From Retention to Rights: Intermediaries to Recalibrate for DPDP Compliance

I have a piece with Pragya Garg and Yash Vardhan in today's Financial Express on the newly notified data privacy law and its impact on the financial market, and securities market in particular. "What emerges is a regulatory architecture in transition, shifting from a retention-based model to one centred on rights, proportionality and accountability." The full piece is below:

On November 13, 2025, the Ministry of Electronics and Information Technology notified the implementation timelines for the Digital Personal Data Protection Act, 2023 (Act) and published the final version of the Digital Personal Data Protection Rules, 2025 (Rules). Although implementation of both the Rules and the Act follows a staggered model, with core operational obligations applicable from May 2027, data fiduciaries (person(s) determining means and purpose of processing data) now have an 18-month transition window to realign their systems and practices to the new regime. In this backdrop, India’s securities market, though already operating under data governance structures that may appear akin to privacy frameworks, is now at an inflection point that calls for closer regulatory scrutiny.

Take, for instance, data retention obligations. Much like the Digital Personal Data Protection (DPDP) framework, SEBI requires its registered intermediaries to preserve specified data sets. Stockbrokers, for example, must maintain books of account, records and documents for a period of five years. But these requirements were designed with a different purpose in mind: market surveillance, anti-money laundering compliance and investor dispute resolution. The regulatory architecture, therefore, treated data primarily as an asset to be retained, rather than as a right to be managed.

While confidentiality obligations do exist, their force lies largely within operational circulars, and their application can be diluted through broadly worded consents embedded in standard-form client documentation. Data security has been addressed primarily through IT governance norms and cybersecurity standards. Yet one key element remains absent, a systematic obligation to delete or erase personal data once its regulatory or operational purpose has been met. As a result, investors’ personal data within the securities market may continue to accumulate over time in the absence of effective deletion and data minimisation protocols.

Regulators are now poised to review their existing guidelines to ensure that financial regulations and data protection laws align with the Act’s requirements, thereby preventing any conflict between sectoral mandates and core data protection principles. A key area of focus is expected to be the “Know Your Customer” (KYC) regime. The current KYC Master Directions, derived from the Prevention of Money Laundering Act (PMLA), require regulated entities to collect and retain certain customer data for the provision of financial services. While consent is mandatory for obtaining such information, any additional data gathered under a customer acceptance policy will now require a sound legal basis and must conform to the Act’s principle of data minimisation.

In line with this shift, regulators may issue instructions on setting appropriate data retention periods for AML/KYC processes, clarifying that customer data should be retained only as long as necessary to meet statutory AML obligations. They may also reiterate that while sharing customer data with authorities for AML purposes constitutes a legitimate interest under the Act, such sharing must be both necessary and proportionate to the request made.

Further, intermediaries may be required to respect customer rights under the Act including the right to access data and rectify inaccuracies, even within AML/KYC procedures. Regulators may encourage the use of Data Protection Impact Assessments (DPIAs) to evaluate potential privacy risks and update related instructions on customer protection, third-party due diligence, monitoring and data privacy to bring them in line with the new legal framework.

What emerges is a regulatory architecture in transition, shifting from a retention-based model to one centred on rights, proportionality and accountability. The challenge for the securities market will be to pivot without compromising the robustness of market surveillance and financial integrity.

Another interesting aspect to note is that the emerging Consent Manager regime under the DPDP framework may sit alongside, and potentially intersect with the existing Account Aggregator (AA) ecosystem. The AA framework has already created a consent-driven infrastructure for financial data sharing, with standardised consent artefacts, open APIs, and a large set of regulated financial institutions participating across multiple regulators. In contrast, the Consent Managers envisioned under the Act are designed as sector-agnostic intermediaries, enabling data principals to give, manage, review and withdraw consent for various categories of personal data, with registration and oversight placed under the Data Protection Board. 

Notably, both frameworks share key conceptual building blocks, including interoperable platforms, consent logging, limits on accessing underlying data and restrictions on outsourcing. This raises an important policy question: can the two systems be read harmoniously? One potential approach could be to treat AAs as specialised consent managers for financial data, or alternatively, to align the technical and legal standards so that intermediaries are not forced to navigate two parallel, and possibly overlapping, consent infrastructures.

