Government Introduces Landmark Reforms to Strengthen India’s Capital Markets and Attract Foreign Investors

In a significant move aimed at reinforcing India's status as a preferred global investment destination, the Ministry of Finance has announced a comprehensive set of reforms designed to deepen the Government Securities (G-Sec) market and encourage higher participation from Foreign Portfolio Investors (FPIs) and overseas individual investors.

The latest measures are part of the Government’s broader strategy to strengthen capital markets, improve investor accessibility, and attract long-term foreign capital into the country. By simplifying investment procedures and enhancing regulatory flexibility, the reforms seek to make India’s financial markets more competitive and aligned with international standards.

Overseas Individuals to Receive Greater Access to Indian Equity Markets

One of the key reforms focuses on expanding investment opportunities for individual Persons Resident Outside India (PROIs). Until now, the Portfolio Investment Scheme (PIS) was primarily available to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). Under the new framework, individual PROIs will also be allowed to invest in the equity shares of listed Indian companies through this route.

As announced by the Union Finance Minister in the Union Budget 2026-27, the investment ceiling for an individual PROI has been increased from 5% to 10% in any listed company. Additionally, the aggregate limit for all individual PROIs has been raised significantly from 10% to 24%.

To operationalize these changes, the Department of Economic Affairs (DEA) is issuing the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026.

The Government believes these changes will streamline onboarding procedures, lower compliance burdens, and encourage a larger pool of overseas investors to participate in India's equity markets. The reforms are also expected to bring more stable and long-term capital inflows into the country.

Government Expands FPI Access to Government Securities

To strengthen participation in India's sovereign debt market, the Government has also announced a major overhaul of the framework governing FPI investments in Government Securities.

Under the revised policy, the list of securities eligible under the Fully Accessible Route (FAR) will be expanded to include newly issued Government Securities with maturities of 15 years, 30 years, and 40 years. Sovereign Green Bonds (SGrBs) issued in eligible FAR tenors will also be included within the expanded framework.

In another major relaxation, several restrictions applicable to FPIs investing through the General Route will be removed. These include:

• Short-term investment limits
• Concentration limits
• Security-wise investment limits

However, the overall investment caps will remain unchanged at:

• 6% of the outstanding stock of Central Government Securities
• 2% of the outstanding stock of State Government Securities (SGSs)

The Government has also decided to merge the existing "general" and "long-term" sub-categories into a unified investment limit for Government Securities and State Government Securities.

According to market experts, these reforms are likely to improve liquidity, support the development of a more efficient yield curve, and attract institutional investors such as pension funds, insurance companies, and sovereign wealth funds that typically seek long-term and stable investment opportunities.

Tax Exemption on Interest and Capital Gains from Government Securities

In a move expected to significantly improve the attractiveness of Indian debt markets, the Government has announced a complete income tax exemption for FPIs on interest income and capital gains arising from investments in Government Securities.

The exemption will take effect from April 1, 2026, and will apply to all eligible interest income and capital gains earned by FPIs from investments in Government Securities on or after that date.

The same tax benefit has also been extended to the Bank for International Settlements (BIS) with respect to its investments in Indian Government Securities.

The Government stated that aligning India's tax treatment of sovereign debt investments with global best practices will help attract patient and durable capital from international investors and strengthen foreign participation in the country's bond market.

Reforms Expected to Enhance India's Global Investment Appeal

Collectively, these measures are aimed at reducing regulatory complexities, simplifying investment processes, and creating a more investor-friendly environment for global participants.

By widening access to equity markets, expanding investment opportunities in Government Securities, and offering attractive tax incentives, the Government expects to diversify the investor base and encourage greater foreign participation in India's financial markets.

With India continuing to be one of the fastest-growing major economies globally, these reforms are expected to play a crucial role in attracting long-term international capital while supporting the overall development and stability of the country's capital markets.

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Short Summary

The Government of India has announced major reforms to attract foreign investment by expanding access to Indian equities and Government Securities. Key measures include higher investment limits for overseas individuals, relaxed FPI regulations for G-Secs, and a complete tax exemption on interest and capital gains from Government Securities effective April 1, 2026.