The Reserve Bank of India has opened direct equity investment in listed firms to all foreign individuals, expanding beyond non-resident Indians (NRIs) and overseas citizens of India (OCIs). According to The Economic Times, this move aims to broaden the investor base for Indian equities and boost foreign currency inflows to stabilize the rupee amidst FPI outflows. The RBI announced Monday evening that overseas individuals can invest in equity instruments of listed firms on recognised stock exchanges with enhanced limits, marking a further liberalisation of India's foreign investment regime. The government had last week notified relaxed rules for investments in listed Indian stocks by residents outside the country, including foreign individuals and entities, with the amended rules under the Foreign Exchange Management Act (FEMA) allowing 'persons resident outside India' (PROIs) to invest through portfolio investment schemes.
The notification doubles the investment limit for such investors, with an individual PROI now able to hold less than 10% of the total paid-up equity capital of a listed company, or the same percentage of the paid-up value of each series of debentures or preference shares or share warrants issued by it. As reported by The Economic Times, the combined holding of all such individuals in a company has been lifted to 24% from 10%. Any individual PROI investment above the 10% prescribed limit in a company must be divested within five trading days of the breach, with the PROI required to inform such breach to depositories and the company concerned within seven trading days from the settlement date. Under the revised rules, eligible overseas individuals may purchase, sell or transfer equity instruments of listed Indian companies on a repatriation basis through recognised stock exchanges and authorised dealer banking channels, with transfers also permitted through sale or gift subject to prescribed conditions.
Industry participants view this as a long-term positive for India that opens up another avenue for liquidity beyond foreign portfolio investors (FPIs). As reported by The Economic Times, Dhiraj Relli, managing director and CEO at HDFC Securities, noted that "Structurally, this is a long-term positive for India as it opens up another tap for liquidity in terms of not only overseas individuals, but also family offices, HNIs, people of Indian origin, entrepreneurs and more." Currently, foreign individuals invest in Indian markets through pooled investment vehicles managed by foreign institutions, alternative investment funds, mainly Category III. The move is expected to reduce dependence on foreign portfolio investors and create new opportunities for brokers and market intermediaries. However, initial inflows are likely to remain slow due to operational, tax, and compliance complexities that foreign investors must navigate.
Despite regulatory clarity, investing in India remains cumbersome for foreign individuals in the near term, requiring extensive documentation and banking formalities. As reported by The Economic Times, Shweta Rajani from Anand Rathi Wealth explained that "Foreign individuals need to open Indian bank accounts, which requires quite a lot of paperwork including verified identity documents, address proofs, and tax compliance forms. Banks need attested copies of all documents, which can be time-consuming for someone living abroad." The biggest challenge is that unlike NRIs who have established systems, foreign nationals are entering uncharted territory with banks still figuring out operational procedures, currency conversion, tax reporting, and compliance. Market participants expect brokers, exchanges, depositories, custodians and banks to play a key role in developing the ecosystem, while financial firms may introduce services tailored to overseas investors.
Taxation remains a key area where foreign individuals need clarity. As reported by The Economic Times, Nehal Sampat from Price Waterhouse & Co noted that "Under the tax law, the gains earned by FPIs from sale of listed shares are expressly regarded and taxed as 'capital gains'. For foreign individuals, since their investment would no longer be under the 'FPI route', the gains from listed shares could be taxable as 'capital gains' or 'business income', depending upon their specific facts." The government and authorities are pushing through this opening at a time when foreign portfolio investors have been pulling money out of Indian equities, adding to pressure on the rupee. The RBI last week opened a special window for banks to mobilise foreign currency non-resident (FCNR) deposits from NRIs and offered a 1.5% fixed-rate swap facility for external commercial borrowings by public sector units.
