India’s central bank, the Reserve Bank of India (RBI), is set to significantly enhance the foreign investment landscape by doubling the investment cap for individual foreign investors in listed companies from the current 5% to 10%, according to a report by Reuters.
This decision aims to increase capital inflows, especially in light of significant foreign portfolio investor (FPI) outflows.
The proposal is currently in the final stages of discussion between the government, the Reserve Bank of India (RBI), and the Securities and Exchange Board of India (SEBI).
Foreign portfolio investors (FPIs) have been pulling funds from Indian stock markets, with over $28 billion withdrawn since September 2024 when the NSE Nifty 50 benchmark hit a record high. This exodus is largely due to poor corporate earnings, high valuations, and concerns over potential U.S. tariffs.
To counteract these effects and attract new foreign investments, India is expanding benefits previously exclusive to non-resident Indians (NRIs) and overseas citizens of India (OCIs) to all foreign investors. Additionally, the overall combined limit for foreign individual investors in a listed firm will be raised to 24% from the current 10%.
"It is felt that these proposals may be implemented as early as possible," the RBI stated in a letter to the government last week, citing recent disruptions in capital inflows due to external factors.
Emails requesting comments from the Finance Ministry, RBI, and Securities and Exchange Board of India (SEBI) did not receive any response at the time of reporting.
Under the current framework governed by the Foreign Exchange Management Act (FEMA), only NRIs and OCIs are permitted to invest up to 5% in an Indian listed company. The new proposal will expand this provision to all foreign individual investors, allowing them to hold up to 10% in a single company.
"Current foreign exchange management rules only mention non-resident Indians (NRIs) and overseas citizens of India (OCIs) under Schedule III," a senior government official said. "We are broadening this to include all individual foreign investors."
Currently, the combined foreign individual investor holding in an Indian listed company cannot exceed 10%. Under the proposed revision, this limit would be raised to 24%, thereby increasing the overall scope of foreign participation in Indian equities.
While the RBI and the government favor the move, SEBI has raised concerns over potential challenges in tracking foreign investments and ensuring compliance with market regulations.
"Without effective monitoring across different frameworks, such takeovers may go undetected," SEBI cautioned the RBI in a letter last month.
A major concern flagged by SEBI is that a single foreign investor, along with associated entities, could collectively exceed 34% ownership in a company, which would automatically trigger takeover regulations.
Indian regulations require any investor acquiring over 25% of a company to make an open offer to buy shares from retail investors. SEBI warns that, without stringent monitoring mechanisms, foreign investors may circumvent these rules, potentially leading to unregulated takeovers.
The government, RBI, and SEBI are currently assessing these risks before implementing the new policy. Officials indicate that measures will be taken to rationalize foreign investment rules to prevent potential arbitrage and loopholes.
"We are working to rationalize the rules to prevent the possibility of such arbitrage across regulations by the foreign investors," the second official added.
The RBI’s proposed policy change marks a significant shift in India's foreign investment framework. By increasing investment caps for individual foreign investors, India aims to boost capital inflows, strengthen market participation, and counterbalance ongoing FPI outflows. However, regulatory bodies like SEBI remain cautious, emphasizing the need for robust monitoring mechanisms to ensure compliance and prevent market manipulation.
As discussions continue, investors and market participants will closely monitor how these reforms evolve and the potential implications on India's equity markets and foreign investment climate.