The Securities and Exchange Board of India (SEBI) is reportedly considering a major policy shift that could alter the way foreign investors participate in India’s stock market. According to a recent report by the Economic Times, SEBI is exploring the possibility of allowing overseas individuals to invest directly in Indian equities, bypassing the existing foreign portfolio investor (FPI) framework.
This potential reform aims to expand the ownership base for local risk assets, making Indian markets more accessible to global investors. However, concerns about regulatory safeguards and compliance risks remain key discussion points.
Current Investment Framework for Foreign Investors
At present, foreign individuals can invest in Indian primary and secondary markets only through the FPI route. Within this structure, investors are required to register under Category II FPIs, which involves engaging a local sub-custodian in India to manage compliance and operational requirements.
Key restrictions under the current FPI framework:
- Foreign investors can own up to 10% of a listed Indian company under the FPI route. Any stake exceeding this limit is considered foreign direct investment (FDI) and is subject to sector-specific restrictions.
- Overseas investors who do not want to register as FPIs have the option of using participatory notes (P-notes), an instrument that has been viewed with suspicion due to its perceived lack of transparency.
- Strict Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations make it difficult for foreign individuals to invest directly in Indian equities.
SEBI’s New Proposal
In a meeting last week, SEBI officials and market participants discussed the potential benefits of allowing direct foreign individual investments in Indian stocks. If implemented, this move could attract ultra-high net worth individuals (UHNWIs) from major financial hubs like London, New York, and Singapore.
Possible benefits of the proposal include:
- Broadening the Investor Base: By allowing direct participation, India can attract a larger pool of international investors, increasing liquidity and market depth.
- Easier Compliance for Investors: Bypassing the FPI route could simplify regulatory procedures, making it more convenient for foreign individuals to invest.
- Strengthening India’s Global Market Standing: Providing direct access to foreign individuals could enhance India’s reputation as a globally competitive investment destination.
Need for Safeguards and Regulatory Challenges
While the proposal has the potential to boost foreign investments, regulatory safeguards will be crucial to mitigate risks such as money laundering and tax evasion. Legal and financial experts have highlighted the importance of maintaining stringent compliance measures.
Key concerns:
- Ensuring Proper KYC and AML Compliance: SEBI must implement robust measures to ensure foreign investors adhere to India’s financial regulations.
- Tax Compliance and Repatriation Controls: Clear guidelines must be established to ensure that foreign investors fulfill tax obligations before repatriating funds.
- Maintaining Transparency: Direct access should not create loopholes that can be exploited for illicit financial activities.
Market Implications
India has experienced significant foreign investor selloffs in recent months, with FPIs reducing their exposure to Indian equities. SEBI’s proposed reform could serve as a countermeasure to attract fresh international capital and stabilize market volatility.
SEBI Chairman Tuhin Kanta Pandey, speaking at the Moneycontrol Global Wealth Summit 2025, emphasized the need for both domestic and foreign investors to support India’s economic growth. “We will be happy to engage with FPIs and AIF industry participants to address their difficulties and further rationalize regulations to promote ease of operation,” he stated.
So, What’s Next?
- SEBI is expected to conduct further deliberations with key stakeholders.
- Government and RBI approvals will be critical in shaping the final decision.
- Investors should stay informed about regulatory updates that could impact market dynamics.
India’s capital markets stand at a pivotal juncture, and SEBI’s next steps will determine the extent to which global investors can participate in India’s growth story.
Conclusion
SEBI’s potential move to allow direct foreign individual investments in Indian equities marks a significant departure from the existing regulatory framework. While the proposal has the potential to enhance market liquidity and attract global investors, concerns about compliance, transparency, and regulatory safeguards must be addressed.
With discussions still in their early stages, the outcome of this policy shift remains uncertain. However, if implemented with the right regulatory framework, this change could position India as a more accessible and attractive investment destination for international investors.
Disclaimer: This article is for informational purposes only and should not be considered as investment advice.
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