Such integration, however, would require careful cross-regulatory coordination and may emerge gradually, shaped by regulatory guidance and industry practice rather than by a single, definitive policy shift.

Further, the issue of outsourcing responsibility reflects a principle already embedded within securities regulation but the DPDP framework may expand its scope in ways that warrant deeper examination. Historically, SEBI regulations have held intermediaries accountable for compliance lapses by third parties to whom functions are outsourced, even when the intermediary has limited operational control. The DPDP regime adopts a similar approach: a data fiduciary remains liable for breaches by data processors, irrespective of contractual arrangements.

However, DPDP may broaden the dimensions of liability by including privacy-related obligations not traditionally captured in securities regulation. An intermediary could now face exposure if an outsourced vendor mishandles consent withdrawal requests, fails to deploy mandated security safeguards, or retains personal data beyond approved timelines. Such developments may compel intermediaries to revisit and re-negotiate existing contracts with processors to explicitly embed DPDP obligations, particularly for entities reliant on cloud providers, payment gateways or external data vendors. Service agreements that historically focused on operational metrics may now need to be recast through the lens of privacy compliance.

As the securities market transitions from retention-centric to deletion-centric protocols, from bundled consent to granular controls, and from operational oversight to privacy-centric governance, early adopters may find a competitive edge. Intermediaries that build transparent, user-friendly consent systems, automate deletion for non-regulatory data, and communicate privacy-first practices to clients could cultivate stronger trust, turning compliance into a market differentiator.

Aligning Profit and Protection - Insights on SEBI’s Mutual Fund Reforms

I have a piece with Aniket Singh Charan and Varun Matlani in yesterday’s Financial Express on SEBI’s proposal to change regulations with respect to mutual funds, in particular it’s attempt to reduce the fees a fund can charge. We argue that a regulator, in the absence of proof that competition is not working, should not be setting rates. While it appears investor friendly, the second order effects of price caps include reversing financial inclusion and dis-advantaging smaller players to name two. 

In 1774, a Dutch merchant and broker established what is widely regarded as the first mutual fund by inviting investors to form a trust named Eendragt Maakt Magt meaning “Unity Creates Strength.” Over time, the mutual fund structure has evolved across jurisdictions. Continuing this process, on October 28th, 2025, the Securities and Exchange Board of India (SEBI) released a Consultation Paper on Comprehensive Review of SEBI (Mutual Funds) Regulations, 1996 (MF Regulations)(Consultation Paper), proposing amendments to the existing framework to align the distribution of returns between Asset Management Companies (AMCs) and investors. A few of the major changes, that are the source of heated discussions in the industry are discussed below.

The first such change is the proposal to revise the Total Expense Ratio (TER) limits such that statutory levies (such as STT and GST) are excluded from the computation of the TER. It is proposed that such levies may be passed directly to investors. While this shift enhances transparency and aligns cost pass-through with regulatory intent, it also triggers a consequential downward revision of the existing TER limits. Specifically, the Consultation Paper recommends a reduction of 20 bps for close-ended schemes, and 15 bps and 10 bps for certain categories of open-ended schemes. The magnitude of the proposed downward revision lacks any clear basis and poses concerns for the growth of the mutual fund industry. The downward revision of the TER, exceeds the GST and other statutory components currently a part of the TER and the consequence is an additional, unintended reduction that directly compresses the operating margins of AMCs. In effect, AMCs are compelled to absorb a cost cut that goes beyond the statutory levy adjustment, with no proportionate benefit accruing to investors. Moreover, when AMC revenues are squeezed, the impact is often passed on to MFDs, weakening the distribution network that underpins financial inclusion. A large share of first-time and retail investors especially in smaller towns and underserved regions enter the mutual fund market through these last-mile channels. Any reduction in the economic viability of this network risks undermining the infrastructure that enables widespread investor participation. Mutual funds indeed compete with other assets like insurance and real assets such as property and gold.

