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The Government of India has announced a significant package of reforms aimed at deepening the Government Securities (G-Sec) market and attracting greater Foreign Portfolio Investment (FPI) into Indian equities and debt instruments.
Announced on June 5, 2026, these measures reflect India’s continuing efforts to integrate with global capital markets while maintaining financial stability. The reforms focus on three key areas: liberalization of equity investments by Persons Resident Outside India (PROIs), easing restrictions on foreign investment in Government Securities, and granting tax exemptions on interest and capital gains arising from investments in Government Securities. Collectively, these initiatives are expected to enhance market liquidity, broaden the investor base and attract long-term foreign capital.
Broadening Access to Indian Equity Markets
A major reform is the extension of the Portfolio Investment Scheme (PIS) to individual Persons Resident Outside India (PROIs). Previously, this route was largely available only to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). The Government has also increased the individual investment limit in a listed company from 5 per cent to 10 per cent and the aggregate limit for all PROIs from 10 per cent to 24 per cent. These changes are expected to expand foreign participation in Indian equity markets by leveraging existing investor on boarding mechanisms and reducing compliance barriers. The move reflects growing confidence in the maturity and regulatory strength of India’s capital markets.
Deepening the Government Securities Market
The Government has also taken important steps to strengthen the sovereign debt market. The scope of the Fully Accessible Route (FAR) has been expanded to include newly issued Government Securities with maturities of 15, 30 and 40 years, as well as Sovereign Green Bonds. This reform is particularly significant for long-term institutional investors such as pension funds, insurance companies and sovereign wealth funds, which typically prefer long-duration securities. Greater participation by such investors can improve liquidity and contribute to a more efficient yield curve.
Further, the removal of short-term investment limits, concentration limits and security-wise investment caps under the General Route simplifies the investment framework. The merger of the existing “general” and “long-term” investment categories into a single limit will further enhance operational efficiency and ease of investment.
Tax Exemption on interest and capital gain
Perhaps the most impactful measure is the complete exemption from income tax on interest income and capital gains earned by FPIs on investments in Government Securities, effective from 1 April 2026. Taxation plays a crucial role in global investment decisions. By exempting these incomes from tax, India significantly improves the post-tax returns available to foreign investors and aligns its tax treatment more closely with international practices.
Economic implications and challenges
The benefits of these reforms extend beyond the financial markets. Increased foreign participation in Government Securities will diversify the investor base and reduce dependence on domestic institutions for government borrowing. A deeper debt market can potentially lower borrowing costs and improves fiscal efficiency. Stable long-term capital inflows can also strengthen India’s external sector, enhance foreign exchange reserves and reduce volatility arising from short-term capital movements. At the same time, increased participation in equity markets can improve liquidity and support more efficient capital allocation across the economy.
While the reforms are expected to yield substantial benefits, greater foreign participation may increase sensitivity to global economic conditions, including interest-rate movements and geopolitical developments. Recognizing these risks, the Government has retained overall quantitative limits on foreign investment in Government Securities. This balanced approach seeks to encourage foreign capital while preserving financial stability and macroeconomic safeguards.
Conclusion
The reforms announced by the Government represent a significant step in the evolution of India’s capital markets. By liberalizing equity investment norms, simplifying access to Government Securities and providing tax exemptions for FPIs, India has addressed several long-standing concerns of global investors. More importantly, these measures signal a strategic shift towards attracting stable, long-term capital rather than short-term portfolio flows. If supported by continued economic growth and policy stability, the reforms have the potential to strengthen India’s position as a leading global investment destination and deepen its financial markets in the years ahead.
Disclaimer: The opinions and views expressed in this article/column are those of the author(s) and do not necessarily reflect the views or positions of South Asian Herald.
