What Changed, From When, and Why It Matters

For years, REITs(Real Estate Investment Trusts) sat in an uncomfortable corner of Indian regulation. They were traded like equity, priced by the market like equity, yet often treated as debt or hybrid exposure inside mutual fund rulebooks. That mismatch created confusion for fund managers, disclosure gaps for investors, and unnecessary friction in capital allocation.

SEBI’s November 2025 circular ends that ambiguity. From January 1, 2026, REITs will be treated as equity-related instruments for mutual funds and specialised investment funds. This is not a cosmetic change. It is a legal reset that brings classification closer to economic substance.

As a capital markets lawyer, I see this circular less as a policy experiment and more as a long-overdue correction.

What SEBI has Formally Decided

• REITs move into the equity category

From January 1, 2026, any investment by mutual funds or specialised investment funds in REITs will be counted as equity exposure. This applies prospectively. New investments from that date onward fall squarely within the equity bucket.

InvITs are excluded from this change. They continue to be treated as hybrid instruments. That distinction is deliberate and defensible, given the different cash flow profiles of infrastructure assets.

• Existing debt scheme holdings get protection

REIT units already held by debt mutual fund schemes as of December 31, 2025 are grandfathered. There is no forced selling and no regulatory cliff.

SEBI has encouraged asset managers to reduce such exposure over time, keeping market liquidity and investor interest in view. This language matters. It signals regulatory restraint rather than coercion.

• REITs enter the market-cap framework

AMFI has been asked to include REITs in the standard market-cap classification of securities. This step brings REITs into the same reference system used for large-cap, mid-cap, and small-cap categorisation.

Once that happens, REITs stop being treated as outliers inside equity portfolios. They become comparable, at least from a classification standpoint.

• The scheme document changes without the investor’s exit pressure

Asset managers must issue addenda to reflect the new treatment of REITs. SEBI has clarified that these updates do not amount to a fundamental attribute change.

This removes the need for exit windows and avoids disruption across schemes. It also reflects a view that classification clarity should not be mistaken for a strategy change.

• Index inclusion is delayed by design

REITs will not be added to equity indices until July 1, 2026. The six-month gap is intentional. It allows the market to absorb the new treatment before passive flows enter the picture.

From a legal perspective, this is one of the more careful elements of the circular.

What this circular does not do

The circular is precise in its scope.

• It does not mandate new allocations to REITs.
• It does not convert InvITs into equity instruments.
• It does not alter taxation.
• It does not promise higher returns or lower risk.

This is a classification change, not a performance guarantee.

Why was this change unavoidable? 

The earlier treatment of REITs as debt or quasi-debt was difficult to defend on first principles.

REIT distributions are not fixed obligations. Unit prices move with market sentiment, interest rates, asset quality, and leasing conditions. Investors bear valuation risk in the same way they do with listed equity.

Labeling such exposure as debt inside mutual fund portfolios created a false sense of safety. It also constrained equity funds from holding an asset class that behaves like equity in most material respects.

SEBI’s circular corrects that mismatch.

The Real Impact on Mutual Funds

• Equity-oriented schemes now have clear legal room to invest in REITs without breaching exposure rules. That flexibility did not exist earlier.
• Debt schemes, over time, are expected to reduce REIT exposure. This will not happen overnight, and the regulator has not asked for haste.
• For fund managers, the change shifts REIT analysis from yield-only discussions to equity-style risk assessment. That includes occupancy trends, asset concentration, sponsor quality, and interest rate sensitivity.

What Investors Should Understand

• Equity classification does not make REITs similar to operating companies. They remain asset-backed vehicles with distribution-focused structures.
• At the same time, investors should stop viewing REITs as fixed-income substitutes. Price volatility, market cycles, and capital value changes are part of the package.
• The circular improves transparency by placing REIT risk where it belongs, inside the equity frame.

Strategic Investors and the Broader Signal

Alongside the reclassification, SEBI has widened the definition of strategic investors for REITs and InvITs. Pension funds, alternative funds, and other long-horizon players now have clearer entry routes.

Taken together, these moves point to a regulator that wants patient capital, better price discovery, and fewer artificial barriers between asset classes.

A Legal Reading of What Just Happened

This circular does not rewrite the REIT framework. It corrects a classification problem that had lingered for too long.

By choosing a phased transition, offering grandfathering, delaying index inclusion, and avoiding forced exits, SEBI has shown restraint and clarity. The market has been given time to adjust without being pushed.

From a legal standpoint, this is how capital market reform should work. Clear intent. Limited disruption. Substance over labels.

Closing Perspective

From 2026 onward, REITs will sit where they always should have, inside the equity category. That clarity benefits fund managers, investors, and the market as a whole.

The circular does not make REITs safer or riskier. It makes them easier to understand. In regulation, that is often the most valuable outcome.

Author

Gaayan Sethi 

Global General Counsel

Antier Solutions 

About

With over 28 years of extensive experience in banking and corporate finance, along with more than 11 years in financial and business consulting, Gaayan offers a unique blend of expertise that spans multiple domains. As a CFA (ICFAI) charterholder, Gaayan’s career has been distinguished by a deep commitment to excellence in both financial management and legal practice.