Easing Business for REITs and InvITs: How Far?
- CCL NLUO
- 2 days ago
- 7 min read
Authors: Shanaya Singh & Prince Raj
Third year law students at Gujarat National Law University, Ghandinagar
I. Introduction
The Securities and Exchange Board (‘SEBI’) of India published a consultation paper on 5 February 2026 which proposed four specific changes to existing regulations that govern Real Estate Investment Trusts (‘REITs’) and Infrastructure Investment Trusts (‘InvITs’). The Hybrid Securities Advisory Committee, the Indian REITs Association, and the Bharat InvITs Association provided input to develop these proposals, which aim to remove operational barriers that have affected these investment vehicles.
The consultation paper presents a key analysis at the right moment, when the Union Budget 2026-27 shows that the government wants Central Public Sector Enterprises to use REITs for asset monetisation and has proposed an Infrastructure Guarantee fund to offer partial credit guarantees to infrastructure lenders during the development and construction phase, while SEBI has reclassified REIT units as equity instruments. The paper presents itself as a systematic effort which industry stakeholders developed to resolve compliance problems. The question is whether the incremental changes provide sufficient improvements or if the regulator chose to maintain the current system when fundamental changes were necessary. This post assesses all four proposals to determine their effects on market participation while identifying which ones require further research before their planned changes become permanent.
II. SPVs After Concession Expiry and Borrowing Flexibility
The first proposal concerns the treatment of special purpose vehicles (‘SPVs’) in InvITs post the expiration or termination of concession agreements. Under Regulation 2(1)(zy) of the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (‘InvIT Regulations’), an SPV must hold at least ninety percent of its assets directly in infrastructure projects. Once a concession agreement concludes, the underlying asset reverts to the concessioning authority. leaving the SPV technically non-compliant with this definitional threshold. The Bharat InvITs Association has shown to SEBI through the Hybrid Securities Advisory Committee that SPVs need time to complete their operations because they cannot be shut down immediately. The consultation paper itself acknowledges this difficulty. However, even after the concession expires, the SPV does not become redundant; it continues to carry remaining obligations arising from the original period of concession. The company must handle ongoing income tax and GST assessments, which will last for multiple years while it fights all active lawsuits connected to the project, and needs to fulfill its defect liability responsibilities, which it established in the original contract with the concessioning authority. The SPV operation includes existing project debts which will require repayment until after the concession period ends. All of this continues without any corresponding revenue inflow, generating negative cash flows that feed back into the InvIT’s net distributable cash flow calculations. Requiring an InvIT to divest from such an entity immediately would leave it with no viable option; it would either force a fire sale of the SPV at a distressed valuation or compel a tax-inefficient restructuring. As the transfer of SPV shares or assets would trigger capital gains tax obligations at both InvIT and SPV levels while also creating stamp duty requirements, which would result in both tax obligations and the loss of pass-through treatment under Section 115UA of the Income Tax Act, both of which would ultimately harm unitholders.
SEBI intends to redefine SPV entities through an amendment that will allow organizations to maintain their SPV status after their concession agreements expire, provided they follow a one-year exit or reinvestment requirement and full disclosure requirements that apply to both InvIT and SPV levels. The disclosure requirements provide complete asset and liability information together with information about contingent liabilities and debt repayment schedules with all exit strategies, along with the exit strategy proposed by the investment manager, and the steps taken to effect it. The two key elements require investigation through research. The one-year exit period begins after the latest of three events which are either completion of the concession agreement or its termination or all pending claims and litigations or the conclusion of the defect liability period. The phrase ‘conclusion of all pending claims/litigations’ could itself become a source of ambiguity. Does a pending appeal constitute a ‘pending claim’? SEBI needs to make a decision about whether the trigger needs complete case resolution or only requires the initial decision to be made. The proposal only applies to Public-Private Partnership (PPP) projects, where a private entity establishes a partnership with a government authority to construct and maintain infrastructure according to a specified time-period concession agreement. However, InvITs hold properties through non-PPP agreements which include long-term lease and operation-and-maintenance contracts for renewable energy and telecom tower projects. Stakeholders should flag this shortcoming as a critical issue.
