SEBI Prepares Market Overhaul as India Seeks Return of Foreign Capital
The Securities and Exchange Board of India is preparing a series of changes to India's trading framework as policymakers seek to strengthen the country's appeal to international investors.
The planned reforms are expected to target several areas that large institutional investors consider important when deciding where to deploy capital, including trading costs, collateral requirements, stock lending, short selling, derivatives and mechanisms used to establish closing prices.
The effort comes at an important moment for Indian markets. Foreign investors withdrew more than $50 billion from Indian equities between October 2024 and June 2026, while foreign ownership of Indian stocks fell to its lowest level in roughly 17 years. India's weighting in the MSCI Emerging Markets Index has also slipped below 12%, according to Reuters.
Lower Collateral Requirements Could Reduce Trading Costs
One of the reforms being considered involves lowering collateral requirements for transactions involving highly liquid shares.
Collateral requirements play an important role in limiting settlement and counterparty risks. However, they can also increase the amount of capital institutional investors must keep tied up while trading.
For large global funds operating across multiple markets, capital efficiency can influence where and how actively they trade. A framework that requires less collateral without weakening risk controls could therefore make Indian equities more competitive with other major Asian markets.
SEBI's challenge will be finding the right balance between improving efficiency and maintaining the safeguards that support India's market infrastructure.
Long-Term Derivatives Could Attract Institutional Strategies
Another area under consideration is encouraging longer-term derivatives.
Global institutional investors frequently use futures and options not simply for speculation but also to hedge portfolios and manage long-term exposure. Expanding the availability or attractiveness of longer-duration instruments could give overseas funds greater flexibility when investing in India.
At the same time, SEBI continues to focus on risks associated with derivatives trading, particularly among individual investors. The regulator has previously highlighted substantial losses among retail participants in equity futures and options.
That creates an important distinction for policymakers: reforms designed to improve institutional hedging and market depth must coexist with measures intended to protect less sophisticated investors.
Stock Lending and Short-Selling Framework Under Review
SEBI is also looking at improvements to India's Securities Lending and Borrowing Mechanism, or SLBM.
SEBI Chairman Tuhin Kanta Pandey recently said the regulator intends to revamp the mechanism. A more efficient securities-lending market could make it easier for investors to borrow shares, potentially supporting liquidity and more effective short selling.
Efficient securities lending is an important part of mature equity markets because it can support hedging, arbitrage and price discovery.
For foreign institutional investors accustomed to deep securities-lending markets elsewhere, improving India's framework could remove another operational obstacle.
Closing Auction System Forms Part of Wider Market Modernisation
India is also moving toward a more developed closing-auction framework.
Closing auctions allow market participants to place orders around the end of a trading session so that a widely accepted market-clearing price can determine the official closing level.
Foreign investors have generally supported India's move toward a closing auction system, although some domestic institutions have raised concerns about liquidity and implementation.
SEBI has indicated that the Closing Auction Session is here to stay, while improvements to securities lending could further support participation in the mechanism.
SEBI Is Also Simplifying Access for Foreign Investors
The trading reforms are part of a broader effort to reduce administrative friction for overseas investors.
On August 20, SEBI introduced provisions allowing FPIs to submit digitally signed Power of Attorney documents, removing requirements such as notarisation, apostillisation or consularisation in applicable cases. The change is intended to simplify documentation and onboarding.
India has also been developing simplified access mechanisms for eligible foreign investors, alongside broader reforms intended to deepen both equity and debt markets.
Together, these measures suggest regulators are addressing not only investment opportunities but also the practical costs and complexity involved in accessing Indian markets.
Why Foreign Investors Have Been Pulling Money Out
Foreign capital flows are influenced by much more than domestic market regulations.
Relative valuations, currency movements, global interest rates, corporate earnings and investment opportunities in competing markets can all affect international portfolio allocations.
The Indian rupee has weakened by roughly 6% in 2026, adding another consideration for overseas investors whose returns ultimately need to be measured in currencies such as the US dollar.
However, there are signs that sentiment can change quickly. Foreign portfolio investors returned as net buyers during the first half of August 2026, investing about ₹16,621 crore in Indian equities, helped by factors including improved relative valuations, corporate earnings and expectations surrounding US interest rates.
Why the Reforms Matter for India's Stock Market
Attracting international institutional investors is about more than increasing headline capital inflows.
Greater participation by global pension funds, asset managers, sovereign wealth funds and other institutional investors can increase liquidity and broaden the investor base. Efficient trading infrastructure can also strengthen price discovery and potentially improve India's competitiveness in global benchmarks.
Benchmark representation matters because trillions of dollars globally are managed either directly against major indices or with those indices serving as important reference points.
If India can improve accessibility while its listed companies continue expanding, it could strengthen the case for larger long-term allocations from global portfolios.
Balanced Analysis: Regulation Alone Cannot Guarantee Foreign Money Will Return
SEBI's reforms could remove structural obstacles, but easier trading conditions alone are unlikely to determine foreign investment flows.
International investors will continue comparing India with markets across Asia and other emerging economies based on valuations, earnings growth, currency stability, taxation, interest rates and geopolitical risks.
There are also implementation risks. Major changes to trading systems can initially create operational challenges or volatility as exchanges and investors adjust. India's recent transition to a new closing-price mechanism illustrated some of those difficulties.
The strongest outcome would therefore be a market structure that becomes easier and less expensive to access while preserving investor protection and financial stability.
What Happens Next?
SEBI is expected to work through several of these reforms over the coming months, with Reuters reporting that the regulator aims to complete the broader set of changes within roughly nine months.
The eventual impact will depend on the details of the final rules and how smoothly exchanges, clearing corporations, brokers and institutional investors adapt.
Still, the direction is clear: India wants its capital markets to compete more effectively for global money.
If the reforms successfully lower trading friction, improve liquidity and make hedging and securities lending easier, India could be better positioned to capture foreign capital when global investors increase their allocations to emerging markets.
For SEBI, the objective is therefore larger than reversing a period of foreign selling. It is about building a market structure capable of supporting India's ambitions to become an even more important destination for global investment.
This article is based on reporting published by Reuters.
