Overview
The Ministry of Finance has unveiled a package of reforms aimed at deepening the G‑Sec market and attracting more FPIs into the equity segment. The measures focus on easing investment for PROI investors and simplifying regulatory hurdles for foreign capital.
Key Developments
- **Liberalisation for PROIs** – Under the revised Portfolio Investment Scheme, individual PROIs can now invest in listed Indian equities. The per‑company limit rises from 5 % to 10 % and the aggregate limit for all PROIs increases from 10 % to 24 %.
- **Expansion of the Fully Accessible Route (FAR)** – The list of securities eligible under the Fully Accessible Route now includes new government bond issuances of 15, 30 and 40‑year tenors and Sovereign Green Bonds.
- **Relaxation of General Route restrictions** – The three caps on short‑term investment, concentration, and security‑wise limits for FPIs are removed. The overall quantitative ceiling of 6 % of central‑government securities and 2 % of state‑government securities remains unchanged, but the ‘general’ and ‘long‑term’ sub‑limits are merged into a single limit.
- **Tax exemption on G‑Sec returns** – Effective 1 April 2026, interest and capital gains earned by FPIs on G‑Sec will be exempt from income tax. A similar exemption is granted to the Bank for International Settlements (BIS).
Important Facts
The reforms will be implemented through the Department of Economic Affairs by issuing the Foreign Exchange Management (Non‑Debt Instruments) (Third Amendment) Rules, 2026. By simplifying onboarding and reducing compliance, the government expects a broader base of stable foreign investors, including pension funds, insurance companies, and sovereign wealth funds, to channel long‑term capital into Indian equities and bonds.
UPSC Relevance
These measures illustrate how fiscal policy and capital‑market reforms are used to attract foreign capital, a recurring theme in GS 3 (Economy). Understanding the role of FPIs helps answer questions on external sector financing, while the tax exemption aligns India with global best practices, relevant for questions on taxation and international investment norms.
Way Forward
Successful implementation will depend on efficient coordination between the Ministry of Finance, the DEA, and market regulators. Monitoring the inflow of foreign capital, ensuring compliance with the new limits, and assessing the impact on the yield curve will be critical for achieving the intended deepening of the capital market.