The Government of India and the Reserve Bank of India have announced structural reforms to liberalise foreign portfolio investment into Indian equities and government securities. Measures include extension of the Portfolio Investment Scheme to individual Persons Resident Outside India, tax exemption for FPIs on G‑Secs via ordinance, and expansion of the Fully Accessible Route to long‑term bonds and green bonds.
What is changing and why it matters
The reforms open equity markets to individual global investors and remove tax and operational frictions for institutional debt investors. Objectives: attract durable foreign capital, reduce sovereign borrowing costs, deepen the government securities market, improve price discovery, and align market access with requirements of global bond indices.
Key reforms — Equity investment liberalisation
Extension of Portfolio Investment Scheme to individual PROIs
Individual Persons Resident Outside India (PROIs) may now invest directly in listed Indian equities under the Portfolio Investment Scheme (PIS). The Department of Economic Affairs notified the Foreign Exchange Management (Non‑Debt Instruments) (Third Amendment) Rules, 2026 to operationalise this access.
Investment limits and onboarding simplification
- Single‑company cap: Individual PROI limit doubled from 5% to 10% of paid‑up equity.
- Aggregate PROI cap: Collective holding by all individual PROIs in one listed company raised from 10% to 24%.
- Onboarding: KYC and operational processes reuse existing NRI/OCI infrastructure to avoid separate complex registrations with the securities regulator.
- Regulatory threshold: Investments below 10% remain FPIs; stakes ≥10% are treated as FDI under SEBI/FEMA norms.
Key reforms — Government securities market
Direct tax exemption for FPIs on G‑Secs
An ordinance amended the Income Tax Act to exempt FPIs from direct taxes on interest and capital gains from Government Securities. This removes the 12.5% long‑term capital gains and 20% withholding tax on interest for G‑Sec income accruing from the specified date. The exemption is also extended to the Bank for International Settlements to attract institutional flows.
Fully Accessible Route (FAR) expansion
The RBI widened the FAR to automatically include all fresh long‑term central government bonds of 15, 30 and 40 years, and sovereign green bonds of those maturities. FAR allows non‑residents to buy specified central government bonds without quantitative ceilings and was a prerequisite for global bond‑index inclusion.
Dismantling of micro‑prudential limits and single limit consolidation
| Abolished operational restriction | Pre‑reform function |
| Short‑term investment limit | Restricted share of debt portfolio in securities maturing under one year. |
| Concentration limit | Capped exposure to a single issuer or issuer group for an institutional investor. |
| Security‑wise investment limit | Limited collective FPI ownership of the outstanding stock of a single sovereign security. |
Macro‑prudential absolute caps remain: 6% of outstanding stock for Central Government Securities and 2% for State Government Securities. The earlier ‘general’ and ‘long‑term’ channels are consolidated into a single unified limit window to simplify portfolio rebalancing.
Legal and institutional framework
- Statutory instruments: Foreign Exchange Management Act, 1999 manages PIS and FPI norms; Income Tax Act amended by Presidential Ordinance under Article 123 provided the tax exemption.
- Agencies: Department of Economic Affairs (policy and FEMA amendments), Reserve Bank of India (FAR expansion, limit architecture) and SEBI (market regulation and monitoring).
- International linkages: FAR expansion and tax parity aim to meet conditions for inclusion in indices such as the JPMorgan GBI‑EM and to attract institutional custodians like the BIS.
Economic and financial implications
- Capital inflows and liquidity: Broader investor base in equities and debt expected to raise gross foreign inflows and secondary market liquidity.
- Sovereign borrowing costs: Higher external demand for long‑dated G‑Secs can compress yields and lower government financing costs.
- Currency stability: Increased, and potentially more stable, foreign capital can counteract exchange‑rate pressures in emerging‑market episodes.
- Market depth and price discovery: Inclusion of long‑term bonds and removal of micro limits should improve curve construction and benchmark liquidity.
- Index inclusion and passive flows: FAR and tax clarity reduce frictions that previously impeded passive index inclusion; index inclusion typically brings predictable long‑term flows.
- Sustainable finance: Allowing sovereign green bonds into FAR attracts climate‑aligned global investors and mobilises concessional green funding for public projects.
Risks, challenges and policy anchors
| Risk / Challenge | Policy anchor / Mitigation |
| Capital flow volatility | Use reserve buffers, FX swap lines, macro‑prudential tools and communication to manage sudden stops. |
| Concentration risk in specific securities | Maintain macro caps (6% CGS, 2% SGS) and surveillance to detect issuer concentration early. |
| Operational strain on market infrastructure | Upgrade trading, clearing and settlement systems; strengthen custodial and banking connectivity. |
| Investor protection and retail access risks | Clear disclosure norms, dispute resolution mechanisms and KYC safeguards for PROIs. |
| Global headwinds | Policy flexibility to adjust access or prudential norms in response to large external shocks. |
Operational implications for stakeholders
- RBI: Monitor FAR flows, enforce macro caps, and coordinate liquidity operations.
- DEA/Finance Ministry: Manage fiscal implications of lower borrowing costs and tax revenue changes from the exemption.
- SEBI: Oversee equity market integrity and ensure compliance with FPI definitions and limits.
- Custodians, banks and clearing agencies: Scale KYC, settlement and safekeeping operations for increased non‑resident participation.
- Pension funds and insurers: Benefit from unified limits and long‑dated instruments for liability matching.
Model Questions
- Analyze the multi‑pronged approach adopted by India through recent foreign portfolio investment reforms to deepen its capital markets and enhance foreign capital inflows. Evaluate the economic rationale and likely outcomes. [GS-III: Economic Development]
- Examine the legal and institutional framework that enabled the recent FPI reforms. How do these changes affect financial regulation and governance in India? [GS-II: Governance]
- Discuss the measures taken to include individual global investors and to simplify operations for institutional funds in both equity and debt segments. What are the implications for market depth and stability? [GS-III: Economic Development]
- In the context of global bond indices and sustainable finance, assess how recent reforms in the government securities market advance India’s objectives. [GS-III: Environment & DM]
Answer should outline reforms in equities (PIS to PROIs; higher single and aggregate limits; simplified onboarding) and debt (tax exemption, FAR expansion to long‑dated and green bonds, removal of micro limits, single limit). Explain rationale: reduce sovereign borrowing cost, stabilise currency, improve liquidity and price discovery. Assess outcomes: higher inflows, index inclusion prospects, lower yields, and risks of flow volatility requiring macro‑prudential response.
Answer should identify instruments: FEMA amendments (PIS extension), Income Tax Act amendment via Presidential Ordinance (Article 123), RBI rule changes (FAR). Discuss roles of DEA, RBI and SEBI. Cover effects: streamlined compliance, consolidated debt limits, enhanced transparency, faster market access, and the need for strengthened surveillance, coordination among regulators, and legislative ratification of ordinance measures.
Answer should state equity measures: PROIs via PIS, single‑company limit 10%, aggregate PROI cap 24%, reuse of NRI/OCI KYC. Debt measures: tax exemption on G‑Secs, FAR expansion to long maturities and green bonds, abolition of short‑term, concentration and security‑wise limits, single unified limit. Analyse implications: deeper liquidity and yield curve; improved long‑term capital; but greater exposure to volatile flows, requiring RBI macro‑prudential oversight.
Answer should note FAR inclusion of long‑dated and sovereign green bonds and removal of tax frictions. Explain how these meet technical and market access criteria for indices like JPMorgan GBI‑EM, attract passive and active long‑term investors, and channel capital to green public projects. Also discuss safeguards needed to ensure green bond standards, reporting, and resilience to external shocks.