RBI plans to double foreign investor cap in listed firms to 10% to boost inflows: Report

Foreign portfolio investors (FPIs) have pulled out over $28 billion from Indian equities since the NSE Nifty 50 reached a record high in September.

Concerns over weak earnings, high valuations, and potential U.S. tariffs have driven this exodus.

To counter these outflows, India is extending investment benefits previously restricted to overseas Indians to all foreign investors while raising the applicable limits, officials said.

RBI pushes for swift implementation

In a letter to the government last week, the RBI emphasised the urgency of implementing these measures. “It is felt that these proposals may be implemented as early as possible,” the central bank stated, citing disruptions in capital inflows and external sector developments.

Emails seeking comments from the finance ministry, RBI, and the Securities and Exchange Board of India (SEBI) did not receive a response.

Changes in investment limits

Under the proposed reforms, all foreign individual investors will be allowed to hold up to 10% in a listed Indian company, up from the current 5% limit that applies only to non-resident Indians (NRIs) and overseas citizens of India (OCIs) under the Foreign Exchange Management Act (FEMA).

“Current foreign exchange management rules only mention non-resident Indians (NRIs) and overseas citizens of India (OCIs) under Schedule III,” a senior government official told Reuters. “We are broadening this to include all individual foreign investors.”

Additionally, the combined holding limit for all overseas individual investors will rise from 10% to 24%, officials added.

Final stages of discussion

The plan is in its final stages of discussion between the government, RBI, and SEBI. However, SEBI has raised concerns about monitoring compliance with foreign investment limits.

“Without effective monitoring across different frameworks, such takeovers may go undetected,” SEBI warned the RBI in a letter last month, adding that a single foreign investor, along with associates, could surpass a 34% stake, potentially triggering takeover regulations, according to the report.

Regulatory concerns and safeguards

Indian rules require an investor acquiring more than 25% in a company to make an open offer for shares held by retail investors. “We are working to rationalise the rules to prevent the possibility of such arbitrage across regulations by the foreign investors,” a second government official told Reuters.

Regulators are now assessing ways to prevent regulatory loopholes before finalising the reforms.