Sebi's Move to Reclassify REITs and InvITs as Equity: Unlocking Real Estate and Infrastructure Capital
Sebi's proposal to reclassify REITs and InvITs as equity instruments is poised to unlock significant capital for India's real estate and infrastructure sectors. This move aligns India with global standards, deepening liquidity and accelerating investment in a $1 trillion real estate and $4.5 trillion infrastructure market.
ReitsInvitsSebiReal EstateInfrastructureReal EstateSep 11, 2025
Yet, these instruments remain underutilised. REITs constitute only 12 per cent of India's listed real estate market capitalisation and a mere 0.35 per cent of the global REIT index. This stands in contrast to mature markets like the US, Australia, and Britain, where REITs account for over 90 per cent of listed real estate market capitalisation. With real estate projected to hit $1 trillion by 2030 and infrastructure needing $4.5 trillion, the question isn't REITs' and InvITs' potential, but how best to unleash it for growth.
REITs and InvITs are categorised as hybrid instruments. This imposes limitations on mutual fund (MF) investments, capping exposure at 10 per cent of a scheme's NAV and 5 per cent per issuer, thus limiting MF inflows. While these restrictions were reasonable when introduced in 2017, they are outdated now. Further, the 'hybrid' classification limits the inclusion of REITs and InvITs in benchmark indices. Reclassifying these instruments as equity would dismantle these barriers and unlock their full market potential.
Economically and structurally, units of REITs and InvITs bear similarities to equity shares. These units represent a proportional beneficial interest in the trust's assets and cash flows. Further, the absence of a fixed maturity date and requirement for principal repayment supports the cause. The mandatory distribution of at least 90 per cent of net distributable income to unit holders is linked to the performance of underlying assets, mirroring the nature of dividends, which are declared from a company's profits rather than contractual payments akin to debt interest.
Furthermore, REIT and InvIT units are publicly listed, traded, and settled on stock exchanges, leveraging the same infrastructure as equity shares, including identical mechanisms for price discovery and trading. Unit holders possess the right to vote on crucial decisions, including asset acquisitions, borrowings, and managerial appointments, directly paralleling the governance rights of equity shareholders.
On the taxation front, the I-T Act 1961 aligns the tax treatment of long-term capital gains on REIT/InvIT units with that of equities. Notably, even Sebi, when establishing the original investment caps in 2017, explicitly acknowledged these inherent equity-like traits.
International experience demonstrates that whether organised as corporations or trusts, listed REITs in major markets share core characteristics with traditional equity securities. These include robust market liquidity, residual risk-bearing by unit holders, and a direct alignment of returns with performance. These global jurisdictions have integrated REITs into mainstream equity indices. This integration has been vital in boosting institutional participation, lowering the cost of capital, and enhancing secondary market liquidity. In the US, for instance, REITs are fully integrated into major equity benchmarks such as the S&P 500 and MSCI US REIT Index, enabling over 150 million Americans to invest in REITs through retirement plans and MFs.
To propel REITs and InvITs into India's investment mainstream, regulatory reforms are needed. Formal recognition and reclassification of REITs and InvITs as equity instruments would align regulatory treatment with the true economic nature of these instruments, characterised by residual ownership, market-based valuation, and performance-linked returns, and harmonise India's approach with international standards.
Index inclusion would unlock automatic inflows from passive investment vehicles, such as ETFs and index-linked MFs, deepening liquidity, improving price discovery, and strengthening investor confidence. These inflows would incentivise more people to monetise real assets, freeing up capital for further project construction.
Rationalising MF limits will empower MFs to respond to market dynamics more effectively, facilitating broader participation and accelerating capital formation in the real estate and infrastructure sectors.
Sebi's proposed reclassification is a strategic pivot poised to shape the next decade of investment in India. With a compelling economic rationale, strong global precedents, and growing investor interest, the case for formal equity classification is a reform whose time has come.
Frequently Asked Questions
What are REITs and InvITs?
REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) are investment vehicles that pool funds from multiple investors to invest in real estate and infrastructure projects. They are publicly listed and traded on stock exchanges.
Why is Sebi proposing to reclassify REITs and InvITs as equity instruments?
Sebi's proposal aims to unlock capital for India's real estate and infrastructure sectors by aligning regulatory treatment with the true economic nature of these instruments, which bear similarities to equity shares.
How will reclassification benefit the real estate and infrastructure sectors?
Reclassification will deepen liquidity, improve price discovery, and enhance investor confidence. It will also facilitate broader participation and accelerate capital formation in these sectors.
What are the current limitations of REITs and InvITs in India?
REITs and InvITs are currently classified as hybrid instruments, which limits mutual fund investments and their inclusion in benchmark indices. This restricts their full market potential.
How do REITs and InvITs compare to traditional equity securities internationally?
Internationally, listed REITs share core characteristics with traditional equity securities, including robust market liquidity, residual risk-bearing by unit holders, and a direct alignment of returns with performance. They are often integrated into mainstream equity indices.
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