Context: The Ministry of Finance announced a sweeping set of capital market reforms aimed at deepening the Government Securities (G-Sec) market and accelerating Foreign Portfolio Investment (FPI) into equities.
What It Is?
- It is a macro-economic regulatory structural reform package designed to open up India’s equity and sovereign debt markets to global investors. The policy transforms how individual foreigners buy Indian corporate stocks and changes the rules for institutional funds purchasing government debt.
Aim:
- The primary objective is to make India a premier global investment destination by attracting stable, long-term, and patient foreign capital.
- The reforms aim to simplify market access, lower compliance burdens, establish a smooth long-term sovereign yield curve, and significantly step up national foreign exchange inflows.
Breakdown of Key Reforms Announced:
The policy changes are distributed across three independent financial pillars:
- Liberalisation of Equity Investment for Individual Foreigners
- The Reform: Amendment of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
- New Announcement: Individual Persons Resident Outside India (PROIs) are now permitted to directly invest in listed Indian equities through the Portfolio Investment Scheme (PIS). Previously, this streamlined path was strictly reserved for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs).
- Key Features:
- The single-company investment ceiling for an individual foreign national is doubled from 5% to 10%.
- The aggregate, overall cap for all individual PROIs combined in a single listed firm is expanded from 10% to 24%.
- Onboarding uses the pre-existing, highly efficient NRI/OCI digital pipelines to ensure fast setup without demanding complex new verification layers.
- Review of the Regulatory Framework for G-Sec Debt Markets
- The Reform: Institutional FPI debt-purchasing guidelines are being completely overhauled to unlock the long-term sovereign bond market.
- New Announcements:
- Expansion of the Fully Accessible Route (FAR)—which permits restriction-free foreign investment—to include ultra-long-term 15, 30, and 40-year new G-Sec issuances alongside Sovereign Green Bonds (SGrBs).
- Complete removal of administrative operational boundaries for FPIs investing under the General Route.
- Key Features:
- Elimination of Three Core Restrictions: The central bank and finance ministry have permanently scrapped the short-term investment limit, the concentration limit, and the security-wise limit for FPIs dealing in G-Secs.
- Retention of Macro-Caps: To guard against sudden currency flight, the overall quantitative ceiling is held steady at 6% of the total outstanding stock of Central Government Securities and 2% for State Government Securities (SGSs).
- Unified Category Merger: The separate sub-buckets of ‘General’ and ‘Long-term’ investment limits are unified into a single pool per security category, giving fund managers complete portfolio flexibility.
- Total Income Tax Exemption on G-Sec Investments:
- The Reform: Introduction of a zero-tax regime for foreign institutional capital locked into Indian sovereign debt paper.
- New Announcement: Complete exemption from income tax for FPIs on any interest earned or capital gains generated through investments in Government Securities.
- Key Features:
- Retroactive Implementation Baseline: The exemption is effective for all earnings made on or after April 1, 2026.
- Institutional Alignment: The same tax exemption is explicitly extended to the Bank for International Settlements (BIS) to lock in highly secure, sovereign-tier international liquid reserves.
- Global Parity: This tax carve-out eliminates structural cost disadvantages, placing Indian G-Sec yields on equal footing with advanced Western and Asian sovereign debt markets that operate tax-free frameworks for foreign central funds.
