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Easing FPI threshold can induce capital inflow

Background & Context

  • SEBI has raised the Foreign Portfolio Investors (FPI) investment threshold for granular disclosures from ₹25,000 crore to 50,000 crore.
  • This decision comes amid persistent FPI outflows and aims to reduce compliance burdens while maintaining regulatory oversight.
  • The move follows the August 24, 2023 circular, which introduced stricter disclosure norms after allegations of stock manipulation using FPI structures (e.g., Hindenburg-Adani case).

Relevance : GS 3(Indian Economy )

A. Backward Linkages (Causes & Historical Context)

  1. Hindenburg Report & Market Integrity:
    1. The 2023 SEBI circular was introduced to curb misuse of FPI routes in stock price manipulation and non-compliance with minimum public shareholding norms.
    2. Allegations of opaque ownership structures led to regulatory tightening.
  • FPI Outflows & Market Volatility:
    • High compliance costs for large FPIs (above ₹25,000 crore) led some funds to reduce their exposure, contributing to recent outflows.
    • India had some of the most stringent granular disclosure norms among emerging markets, discouraging investment.
  • Equity Market Growth:
    • India’s cash equity markets have doubled in size in the last few years, warranting an adjustment in regulatory thresholds.
    • Raising the threshold to ₹50,000 crore aligns with this expansion, reducing regulatory burdens for mid-sized FPIs.

B. Forward Linkages (Impacts & Future Prospects)

  1. Increased Capital Inflows & Market Depth:
    1. Relaxed compliance norms may attract larger foreign funds, reversing the recent FPI outflows.
    2. Improved liquidity in equity markets may enhance stability and valuation.
  • Boost to Investor Confidence & Participation:
    • Mid-sized FPIs now face less regulatory burden, encouraging greater foreign participation in Indian equities.
    • Institutional investors will find Indian markets more attractive due to reduced compliance complexities.
  • Regulatory Balancing & Market Oversight:
    • SEBI has maintained oversight for FPIs investing over ₹50,000 crore, ensuring transparency while easing burdens.
    • The move indicates flexibility in policymaking, adapting to market realities without compromising accountability.
  • Comparative Positioning in Emerging Markets:
    • India was among the few markets with such detailed beneficial ownership disclosures for FPIs.
    • The revised norms make India more competitive vis-à-vis markets like Brazil, South Korea, and Taiwan, which have relatively relaxed FPI regulations.

March 2025
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