The proposal to reclassify REIT and InvIT units as equity, outlined in Sebi's April 2025 consultation paper, could unlock capital for India's real estate and infrastructure sectors. Since their launch in 2014, REITs and InvITs have gained momentum. As of March 2024, India has 5 REITs and 24 InvITs, the majority of which are listed. In FY24, InvITs raised over ₹33,000 cr - a more than five-fold increase from 2023 - and REITs mobilised close to ₹6,000 cr.

Yet, these instruments remain underutilised. REITs constitute only 12% of India's listed real estate market capitalisation and a mere 0.35% of the global REIT index. This stands in contrast to mature markets like the US, Australia and Britain, where REITs account for over 90% of listed real estate market capitalisation. With real estate projected to hit $1 tn by 2030 and infrastructure needing $4.5 tn, 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 MF investments, capping exposure at 10% of a scheme's NAV and 5% 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 While these restrictions were reasonable when introduced in 2017, they are outdated now.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 support the cause. The mandatory distribution of at least 90% 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 mn 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 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 Inclusion of REITs and InvITs 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.