Foreign investors have been pulling money out of Indian equities at an unusually heavy pace, prompting the Securities and Exchange Board of India (SEBI) to consider a series of measures aimed at making the country’s stock market more attractive to global institutional investors. The proposed changes include reducing collateral requirements for highly liquid cash-equity trades and encouraging longer-dated derivatives, according to people familiar with the plans.
The proposed reforms come at a challenging time for India’s capital markets. Foreign ownership of Indian stocks has fallen to a 17-year low, while overseas investors sold more than $50 billion of Indian equities between October 2024 and June 2026. The rupee has also weakened by around 6% in 2026, adding another concern for international investors whose returns are affected by currency movements.
SEBI Looks to Reduce Upfront Capital Requirements
One of the main proposals under consideration is a reduction in collateral requirements for trades in highly liquid cash equities. The objective is to reduce the amount of capital investors have to keep tied up before executing trades.
For large institutional investors, the amount of capital required to support trading activity can significantly influence the attractiveness of a market. Lower collateral requirements could allow foreign funds to deploy capital more efficiently and potentially improve trading volumes and liquidity.
The proposal is part of a broader effort by SEBI to address practical issues raised by international investors and make India’s market structure more competitive with other major emerging markets.
Key Proposed Changes
| Reform Area | Proposed Direction | Potential Benefit |
|---|---|---|
| Cash-equity collateral | Lower requirements for highly liquid stocks | Reduces upfront capital burden |
| Derivatives | Encourage longer-dated contracts | Gives institutions more hedging flexibility |
| Stock lending | Expand eligible securities | Makes short selling easier |
| Securities lending and borrowing | Nearly double eligible stocks | Improves market liquidity |
| Closing auction | Improve price-discovery mechanism | Potentially reduces distortions |
| Foreign investment access | Simplify market processes | Could improve global participation |
SEBI has not yet finalized all of these measures, meaning the exact requirements and implementation timelines could change.
Foreign Investors Have Pulled More Than $50 Billion
The urgency behind the reforms can be seen in foreign capital flows.
Foreign investors sold more than $50 billion worth of Indian equities between October 2024 and June 2026, according to exchange data cited in the latest reporting. At the same time, foreign ownership of Indian stocks fell to its lowest level in 17 years.
| Foreign Investment Indicator | Latest Data |
|---|---|
| Foreign equity selling | More than $50 billion |
| Period measured | October 2024–June 2026 |
| Foreign ownership | 17-year low |
| Rupee decline in 2026 | About 6% |
| India’s MSCI Emerging Markets weighting | Below 12% |
| Reform target | Improve market attractiveness |
The decline in foreign participation is important because overseas institutions remain a major source of capital for Indian companies and markets.
A sustained reduction in foreign ownership can also affect market liquidity and India’s representation in global benchmarks.
India’s Weight in Global Indexes Has Fallen
India’s weight in the MSCI Emerging Markets Index has dropped to below 12%, according to Reuters reporting. A lower index weight can become a concern because global funds that track emerging-market benchmarks may allocate less money to Indian equities when the country’s weighting declines.
This creates a potentially self-reinforcing challenge. Lower foreign participation can reduce demand for Indian stocks, while lower index representation can reduce the amount of capital automatically allocated to the market by benchmark-linked funds.
SEBI’s proposed reforms are therefore aimed not only at individual trading costs but also at making India’s overall market structure more competitive.
Why Global Investors Care About Market Structure
Foreign institutional investors typically assess several factors before allocating capital to a market.
| Investor Consideration | Importance |
|---|---|
| Trading costs | Determines cost of entering and exiting positions |
| Collateral requirements | Affects capital efficiency |
| Liquidity | Determines how easily large positions can be traded |
| Short-selling access | Supports hedging and price discovery |
| Derivatives availability | Helps manage portfolio risk |
| Currency stability | Affects returns for foreign investors |
| Market regulation | Influences operational and compliance costs |
| Index weighting | Affects benchmark-driven allocations |
Reducing friction in these areas could make Indian equities more competitive against other emerging markets.
Longer-Dated Derivatives Could Attract Institutions
Another proposal involves encouraging longer-dated derivatives.
India has one of the world’s most active equity derivatives markets, but much of the activity has historically been concentrated in short-dated contracts. SEBI has been attempting to shift market activity away from excessive short-term speculative trading while maintaining useful hedging instruments for sophisticated investors.
Longer-dated derivatives could be particularly useful for institutional investors because they can provide more flexibility when managing portfolios over months rather than days.
The proposed approach could therefore help distinguish legitimate institutional hedging from highly speculative short-term activity.
SEBI Also Wants to Expand Stock Lending
SEBI is considering changes that would make stock lending and short selling easier.
The regulator plans to nearly double the number of stocks eligible for securities lending and borrowing, according to the latest reporting.
Stock lending allows investors to borrow shares, generally for purposes such as short selling. A deeper lending market can increase liquidity and improve price discovery because investors have greater ability to express both positive and negative views on individual stocks.
