RBI Plans to Double Foreign Individual Investment Cap in Listed Companies to 10%

India’s central bank, the Reserve Bank of India (RBI), is planning to raise the cap on investment by individual foreign investors in listed companies from 5% to 10%. The proposal, still under discussion between the RBI, the government, and the Securities and Exchange Board of India (SEBI), plans to revise the current limits under the Foreign Exchange Management Act (FEMA).

Widening Scope Beyond NRIs and OCIs

Currently, only Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) are allowed to invest up to 5% in an Indian listed company under FEMA’s Schedule III. The proposed changes will expand this benefit to all foreign individual investors and increase the permissible holding to 10%.

Combined Holding Limit to Rise

In addition to increasing the individual cap, the RBI also plans to raise the combined holding limit for all overseas individual investors in a listed company from 10% to 24%. According to government officials, this step is part of a broader set of proposals to increase foreign capital inflow.

Capital Outflows in Recent Months

Foreign Portfolio Investors (FPIs) have pulled out over $28 billion from Indian equities since September 2024, when the benchmark NSE Nifty 50 hit a record high. Factors contributing to the outflow include poor earnings, high stock valuations, and concerns over possible U.S. tariffs.

Monitoring and Regulatory Concerns

SEBI has raised concerns regarding monitoring compliance with the proposed limits. The regulator noted that a single foreign investor, along with associated entities, could exceed a 34% holding, crossing the 25% threshold that triggers mandatory open offer requirements under Indian takeover rules.

SEBI warned that without integrated monitoring systems across regulatory frameworks, such breaches might go undetected.

Conclusion

The government, RBI, and SEBI are currently reviewing these concerns before finalising the changes. A letter from the RBI to the government last week emphasised the urgency of implementing these proposals due to ongoing disruptions in capital inflows.

The proposals are at an advanced stage, with the RBI seeking early implementation. Discussions are ongoing to address compliance and regulatory challenges.

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