The fourth proposal creates a solution for InvITs that have reached total borrowings of more than forty-nine percent of their asset value. The InvIT Regulations currently allow new borrowings beyond this limit according to Regulation 20(3)(b)(ii), which authorizes financial institutions to acquire or develop new infrastructure projects. SEBI proposes to expand the list of approved end-uses by adding debt refinancing and capacity expansion capital expenditures and major maintenance expenses, which will mainly be used in road projects. The rationale behind it is sound, as refinancing is a routine feature of long-tenure project finance, and major maintenance is typically a contractual obligation under concession agreements, not discretionary spending. Prohibiting borrowing to meet such obligations while requiring concession compliance creates an unworkable regulatory tension. However, this proposal also carries the greatest risk of regulatory arbitrage since the distinction between ‘capital expenditure for capacity augmentation’ and ‘acquisition or development' of a new project remains unclear, as what qualifies as augmentation varies across asset classes. and ‘acquisition or development’ of a new project remains unclear. The lack of precise definitions enables investment managers to misclassify new project investments as capacity augmentation, which allows them to bypass leverage restrictions. The consultation paper proposes that fresh borrowing should not increase net borrowings beyond the existing level, but this condition alone may not suffice. To develop an additional security provision, the statutory auditor must confirm in the annual general meeting the intended use of the borrowing by producing a certificate.
III. Liquid Fund Investments and Private InvIT Parity
The two remaining proposals have a more limited focus, which enables them to solve actual operational challenges. The second proposal seeks to expand the universe of liquid mutual fund schemes in which REITs and InvITs can park surplus funds. Current Regulation 18(5)(i) of SEBI (Real Estate Investment Trusts) Regulations 2014, together with its corresponding InvIT regulation, prohibits such investments from liquid funds, which must meet a credit risk value of 12 and first-class A-I status under the SEBI Potential Risk Class system, which requires only sovereign and AAA-rated instruments for backing. The industry associations have represented that only a handful of liquid funds meet this threshold, creating concentration risk. SEBI plans to decrease the CRV threshold from its current level of 10, which will allow new schemes that have minimum AA-rated corporate paper exposure to enter the market. This appears to be a logical solution because the actual distinction between CRV 12 and CRV 10 exists as a single rating difference which permits only sovereign and AAA-rated assets to be included in CRV 10, while CRV 12 allows assets with an AA rating to be added. Though the credit risk difference remains marginal, this shift could expand the pool of eligible mutual fund schemes manifold.
The third proposal focuses on the regulatory imbalance that exists between publicly listed InvITs and those that operate as privately listed InvITs. Public InvITs are allowed to invest up to ten percent of their total asset value in greenfield infrastructure projects according to Regulation 18(5)(b) of the InvIT Regulations. The SEBI proposal extends this window to private InvITs, representing a logical alignment with existing regulations. Private InvITs work with more advanced investors who usually include institutional and qualified buyers who have better capabilities to assess greenfield investment risks. Private InvITs follow less strict regulatory rules compared to publicly traded companies because they have reduced requirements for ongoing disclosure, and they have maintained lower standards for operational governance, including reduced continuous disclosure obligations and less stringent reporting requirements compared to publicly listed InvITs. The practice of allowing greenfield investment without establishing stronger governance standards will create an uneven distribution of risks. The SEBI board should link this relaxation of rules to their requirement for increased project-level information disclosure under Regulation 23(5) or to an independent valuation report which public InvITs must provide according to Regulation 23 (2).
IV. Conclusion
While the proposals solve actual compliance problems, their common restriction limits their ability to solve entire industry compliance issues because they only deal with particular industry problems without assessing the complete system that governs REITs and InvITs. The SPV retention solution operates as a remedy for the problem that arises when definitions become mismatched after concessions expire, but it fails to address the absence of a coherent transitional framework within the InvIT Regulations for SPVs that shift from revenue-generating operations to post-concession wind-down. The introduction of special rules for transitional SPVs, which include specific investment requirements, should serve as a better solution than expanding current SPV rules through additional conditions. The borrowing proposal allows more ways to use funds, but it does not check if the current forty-nine cent limit still works for established road assets which generate revenue because their risk levels differ from those of recently obtained properties. The paper fails to address the essential structural deficiencies which affect the ecosystem because it overlooks three major issues: The Income Tax Act's Section 115UA creates a restricted tax pass-through system, which requires SPVs to pay corporate tax on their business income before distributing earnings to the InvIT. This requirement results in unitholders facing higher tax liabilities than direct infrastructure investors, who can bypass this tax obligation at the entity level, the insufficient secondary market liquidity for InvIT units at a threshold of ₹25 crore daily compared to the turnover of almost ₹80 crore for REITs; and the lack of regulatory guidelines for cross-border REIT structures, which has become an urgent issue as cross-border capital flows into Indian real estate continue to grow. The February 2026 consultation paper presents itself as an effective industry response because its consistent focus on disclosure requirements for investor protection shows that regulatory standards for REITs and InvITs have advanced. This is the third consultation paper that SEBI has released over two years, following the May 2024 and October 2024 consultation papers, which shows how the organization needs to complete improvements to its vehicle operations.
Note: This article has been reviewed by Mr. Vinod Kothari (Managing Partner, Vinod Kothari and Company), at the Tier II Stage.