In the present day, fees should be determined entirely by market competition, and price controls are increasingly viewed not only as outdated but also as counterproductive. Their second order effects are routinely underestimated in policy debates. Forcing fees artificially downward inevitably erodes service quality, curtails investment in research and investor support, and strips smaller or newer funds of the economic runway needed to grow. The result is predictable, entrenched dominance by a few large players and a shrinking, less diverse industry. Over time, such distortions choke innovation, reduce meaningful choice for investors, and weaken the resilience of the asset management sector that regulation is meant to strengthen. The only reason to impose price controls would be when the normal competitive forces are ineffective as in a monopolistic industry with network effects. Mutual funds are highly competitive an industry.

The Consultation Paper also proposes to permit AMC to charge its schemes investment and advisory fees that are identical, in percentage terms, for both direct and regular plans. While this could be viewed as a welcome and well appreciated move, the unintended impact of the same would be a consequent increase in the overall costs borne by regular plan investors who choose to access mutual funds through MFDs. This too, needs to be carefully studied as investors investing in the market though MFDs are often first time investors who may now be subject to higher overall costs.

Another significant proposal in the Consultation Paper is the steep reduction of the maximum permissible brokerage expense from 12 bps to 2 bps for cash market transactions and 5 bps to 1 bps for derivatives. The stated rationale is that brokerage costs in some instances include not only trade execution but also research services, and since AMCs already possess in-house research capabilities, such additional costs may dilute investor returns. While the objective of enhancing transparency and avoiding duplication of expenses is well-intentioned, the practical realities are more nuanced. In many market segments particularly mid-cap, small-cap, and emerging sectors broker-provided research offers timely, security-specific, and sectoral insights may not be readily available through internal or public sources. Such research plays a complementary role to in-house analysis and supports informed price discovery, ultimately benefiting investors. Brokerage commissions therefore often reflect an integrated service rather than an avoidable add-on cost. A sharp reduction in permissible brokerage limits may constrain AMCs' access to critical external research inputs and could inadvertently impair investment decision-making to the detriment of unitholders.

The Consultation Paper also proposes several amendments to Regulation 24(b) of the MF Regulations, which governs the permissible business activities of AMCs. One such proposal, that an AMC may undertake activities regulated by a domestic or foreign regulator only through a subsidiary and with prior SEBI approval, warrants reconsideration. Where an AMC already maintains adequate structural and operational segregation, and the concerned activities are carried out by a distinct business unit with appropriate oversight, compliance frameworks, and ring-fencing of resources, it may not be necessary to mandate a subsidiary structure. Allowing AMCs to undertake such activities directly, through a distinct business unit, subject to obtaining approvals or no-objection certificates from the regulators with whom they are already registered, would provide greater operational flexibility without compromising regulatory safeguards. This approach would also prevent unnecessary duplication of infrastructure and compliance costs while ensuring that investor interests remain fully protected.

The Consultation Paper walks a careful tightrope between rationalising costs and advancing investor-friendly reforms. However, several aspects warrant deeper examination. The proposed reductions in expense ratios and related regulatory changes compound the pressures already confronting AMCs and risk further eroding margins that are, in many cases of smaller players, already thin. What often remains underappreciated in policy debates is the inherently long gestation period of the AMC business model. Most AMCs operate at a loss for years before achieving the scale necessary to turn profitable. The contemplated amendments risk intensifying this structural challenge and may require deeper analysis of operational feasibility before implementation.

India's highest ranked regulatory firm by Asialaw - Finsec Law Advisors

 We’re delighted to share that Finsec Law Advisors has been ranked “Outstanding” in asialaw Rankings 2025 — the highest recognition in India for our Regulatory Practice.

This honour reflects our unwavering commitment to excellence in securities, investment and financial law, and our deep partnerships with clients navigating India’s evolving financial landscape.

 

Our heartfelt thanks to our clients, colleagues, and peers who continue to trust and inspire us on this journey ~ Sandeep Parekh and Anil Choudhary

Easing investments via IFSC

I have a piece in today's Financial Express with Aniket Singh Charan on easing investments via the GIFT city and how recent regulatory changes will help that. 

On August 12, 2025, the International Financial Services Centres Authority (IFSCA) released a circular titled “Regulatory Framework for Global Access Providers”. The circular marks a key step towards clarifying the regulatory framework around Global Access Providers (GAPs) and sets the tone for the next phase of investments through IFSCs.

