Democratising Global Capital: SEBI’s Push to Empower Resident Indians in the FPI Ecosystem

India’s capital markets are taking small but important steps towards giving domestic investors better access to overseas capital structures. On 8 August 2025, the Securities and Exchange Board of India (SEBI) released a consultation paper proposing changes to allow more resident Indian investors to use the Foreign Portfolio Investor (FPI) framework.

While these ideas are not yet law and are open for public feedback, they mark a clear move towards making the FPI route easier for Indian entities and funds to use.

What’s in the Proposal?

Here are the key highlights from the SEBI proposal:

• Retail Schemes in GIFT IFSCs

SEBI’s proposal allows retail schemes based in GIFT City’s International Financial Services Centre (IFSC) to register as FPIs, provided they are sponsored or managed by resident Indian non-individuals. This marks a major shift from the current regime, where FPIs are primarily foreign-owned and Indian entities are restricted due to control norms.

Retail schemes must meet IFSCA’s criteria: a minimum of 20 investors, no single investor holding more than 25% of the corpus, and a 10% cap on exposure to any single company . These schemes resemble mutual funds in structure but operate under IFSC-specific rules. This move enables Indian asset managers to structure globally investable funds within IFSCs, bypassing earlier restrictions that excluded Indian-controlled entities from FPI registration unless they had zero Indian ownership.

• SEBI and IFSCA Alignment

SEBI proposes aligning its FPI norms with IFSCA’s Fund Management Regulations, 2025. Currently, SEBI caps resident Indian non-individual contributions at 2.5% for Category I and II AIFs and 5% for Category III AIFs. The new proposal raises this to 10%, matching IFSCA’s threshold for retail schemes. Additionally, SEBI suggests replacing the “sponsor/manager” terminology with “Fund Management Entity or its associate,” mirroring IFSCA’s language. This harmonisation reduces regulatory friction and simplifies compliance for fund managers operating across SEBI and IFSCA jurisdictions. It also clarifies control and contribution thresholds.

• Access for Mutual Funds

SEBI’s proposal allows Indian mutual funds to become constituents of FPIs, provided they comply with conditions outlined in SEBI’s 4 November 2024 circular . This includes investing in overseas mutual funds or unit trusts that may have exposure to Indian securities. Previously, mutual funds faced restrictions due to control and contribution limits, especially when investing in FPIs with Indian exposure. The new framework enables Indian mutual funds to diversify globally while still participating in India-linked portfolios. This is particularly relevant for funds seeking exposure to Indian equities via offshore vehicles.

• FPI Route

The proposed changes democratise access to FPIs for resident Indians, NRIs, and Indian institutions. Currently, resident individuals can only participate via the Liberalised Remittance Scheme (LRS), and only in FPIs with less than 50% India exposure. Under the new framework, they may contribute up to 100% in certain IFSC-based FPIs, including retail schemes. This opens foreign investment routes previously inaccessible to Indian investors, allowing them to participate in globally diversified portfolios managed by Indian entities. It also enables NRIs and OCIs to invest in India-linked FPIs without breaching control norms.

What Comes Next?

The consultation window is short. SEBI invited public comments in early August 2025 and set a deadline for responses; the regulator will review feedback before deciding whether to convert proposals into formal rules or amendments to the FPI Regulations. Market participants, fund managers, and industry bodies are expected to engage actively in the consultation. If the proposals are adopted, implementation would require careful drafting and coordination with other regulators, notably the IFSCA and the Reserve Bank of India (for cross-border flows).

Practical Takeaways for Investors and Advisors

Here is how the new proposal, if implemented, will impact different market participants:

• For Investors: Watch the consultation outcome and read any final rules closely. Changes could create new, regulated channels to gain overseas exposure, but will also come with new compliance requirements and caps.

• For Fund Managers and Distributors: Consider how IFSC retail schemes and mutual fund participation could be used to serve clients; prepare for tighter disclosure and governance expectations if resident participation increases.

• For Policy Watchers: This is part of a steady trend in 2024–25 of liberalising and simplifying the FPI framework while strengthening disclosure. The aim is to balance easier market access with tighter transparency and risk controls.

Conclusion

SEBI’s proposal could significantly deepen India’s capital markets by channeling foreign capital through IFSCs. By allowing Indian-managed retail schemes to register as FPIs, the framework attracts global investors seeking India exposure via professionally managed vehicles. It also reduces regulatory friction between SEBI and IFSCA, streamlining fund registration and compliance. This could position GIFT IFSC as a competitive global fund hub, similar to Singapore or Luxembourg, enhancing India’s financial sector exports. Moreover, it supports India’s broader goal of capital account liberalisation while maintaining regulatory oversight through SEBI’s and IFSCA’s coordinated frameworks.