Small and Medium REITs and the Insolvency Question SEBI Never Answered

[Pranay is a student at West Bengal National University of Juridical Sciences.]

In March 2024, the Securities and Exchange Board of India (SEBI) notified a framework letting retail investors buy fractional units in a single commercial building for as little as ten lakh rupees each, through a small and medium real estate investment trust (SM REIT). Two further rounds followed within two years as SEBI widened what SM REITs could hold in April 2025, and reclassified REIT units as equity-related instruments for mutual funds, and specialised investment funds from January 2026. None of these three rounds asked what happens to a unit-holder’s money if the special purpose vehicle (SPV) holding the one building behind their scheme goes insolvent. This blog argues that SEBI built a retail product on the exact single-asset, single-developer structure that forced Parliament to rewrite the Insolvency and Bankruptcy Code 2016 (IBC), in 2018. It further contends that the fix Parliament wrote back then, for homebuyers trapped inside one insolvent developer, does not obviously reach an SM REIT unit-holder, because the money now travels through one more layer than Parliament’s Explanation was drafted to cover. The central thesis: India has a statutory answer for retail investors stranded inside a single insolvent asset-holding company; it has simply never been asked whether that answer was built wide enough to reach this particular investor. The governance challenge of SPVs structured in SM REITs have been noted in this blog. This post focuses on the insolvency dimensions those analyses have not reached. 

The Single-Asset Structure and Its Unaddressed Exposure

Under the SEBI (Real Estate Investment Trusts) Regulations 2014, as amended in 2024, an SM REIT is a trust that can run multiple ‘schemes,’ each investing in real estate worth between fifty and five hundred crore rupees, raised from at least two hundred unit-holders at a minimum ticket of ten lakh rupees. Each scheme holds its asset through a SPV that SEBI’s own regulations define as “a wholly owned subsidiary of the scheme of the SM REIT,” which “shall not have any other capital or ownership interest in it.” This is deliberately narrow by design: ring-fencing which means a scheme’s assets, bank accounts, and books stay segregated from every other scheme under the same SM REIT, so a default in one cannot contaminate another. However, ring-fencing a scheme from its siblings does nothing to protect the unit-holders inside that one scheme from the single corporate entity, the SPV, that owns their only asset. Unlike a traditional REIT, which spreads investor money across a portfolio large enough to absorb one bad asset, an SM REIT scheme is, by regulatory design, one building, one SPV, and one set of creditors standing between the unit-holders and total loss.

Insolvency exposure in not confined to the SPV alone: the scheme, and the trust housing it, can each become unable to meet obligations to lenders, to the SPV, or to unit-holders awaiting redemption. Ring-fencing’s logic suggests each failure should stay confined to its own level: only the SPV’s properties enter its insolvency estate under Section 36, and a default by the scheme or trust does not become one by the SPV. That symmetry holds only if the scheme or trust can themselves be placed into an insolvency proceeding. Both are trusts under Indian Trusts Act 1882, not companies or LLPs incorporated by statute, and Section 3(7)’s definition of a ‘corporate person’ does not obviously reach that far, a further question for the regulator to confront.

The 2018 IBC Amendment: What It Covers and Where It Stops

Parliament has already faced a structurally similar problem, and its answer is instructive precisely because of how narrowly it was drafted. After Jaypee Infratech and Amrapali left thousands of homebuyers holding flats they had paid for and a developer in liquidation, the Insolvency and Bankruptcy Code (Second Amendment) Act 2018, inserted an Explanation into Section 5(8)(f) of the IBC deeming any amount raised from an allottee under a real estate project to have the commercial effect of a borrowing, and therefore to be a financial debt. The Supreme Court upheld the amendment’s constitutionality in Pioneer Urban Land and Infrastructure Limited v. Union of India, and later in Manish Kumar v. Union of India, upheld the hundred-allottee threshold introduced by the Insolvency and Bankruptcy Code (Amendment) Act 2020. The Explanation gave homebuyers a seat on the committee of creditors (CoC), as a ‘class of financial creditors,’ represented by an authorised representative. It remains, even so, an unsecured claim: on liquidation, homebuyers rank behind process costs, secured creditors, and workmen’s dues under Section 53’s waterfall, and National Company Law Appellate Tribunal (NCLAT) continues, as recently as March 2026, to confine each Corporate Insolvency Resolution Process (CIRP) to the specific project in default. What the Explanation crucially does, though, is treat the payment as running directly between the person who paid and the company that owes them a flat.