Historically, Indian investors relied on foreign brokers operating outside the purview of domestic regulators to invest in foreign securities thereby raising concerns over transparency and investor protection. To address this, the IFSCA introduced the concept of GAPs in 2021. GAPs are intermediaries authorised to facilitate access to global financial products and services through regulated international exchanges and foreign brokers. Initially, only IFSCA-registered broker-dealers and recognised stock exchanges could access overseas markets, either via cross-border arrangements with regulated entities or by registering as trading members of foreign exchanges (limited to proprietary trading). For broker dealers, such access required a no-objection certificate from the recognised IFSC exchange.

On April 17, 2025, the IFSCA (Capital Market Intermediaries) Regulations, 2025 were notified thereby revamping the framework for the regulation, registration, and supervision of capital market intermediaries operating in IFSCs. Consequently, the IFSCA chose to further deliberate on how entities in IFSCs provide global access and whether the status quo should be maintained. 

Thereafter, on May 08, 2025 the IFSCA released a consultation paper seeking public comments on certain proposals in relation to GAPs (CP 1). The key objective of CP 1 was to introduce clear rules on the registration of GAPs, provide operational modalities, detail permitted products and responsibilities of broker-dealers, define client disclosures, KYC/AML/CFT compliance, code of conduct, periodic reporting, fee structures, and other regulatory requirements. 

CP 1 faced criticism for its narrow eligibility criteria for GAP registration. It allowed only subsidiaries of recognised stock exchanges or foreign brokers with IFSC subsidiaries to act as GAPs, effectively excluding IFSCA-registered broker-dealers. This created an uneven playing field. While foreign brokers with group entities holding overseas memberships could offer market access directly, IFSC-based broker-dealers without such memberships would be forced to route access through other GAPs. The framework was thus seen as restrictive and disadvantageous to domestic participants.

To rectify these defects, on May 30, 2025 the IFSCA published a revamped consultation paper (CP 2) that introduced several key changes. The most significant change was that the definition of GAPs was broadened to allow IFSCA-registered broker-dealers to seek registration as GAPs, provided they enter into formal arrangements with foreign brokers that are trading members of a foreign stock exchange to facilitate global market access. This significantly widened participation and would have the effect of creating greater opportunities for investors to diversify globally through regulated channels.

CP 2 was subject to further comments from the public. In this regard, industry participants identified a major issue concerning the selection of foreign brokers with whom GAPs could enter into agreements. As per CP 2, a GAP was permitted to enter into an agreement only with a foreign broker who was registered as a trading member of a stock exchange in the relevant foreign jurisdiction and who complied with the applicable regulatory requirements of that jurisdiction for providing access to stock markets. This regulatory approach created several challenges, particularly when compared with international practices. For instance, in jurisdictions such as the United States of America, the concept of a “broker-dealer” is distinct from that of a “trading member.” A broker-dealer is primarily licensed to engage in securities trading and investment services for clients, whereas a trading member (often referred to as a member of an exchange) is focused on direct participation in the exchange for execution of trades. A broker-dealer is capable of providing multi-dimensional access to the markets in a foreign jurisdictions through tie ups with various trading members. For example, a FINRA-registered broker-dealer could have tie ups with trading members on NYSE, NASDAQ etc. and could act as a single point of contact in the concerned foreign jurisdiction for the GAP, however, it was effectively excluded from entering into agreements with GAPs. 

The circular issued on August 12, 2025, identified the issues surrounding this restriction and eased the same considerably. A GAP may now enter into an agreement to provide access with any foreign broker that is duly regulated or registered as a broker (by whatever name called) in its home jurisdiction, provided that such broker offers access to global markets in compliance with applicable laws. Thus, the requirement for the foreign broker to also be a trading member of a stock exchange in the concerned foreign jurisdiction has been done away with. Importantly, foreign brokers are now permitted to further extend access to multiple jurisdictions through their own arrangements, thereby enhancing flexibility and broadening the scope of market access available to investors.

The evolution of the framework around GAPs reflects the progressive approach adopted by the IFSCA. This steady regulatory deepening highlights IFSCA’s dual commitment - to ensure adequate supervision while simultaneously promoting and developing IFSCs as a global investment hub.

