The Government of India and the Reserve Bank of India have introduced a comprehensive set of structural reforms to deepen the Government Securities market and enhance foreign capital inflows into listed Indian equities. Promulgated through an executive ordinance and structural policy updates, these measures open up the domestic capital markets to individual global investors while systematically relaxing long-standing tax and operational bottlenecks for institutional funds. The policy pivot aims to counteract recent emerging market currency pressures, lower the sovereign borrowing costs, and establish a highly competitive capital market ecosystem aligned with global standards.
Equity Investment Liberalization for Individual Foreign Investors
Extension of Portfolio Investment Scheme to Individual PROIs
Individual Persons Resident Outside India can now directly access the equity instruments of listed Indian companies via the Portfolio Investment Scheme. This specific operational window was previously restricted exclusively to Non-Resident Indians and Overseas Citizens of India. The Department of Economic Affairs is formalizing this mechanism by notifying the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026.
Revision of Investment Limits and Compliance Fast-Tracking
The regulatory framework updates the statutory investment caps for individual overseas retail capital. The single-company investment limit for an individual PROI has been doubled from 5% to 10%. Concurrently, the aggregate investment ceiling for all individual PROIs combined in a single listed entity is expanded from 10% to 24%. To minimize entry barriers, the onboarding architecture leverages pre-existing Know Your Customer and operational infrastructure utilized for NRI and OCI registration, bypassing the necessity of obtaining separate, complex registrations with the domestic securities regulator.
Deregulation and Expansion of the G-Sec Market
Direct Tax Exemption on Sovereign Debt Instruments
The central government issued an ordinance amending the Income Tax Act to completely waive the direct tax liabilities of Foreign Portfolio Investors on domestic sovereign debt instruments. This statutory modification exempts FPIs from the standard 12.5% long-term capital gains tax and the 20% withholding tax on interest earnings. The tax exemption applies to all interest income and capital gains generated from Government Securities on or after April 1, 2026. This fiscal parity is additionally extended to the Bank for International Settlements to secure durable institutional flows.
Inclusion of Long-Term Bonds under the Fully Accessible Route
The Reserve Bank of India has expanded the Fully Accessible Route framework, which permits non-residents to acquire specified sovereign debt instruments without any quantitative ceilings. The eligible basket under the Fully Accessible Route now automatically incorporates all fresh issuances of long-term government bonds featuring maturities of 15 years, 30 years, and 40 years. This inclusion is expanded to cover Sovereign Green Bonds issued within these designated long-term maturities.
Dismantling of General Route Micro-Prudential Restrictions
To drive operational efficiency for institutional debt desks, the central banking authority has eliminated three distinct micro-prudential investment limits applicable under the General Route.
| Abolished Operational Restriction | Operational Definition & Pre-Reform Status |
| Short-Term Investment Limit | Prevented FPIs from holding more than a fixed percentage of their debt portfolio in securities maturing under 1 year. |
| Concentration Limit | Capped the maximum exposure an individual institutional investor could maintain within a single corporate or sovereign issuer group. |
| Security-Wise Investment Limit | Restricted the maximum percentage of the outstanding stock of any single sovereign security that FPIs could collectively own. |
While these three specific internal allocations are disbanded, the overarching macro-prudential caps remain intact. The absolute investment limits are held at 6% of the total outstanding stock for Central Government Securities and 2% for State Government Securities.
Single Limit Consolidation
The regulatory framework collapses the historical segmentation of debt market access. The independent sub-categories designated as ‘general’ and ‘long-term’ investment channels are integrated into a single unified limit window for Central Government Securities and State Government Securities respectively. This consolidation simplifies portfolio rebalancing for massive global pension funds, insurance syndicates, and sovereign wealth funds.
IASPOINT Booster Facts for UPSC
- Fully Accessible Route Introduction: The Fully Accessible Route was launched by the RBI in April 2020 to enable non-resident investors to invest in specified central government bonds without quantitative caps, acting as a core prerequisite for India’s inclusion in global bond indices like the JPMorgan GBI-EM.
- Ordinance Route Architecture: The direct tax exemption was initiated via a Presidential Ordinance under Article 123 of the Indian Constitution, which grants the executive temporary legislative powers when Parliament is not in session.
- FPI vs FDI Regulatory Threshold: Under SEBI and FEMA regulations, an investment is classified as Foreign Portfolio Investment if an individual foreign investor or an investor group holds less than 10% of the total paid-up equity capital of a listed Indian company; any stake of 10% or greater is treated as Foreign Direct Investment.
- Portfolio Investment Scheme Framework: The Portfolio Investment Scheme is regulated under the Foreign Exchange Management Act, 1999 and overseen closely by the RBI to monitor net non-resident inflows into the secondary stock market.
- Sovereign Green Bonds Institutional Status: First introduced in the Union Budget FY2022-23, Sovereign Green Bonds are financial instruments whose proceeds are explicitly earmarked for public sector projects that reduce the carbon intensity of the domestic economy.