Government Overhauls FPI Rules and G-Sec Taxation to Attract Long-Term Capital
The Ministry of Finance has rolled out a comprehensive set of reforms designed to make Indian capital markets more attractive and accessible to global investors. These measures focus on three broad areas:
- Liberalising equity investments by individual Persons Resident Outside India (PROIs)
- Simplifying and expanding Foreign Portfolio Investor (FPI) access to Government securities (G-Secs)
- Granting income-tax exemptions on interest and capital gains arising from FPI investments in G-Secs
Collectively, these steps are intended to deepen the Government Securities market, widen the investor base in Indian equities, and channel more durable foreign capital into the Indian economy, in line with the Union Budget 2026-27 announcements.
Liberalised Equity Investment Framework for Individual PROIs
Expansion of Portfolio Investment Scheme Access
Under the existing framework, the Portfolio Investment Scheme (PIS) has largely been a route reserved for NRIs and OCIs to invest in equity instruments of listed Indian companies. The latest reform extends this facility to individual Persons Resident Outside India (PROIs), thereby opening up a widely used and well-understood channel of investment to a much broader global investor base.
- Individual PROIs will now be permitted to invest in equity instruments of listed Indian companies under the PIS, on the same onboarding and operational infrastructure currently used for NRI/OCI investors.
- The Department of Economic Affairs (DEA) is formalising these changes through the
Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026, issued under the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019.
Note: The objective is to leverage existing systems and intermediaries rather than create new layers of regulation, thereby ensuring quicker adoption and smoother implementation.
Enhanced Investment Limits for Individual PROIs
A key element of this liberalisation is the significant upward revision of investment caps for individual PROIs under the PIS:
- The individual cap for each PROI in a listed Indian company is being increased from 5% to 10% of the paid-up capital or the relevant class of capital of that company.
- The aggregate cap for all individual PROIs taken together is being raised from 10% to 24% in any listed Indian company.
For example:
- Earlier, if a listed company had a paid-up capital of Rs. 10 crore, an individual PROI could not invest more than 5% (i.e., Rs. 50 lakh).
- Under the revised regime, an individual PROI may invest up to 10%, i.e., Rs. 1 crore.
This enhanced limit allows a more meaningful stake in Indian listed entities and is expected to attract sophisticated global individual investors who seek larger exposures for portfolio diversification.
Impact on Capital Market Participation
These changes are likely to have several practical implications:
- Broader investor base: By allowing PROIs to use a familiar PIS channel with simplified onboarding, India can tap into a much wider pool of individual foreign investors.
- Relatively stable flows: Individual foreign investors, especially those approaching investments with a medium- to long-term perspective, are expected to contribute to more stable foreign inflows compared to purely short-term speculative capital.
- Improved market depth and liquidity: Higher investment caps and easier access can enhance trading volumes and liquidity in listed Indian equities, which in turn may narrow bid-ask spreads and improve price discovery.
Reforms to FPI Investment Framework in Government Securities
Alongside equity market liberalisation, the Government has carried out major reforms in the regulatory and operational framework governing FPI investments in Government securities, including both Central Government securities and State Government securities (SGSs).