The benefits of this revamped approach are significant. First, it is likely to encourage more Indian entities to establish broker-dealer operations within IFSCs, thereby deepening the ecosystem and positioning India as a credible player in cross-border financial services. Second, it provides Indian investors with a transparent, reliable, and regulated alternative for accessing global markets, moving decisively away from earlier unregulated routes. Third, the framework enhances regulatory oversight over the deployment of funds overseas, thereby strengthening investor protection and reducing risks. Finally, by aligning with global best practices, the framework is expected to improve service standards, enhance investor experience, and foster higher quality intermediation in outbound investment channels. 

Only time will tell how much capital will be channelled through GAPs, but industry response so far has been largely positive. The hope is that this framework will encourage greater investment through a regulated and supervised route. Its ultimate success, however, will depend on how IFSCA shapes the regulatory framework going forward, striking the right balance between ease of doing business and investor protection.

Reforms in Focus: SEBI’s Push for Market Efficiency and Safeguards

I have a piece with Navneeta Shankar and Yash Vardhan discussing the outcomes of the recent SEBI board meeting on various topics in today's Financial Express. 

The Securities and Exchange Board of India (SEBI) has long been tasked with walking a careful line between deepening capital markets and protecting investor confidence. Over the past decade, its approach has gradually shifted from a prescriptive, one-size-fits-all rules toward scale-based, proportional regulation and digital facilitation. The decisions announced by SEBI at its board meeting held on September 12, 2025, reflect this evolution. The measures range from easing IPO norms for large issuers to recalibrating related party transaction (RPT) thresholds, streamlining foreign investor access, and broadening mutual fund participation in alternative asset classes. Taken together, they signal a regulator conscious of market realities and willing to fine-tune compliance without diluting oversight.

One of the most consequential reforms is the proposed amendment to the Securities Contracts (Regulation) Rules, 1957 relating to the minimum public offer and minimum public shareholding requirements for large issuers. Under the revised framework, issuers with a post-issue market cap between Rs. 50,000 crore and Rs. 1,00,000 crore may list with a public float as low as 8% (subject to a floor of Rs. 1,000 crore), while those above Rs. 5,00,000 crore may list with just 1% public offer (subject to a minimum dilution of 2.5% and a floor of Rs. 15,000 crore). Timelines for achieving 25% public shareholding have also been extended, up to 10 years for the largest issuers.

This bifurcation of thresholds represents a more calibrated approach to different issuer sizes. Forcing very large companies to dilute aggressively at listing could result in oversupply, weak valuations, and potential instability. The revised norms ease compliance while still maintaining significant market float over time. A balance must be struck between accommodating market absorption capacity and preserving genuine public participation.

In parallel, SEBI has amended the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, to broaden anchor investor participation in IPOs. Previously divided into two categories based on allocation size, anchor investors will now form a single class with participation rules tied to issue size. The anchor portion has been raised to 40% of the institutional book, with one-third reserved for domestic mutual funds and the remainder for insurers and pension funds. Undersubscription in the insurer and pension fund tranche can be reallocated to mutual funds.

These changes are expected to diversify anchor books and provide structured opportunities for long-term institutional investors. Broader participation by foreign portfolio investors (FPIs) operating multiple funds also becomes easier, aligning India with global practices. While such reservations improve stability and credibility in the anchor book, the regulator must ensure they do not restrict issuer flexibility. Expanding the overall pool of eligible institutions may achieve the same objective without rigid segmentation.

Corporate governance remains another focal point. Amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, introduce scale-based thresholds for determining material RPTs. Instead of a flat numerical test, thresholds are now linked to company turnover, with higher bands for companies with turnover exceeding Rs. 20,000 crore and Rs. 40,000 crore. Subsidiary-level thresholds have also been harmonized with parent-level requirements to avoid arbitrage.

This shift toward proportionality is welcome, as fixed numerical triggers were arbitrary and often disproportionate. By tailoring thresholds to entity size, the framework becomes more rational. At the same time, audit committees must retain discretion to examine transactions beyond mere numbers, as governance risks often lie in qualitative context. Codifying omnibus approval validity periods and clarifying that a “holding company” means only a listed holding company also introduces consistency in industry practices and removes existing ambiguities.