That direct line is exactly what an SM REIT unit-holder does not have. The retail investor’s cheque goes to the SM REIT scheme, a SEBI-registered trust; the scheme, not the investor, then holds the equity of the SPV that owns the building and may separately extend it a loan. If that SPV cannot pay its own creditors and is pushed into a CIRP, the person who supplied the underlying capital is not a party to that proceeding at all, the scheme is. Whether the scheme’s own stake counts as financial debt owed to it is a live but different question from whether the individual unit-holder, sitting one layer further back, has any recognised claim on the SPV’s insolvency estate, or on the scheme’s own assets if the scheme itself cannot meet its redemption obligations. Section 5(8)(f)’s Explanation was written for allottees who pay a builder directly. It was never written for, and has never been tested against, an investor who pays a trust that pays a company.

The 2026 IBC Amendment: What It Changed, and What It Left Alone

Parliament had a fresh chance to close this gap while this piece was on review. The Insolvency and Bankruptcy Code (Amendment) Act 2026, assented to on 6 April 2026, is the widest rewrite of the IBC since 2016, introducing a creditor-initiated resolution process and, framework, covering cases where ‘two or more corporate debtors from part of a group.’ None of it is yet in force. Each provision awaits separate notification.

Chapter VA comes closest to this piece’s concern, since a REIT’s trust, scheme, and SPV function as one group. But it is confined to ‘corporate debtors,’ and if the trust and scheme fall outside Section 3(7)’s definition for the reasons above, the new route has no group of corporate debtors into which to consolidate the SPV. The 2026 amendment also re-calibrates payments to dissenting financial creditors, without touching Section 5(8)(f)’s Explanation. Homebuyers gained no new footing in the definition of financial debt. SM REIT unit-holders gained none either.

Three Questions No Court Has Yet Been Asked

No court or tribunal has yet had to resolve this, because no SM REIT-linked SPV has gone through CIRP since the framework launched in March 2024. But three questions are sitting there for whoever the first case reaches. First, whether the scheme’s own claim on the SPV, structured as equity, as convertible debentures, or as a loan, qualifies as financial debt entitling the scheme to sit on that SPV’s CoC in its own right. Second, whether the ‘class of creditors’ mechanisms Parliament built for homebuyers could be read, or would need to be amended, to recognise unit-holders as a class standing behind the scheme, the way homebuyers stand directly behind a developer. Third, what happens to unit-holders if the scheme’s own investment manager cannot meet redemption obligations even where the underlying SPV survives, since SEBI’s framework addresses delisting after asset sale but says nothing about insolvency of the manager itself. None of these has an obvious answer under either statute as currently drafted, because SEBI built the retail product and Parliament wrote the creditor-protection amendment eight years apart, for two different kinds of investor.

None of this means that SM REITs are unsafe as designed; SEBI’s ring-fencing, disclosure, and leverage-cap rules address exactly the risks a regulator is positioned to see in advance. What they do not address is the one risk insolvency law exists to allocate after the fact: who stands where in the queue when a single asset-holding company cannot pay everyone it owes. The 2018 amendment answered that question for a homebuyer’s cheque. It has never had to answer it for a unit-holder’s, because the product carrying that cheque did not exist when Parliament wrote the answer. The gap will not stay theoretical forever. The only real uncertainty is whether it gets closed by a regulator before the fact, or by an NCLAT bench after one.