Potential Impact on the Cash Market
| Market Change | Expected Effect |
|---|---|
| More stocks eligible for lending | Wider short-selling opportunities |
| Easier stock borrowing | Better liquidity |
| Lower collateral | Improved capital efficiency |
| More institutional participation | Higher trading depth |
| Better hedging tools | Improved risk management |
| Greater liquidity | Potentially narrower trading spreads |
For foreign investors, these changes could make India’s cash-equity market more compatible with the strategies they use in developed markets.
SEBI Is Balancing Access With Market Stability
The regulator’s challenge is that making markets easier to access can also increase leverage and trading activity.
India has already experienced rapid growth in leveraged trading. Margin trading facility exposure reached roughly $15 billion and increased about 50% year over year, according to exchange data cited by Reuters.
That creates a balancing act for SEBI.
The regulator wants professional and institutional investors to have efficient tools for hedging and capital deployment, but it also needs to prevent excessive leverage from creating risks for retail investors and the wider financial system.
The proposed reforms therefore appear designed to improve institutional market access without simply encouraging more speculative activity.
Foreign Investor Reforms Come After Recent KYC Changes
SEBI has already taken steps to make India’s market more accessible to investors based outside the country.
On August 14, 2026, the regulator announced relaxations to Know Your Client requirements for individual persons resident outside India, including non-resident Indians, Overseas Citizens of India and foreign nationals.
SEBI also published a consultation paper on reviewing the KYC process for such investors.
These measures form part of a broader regulatory push to reduce administrative barriers to investing in India.
Broader Reform Agenda
| Reform | Status/Direction |
|---|---|
| Overseas investor KYC | Relaxations announced |
| NRI KYC framework | Under review |
| Cash-equity collateral | Proposed reduction |
| Stock lending | Expansion under consideration |
| Short selling | Easing under consideration |
| Longer-dated derivatives | Being encouraged |
| Global fund management | SEBI exploring reforms |
| FPI market access | Continued regulatory review |
SEBI Chairman Tuhin Kanta Pandey has also said the regulator is working on enabling global fund management activities to be carried out from India, while reviewing securities lending and short-selling frameworks.
Why Foreign Capital Matters for India
Foreign portfolio investment is an important source of liquidity for India’s stock market. Large global funds can invest billions of dollars across Indian companies, sectors and index products.
Foreign participation also helps improve market depth. When international investors trade actively, domestic investors benefit from greater liquidity and potentially more efficient price discovery.
However, foreign capital can also be volatile. Global funds can reduce exposure quickly when they see better opportunities in other markets, expect currency weakness or become concerned about valuations.
That means SEBI’s objective is not simply to maximize foreign inflows. It is also to create a market structure in which global investors can participate efficiently while maintaining strong risk controls.
India Faces Competition From Other Emerging Markets
India is competing with other emerging markets for global institutional capital.
Investors compare markets based on valuations, economic growth, currency performance, liquidity, regulation and ease of trading. If trading in another market requires less collateral or offers better hedging tools, international investors can redirect capital accordingly.
SEBI’s planned changes therefore represent an attempt to improve India’s market infrastructure rather than relying solely on the country’s economic growth story.
The reforms could become particularly important as global investors reassess emerging-market allocations amid changing interest rates, geopolitical risks and currency movements.
Proposed Reforms and Their Possible Market Impact
| Proposed Measure | Immediate Objective | Longer-Term Potential |
|---|---|---|
| Lower cash-equity collateral | Reduce upfront capital | Attract institutional traders |
| Longer-dated derivatives | Improve hedging | Increase institutional participation |
| More securities for lending | Expand short-selling universe | Improve liquidity |
| Easier stock borrowing | Reduce trading friction | Better price discovery |
| Market-structure improvements | Increase efficiency | Strengthen global competitiveness |
| Overseas KYC reforms | Reduce paperwork | Broaden foreign investor base |
The combined effect could be more significant than any individual reform. Lower collateral, better hedging instruments and easier stock lending could make Indian equities more accessible to global funds that currently face relatively high operational requirements.
The Bigger Picture
SEBI’s proposed changes mark a shift toward making India’s equity-market infrastructure more attractive to international institutions at a time when foreign ownership has fallen sharply. More than $50 billion of foreign equity selling between October 2024 and June 2026, a 17-year low in foreign ownership and a roughly 6% decline in the rupee this year have increased the urgency around attracting global capital.
The reforms also show that SEBI is trying to make India’s market more sophisticated rather than simply reversing previous restrictions on derivatives. By targeting collateral requirements, longer-dated contracts, securities lending, short selling and overseas investor onboarding, the regulator is attempting to improve institutional participation while preserving safeguards against excessive speculation.
Looking Ahead
SEBI is expected to continue refining the proposed measures before finalizing them. The regulator’s broader reform agenda suggests that improving India’s attractiveness to foreign investors will involve changes across trading, settlement, derivatives, securities lending and investor onboarding rather than a single policy adjustment. The success of the reforms will depend on whether they reduce the cost and complexity of investing without creating new risks for the market.
For India, the stakes extend beyond short-term foreign portfolio flows. A deeper and more accessible equity market can strengthen price discovery, improve liquidity and help Indian companies attract international capital. If SEBI’s reforms succeed in making the market more competitive while maintaining strong risk controls, they could support India’s longer-term ambition of becoming a more important destination for global investment.
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