Other decisions taken at the board meeting are reflective of SEBI’s effort to make it easier to do business in the securities markets by simplifying compliance and reducing procedures for participants. For instance, the introduction of the SWAGAT-FI (Single Window Automatic and Generalised Access for Trusted Foreign Investors) framework is designed to unify and streamline access for objectively identified low-risk foreign investors such as sovereign wealth funds, pension funds, and regulated retail funds. By offering benefits such as 10-year registration validity, exemptions from certain ownership restrictions, and simplified demat account structures, the framework reduces regulatory complexity while signalling India’s intent to attract stable, long-horizon capital.

Domestically, SEBI has broadened the scope for accredited investors and large value funds in the alternative investment space. Accredited investor-only schemes will enjoy flexibility on pari-passu treatment and tenure, while the threshold for large value funds has been reduced from Rs. 70 crore to Rs. 25 crore. These reforms recognize the sophistication of accredited investors and expand the potential investor base, though regulators must monitor whether such relaxations are used disproportionately by funds seeking to avoid standard compliance.

Perhaps the most significant reform is the reclassification of Real Estate Investment Trusts (REITs) as equity instruments for mutual fund investment purposes. Until now, both REITs and Infrastructure Investment Funds (InvITs) were treated as hybrid instruments. With the new classification, REITs will fall within equity allocation limits and become eligible for index inclusion, unlocking passive flows and lowering the cost of capital for real estate developers. This is aligned with global practice, where REITs are integrated into equity markets. 

Investor protection and financial inclusion were addressed through mutual fund reforms. Exit load caps have been reduced from 5% to 3%, distributor incentives have been revised to encourage inflows from beyond the top 30 cities (B-30 cities), and a new incentive has been introduced for onboarding women investors. These measures, though incremental, reflect a regulatory intent to democratize access to financial products and support underrepresented segments of the investor base.

SEBI has also cleared governance reforms for MIIs, requiring two executive directors in addition to the managing director, with defined roles in operations, compliance, risk, and investor grievances. While aimed at enhancing accountability, rigid role definitions may limit flexibility and a board-approved governance framework could have achieved the objective without such constraints. To SEBI’s credit, it did not bring about the most drastic changes that it had previously proposed by way of consultation paper.

Viewed in totality, SEBI’s decisions at its latest board meeting reflect a regulator that is increasingly pragmatic, adopting differentiated rules for different categories of issuers and investors, promoting digital facilitation, and seeking to harmonize with global standards. The reforms address both ends of the spectrum – mega issuers accessing public markets and small retail investors from B-30 cities.

Yet, execution will determine credibility. As India’s capital markets continue to expand in depth and global relevance, SEBI’s role will be to maintain this delicate balance – between growth and oversight; facilitation and vigilance. The task now is to ensure that facilitation does not outpace vigilance, and that in seeking to open doors, the regulator does not lower guardrails. Over a longer period of time, many of the details should be simplified from today’s positions.

9th Episode of 'Decoding with Finsec’

Delighted to bring to you the 9th Episode of 'Decoding with Finsec’ with  Anil Choudhary

where we discuss the recent SEBI Board meetin

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A Trillion-Dollar Opportunity: REITs and InvITs as equity instruments

I have a piece with Purva Mandale in today’s Economic Times that re-classifying REIT (Real Estate Investment Trusts) and InvITs instruments as equity would unlock a lot of capital to be directed towards real estate infrastructure.

We highlight how such a reform can:

• Remove outdated restrictions on MF investments;
• Recognise the economic similarities between REITs/InvITs and equity shares;
• Enable global best practices like index inclusion and performance-linked returns;
• Broaden investor participation, deepen liquidity, and mobilise capital for growth.

Below is the unedited copy of the piece:

In a pivotal move set to redefine India’s capital markets, the Securities and Exchange Board of India (“SEBI”) has proposed to reclassify units of Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”) as ‘equity’ instruments. This proposal, detailed in SEBI’s April 2025 consultation paper, holds the potential to unlock significant capital flows into India’s foundational real estate and infrastructure sectors, crucial for driving the nation’s economic growth.  

