectively required InvITs to dispose of an SPV upon expiry of the concession agreement. In practice, concession transitions are rarely clean. Renewal negotiations extend, re-tendering processes are protracted, and forced sale into a thin secondary market is value-destructive. The March 2026 amendment permits InvITs to hold SPVs beyond concession expiry, subject to enhanced disclosures, a board-approved exit plan, and completion within a SEBI-prescribed timeline.
2. Greenfield Parity for Privately Listed InvITs. Regulation 18(5) had hitherto permitted only publicly listed InvITs to invest up to 10% of asset value in greenfield projects. The March 2026 amendment removes the asymmetry. The practical consequence is that a privately listed InvIT may now operate as both a yielding platform for operational assets and a limited-pipeline vehicle for greenfield development. This is particularly relevant for renewable energy and road sponsors.
3. Expanded Borrowing Flexibility. InvITs with net borrowings between 49% and 70% of asset value may now raise fresh debt for capex, major maintenance for road projects, and refinancing. The road-sector maintenance carve-out addresses an accounting anomaly. Such expenditure cannot be capitalised under Ind AS 16 read with the Service Concession Arrangement framework, since it neither extends the concession period nor increases toll revenue. Without the carve-out, road InvITs in the 49 to 70% leverage band were effectively unable to raise debt to discharge concession obligations.
Additionally, the credit risk threshold for liquid mutual fund schemes eligible for investment of REITs’ and InvITs’ temporary surplus funds has been reduced from 12 to 10.
VI. Critique and Unanswered Questions
1. Grandfathering Without a Disposal Framework. SEBI’s exit guidance is framed in advisory rather than mandatory terms. In a thin secondary market, prolonged debt-fund overhang risks suppressing prices, making grandfathered positions progressively harder to exit at fair value. SEBI may need to prescribe a more structured disposal mechanism, such as phased timelines, periodic divestment reporting or REIT-led unit buybacks.
2. The Increasingly Artificial REIT-InvIT Distinction. The neat regulatory line reflects 2014 asset profiles. In 2026, those profiles are converging. REITs are increasingly holding data centres, renewable energy and industrial logistics assets, all of which are infrastructure-adjacent on any sensible definition. The asymmetry risks becoming an artificial boundary that incentivises sponsors to choose between instruments based on regulatory treatment rather than asset fit. A medium-term review will likely become unavoidable.
3. The Principal-Only Refinancing Restriction. Refinancing transactions routinely roll fees, arrears and prepayment charges into the refinanced instrument. Excluding these requires structural workarounds without serving any obvious regulatory purpose. The legitimate concern is already addressed by the separate condition that net borrowings must not increase. The principal-only overlay is therefore redundant.
4. Silence on the Concession Expiry Timeline. The amendment leaves the consequence of timeline lapse unaddressed. It is unclear whether SEBI may grant case-by-case extensions, whether forced sale becomes mandatory, or what unitholders’ rights are during the interim period.
5. The Insolvency Question. Neither reform addresses the interface between InvIT structures and the IBC. As InvIT AUMs approach Rs. 10 lakh crore, pressing questions remain. These include whether an InvIT SPV is a “corporate person” amenable to CIRP under Section 7, how the Section 14 moratorium operates for trust-held assets, and what enforcement rights look like within the layered SPV-Holdco-Trust structure. In Embassy Property Developments Pvt. Ltd. v. State of Karnataka, the Supreme Court held that the Section 14 moratorium does not extend to government-granted concessions where the public-law character is determinative, a principle directly relevant to InvITs holding road and transmission assets. The treatment of trust-held assets within the insolvency estate has not been authoritatively resolved.
VII. Conclusion
The reforms undertaken between November 2025 and March 2026 collectively constitute the most significant recalibration of the InvIT-REIT framework since the 2014 regulations. The equity reclassification aligns India with global market practice. The March 2026 operational reforms address structural problems practitioners had flagged consistently, including the concession expiry trap, the road maintenance funding gap and the greenfield asymmetry.
The harder questions, however, remain unresolved. The orderly exit of debt funds from grandfathered REIT positions requires a more structured framework. The asymmetric treatment of REITs and InvITs is becoming progressively harder to defend as asset profiles converge. Most consequentially, the absence of a clear insolvency pathway for distressed InvIT structures becomes more pressing with each lakh crore of AUM. SEBI has opened significant regulatory territory, but the mapping is incomplete.
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The article has been co-authored by Arnav Roy and Rushan Sami Mansoori, both Year IV students at NLU Delhi.
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