Since their launch in 2014, REITs and InvITs have steadily gained momentum in India. As of March 2024, India has 5 registered REITs and 24 InvITs, out of which a majority are listed, collectively managing substantial net assets, what started as a trickle is now a substantial number. In the financial year 2024, InvITs have raised over ₹33,000 crore – a more than five-fold increase from the previous year – and REITs mobilized close to ₹6,000 crore in investments.

Despite this evident momentum, these instruments remain considerably underutilized. REITs currently constitute only 12% of India’s listed real estate market capitalization and a mere 0.35% of the global REIT index. This stands in stark contrast to mature markets like the U.S., Australia, and the U.K., where REITs account for over 90% of listed real estate market capitalization. With India's real estate sector projected to reach $1 trillion by 2030 and infrastructure requiring a staggering $4.5 trillion in investment over the same period, the question is no longer about the potential of REITs and InvITs, but rather, how best to unleash it further as a means of development and progress.

Under SEBI’s current regulations for Mutual Funds, REITs and InvITs are categorized as ‘hybrid’ instruments. This classification imposes significant limitations on mutual fund investments, capping exposure at 10% of a scheme’s Net Asset Value and 5% per issuer, thus limiting mutual fund inflows. While these restrictions were reasonable when introduced in 2017 to manage a nascent market liquidity and concentration risks, they are arguably outdated given the current maturity and scale of these markets.

Further, the ‘hybrid’ classification limits the inclusion of REITs and InvITs in benchmark indices and discourages passive investment. Thus, these factors collectively limit liquidity and stunt price discovery. Reclassifying these instruments as equity would dismantle these barriers, more accurately reflecting their true financial nature and unlocking their full market potential.

Economically and structurally, the 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, fundamentally differing from fixed debt obligations. Further, the absence of fixed maturity date and requirement of principal repayment supports the cause. The mandatory distribution of at least 90% of net distributable income to unitholders is directly linked to the performance of the 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. Unitholders 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 Income Tax Act, 1961, already 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 consistently demonstrates that the equity classification of REITs is rooted in their economic substance, not merely their legal structure. Whether organized as corporations or trusts, listed REITs in major markets like the U.S., UK, Singapore, and Australia share core characteristics with traditional equity securities. These include robust market liquidity, residual risk-bearing by unitholders, and a direct alignment of returns with performance.

These global jurisdictions have seamlessly integrated REITs into mainstream equity indices. This integration has been vital in boosting institutional participation, significantly lowering the cost of capital, and enhancing secondary market liquidity. In the U.S., for instance, REITs are fully integrated into major equity benchmarks such as the S&P 500 and the MSCI US REIT Index, enabling over 150 million Americans to invest in REITs through retirement plans and mutual funds, underscoring their mainstream acceptance. In Singapore, S-REITs constitute 10% of the SGX market capitalization. Australia’s A-REITs, embedded in the S&P/ASX 200, represent a significant portion of the global REIT market. These examples demonstrate how equity classification enhances mainstream integration, fosters greater liquidity, and boosts investor confidence. These international experiences underscore that the equity classification of REITs is driven by economic substance and their functional role within capital markets, not merely by legal form.

To propel REITs and InvITs into India’s investment mainstream, a focused set of regulatory reforms is needed. The first and most foundational step is to formally recognize REITs and InvITs as equity instruments. This reclassification would align regulatory treatment with the true economic nature of these instruments, characterised by residual ownership, market-based valuation, and performance-linked returns, and harmonize India’s approach with international standards adopted in mature REIT markets like the U.S., U.K., Singapore, and Australia.

Secondly, equity recognition would enable the inclusion of REITs and InvITs in major equity benchmarks such as the Nifty and Sensex. This is not merely a technical adjustment but a market catalyst. Index inclusion would unlock automatic inflows from passive investment vehicles, such as Exchange Traded Funds (ETFs) and index-linked mutual funds, thereby deepening liquidity, improving price discovery, and strengthening investor confidence in these instruments. These inflows will automatically incentivise more people to monetise their real assets freeing up capital for further construction of projects.

Rationalising these limits will empower mutual funds 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.