Half-Yearly Regulatory Wrap 2026: Developments in Foreign Portfolio Investor Regime in India

Wednesday, October 7, 2026

• Operationalisation of the SWAGAT-FI Framework for Trusted Foreign Investors.
• Draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (“Draft FI Rules”), proposing a uniform 10% FDI/FPI threshold irrespective of the listing status of the Indian entity.
• SEBI circular on net settlement of funds for outright FPI cash-market transactions.
• Tax exemptions for FPIs investing in Government Securities, alongside the removal of 18% GST on brokerage for cross-border intermediary services.
• VRR limit subsumed into General Route, and the investment through Schedule III route is now open to all individuals resident outside India, in addition to NRIs/OCI.
• FPIs investing only in government securities no longer need to furnish investor group details.
• SEBI approves FPI participation in non-agricultural index derivatives and non-cash-settled non-agricultural commodity derivatives.

The first three quarters of 2026 marked a phase of consolidation and implementation in India’s Foreign Portfolio Investor (“FPI”) regulatory framework. Building on the reforms introduced in the second half of 2025, the Securities and Exchange Board of India (“SEBI”), the Reserve Bank of India (“RBI”) and the Ministry of Finance, advanced measures to facilitate FPI participation and streamline the regulatory framework. Key developments included the operationalisation of the Single Window Automatic and Generalised Access for Trusted Foreign Investors (“SWAGAT-FI”) framework, differentiated access for trusted investors, simplification and digitisation of FPI onboarding, introduction of net settlement of funds, tax rationalisation for investments in government securities, and proposed changes to the FPI and Foreign Direct Investment ("FDI") classification framework under the foreign exchange regulations.

In this edition of our regulatory digest, we analyse the key developments in the FPI space during this period, we examine how these changes are reshaping access, onboarding, settlement, taxation and structuring options for foreign investors in Indian markets.

With the objective of identifying low-risk foreign investors and facilitating ease of onboarding and ongoing compliance, SEBI introduced the SWAGAT-FI framework in 2025. The framework was operationalised through amendments to the SEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”) and the SEBI (Foreign Venture Capital Investors) Regulations, 2000 (“FVCI Regulations”) notified in December 2025.

Subsequently, on January 16, 2026, SEBI issued a circular modifying the Master Circular for Foreign Portfolio Investors (“FPI Master Circular”) and, on May 25, 2026, issued a Standard Operating Procedure (“SOP”) in consultation with the depositories. The SOP operationalises the framework by setting out the eligibility criteria, registration procedures, verification protocols, jurisdiction-specific guidance and applicable fee structure, thereby enabling Designated Depository Participants (“DDPs”) and custodians to implement the framework uniformly from its effective date of June 1, 2026.

Please find our detailed Hotline on theSWAGAT-FI framework here and the SOP on the SWAGAT-FI framework here.

On January 8, 2026, SEBI integrated Digital Signature Certificate (“DSC”) issuance into the Common Application Form (“CAF”) portal, enabling an end-to-end digital FPI registration workflow. Earlier, FPIs had to procure DSCs independently from licensed Certifying Authorities, and DDPs and custodians continued to insist on wet-ink signatures and physical submission. This change enables FPI applicants to obtain and apply their DSC within the same online workflow used for registration, rather than through a separate offline process. The integrated workflow addresses this gap and is expected to make the registration process largely paperless.

Please find our detailed Hotline on integration of DSC functionality here.

To further ease FPI onboarding, SEBI, on August 20, 2026, announced the acceptance of digitally signed Power of Attorney (“POA”) Previously, execution of a PoA as part of the FPI onboarding documentation could involve wet-ink signatures, physical circulation and submission of the executed instrument for verification. Permitting digitally signed PoAs enables FPIs to complete this step electronically, reducing documentation and turnaround time. While individually incremental, these measures collectively address procedural and documentation-related friction points that can otherwise delay FPI registration.

On May 15, 2026, SEBI issued a press release notifying the clarifications issued by the Central Board of Direct Taxes ("CBDT") to SEBI to address difficulties faced by FPIs in obtaining Permanent Account Numbers ("PANs"), which were affecting their onboarding. The difficulties arose after the Central Board of Direct Taxes ("CBDT") introduced new PAN application forms in March 2026 that added mandatory information requirements for FPIs. In view of the difficulties expressed by stakeholders in furnishing such information, SEBI engaged with CBDT, which issued certain clarifications to SEBI regarding the issuance of PAN to FPIs. SEBI has notified these clarifications by way of the press release.

The most significant relaxation relates to the Taxpayer Identification Number (“TIN”) field. Under the revised PAN application process, the TIN was a mandatory field, creating difficulties for FPIs from jurisdictions that do not issue a TIN or an equivalent identifier. In the absence of such an identifier, these FPIs could not complete the PAN application without producing information or documentation that was not available in their home jurisdiction. To address this issue, FPIs from jurisdictions where a TIN is not issued or is not applicable may now populate the TIN field with “0000000000”. This enables such FPIs to complete the PAN application process without having to obtain an unavailable identifier and avoids creating an additional onboarding hurdle for investors from jurisdictions without a TIN system.

Separately, on July 21, 2026, the CBDT, through Notification No. 94/2026, amended Rule 157 of the Income-tax Rules, 2026 to expand the definition of “specified fund” to include Category I and Category II AIFs regulated by SEB for purposes of the PAN exemption. Previously, the exemption was limited to foreign investors investing in AIFs based in International Financial Services Centre (“IFSC”), thereby broadening the scope of the exemption beyond GIFT City to other eligible AIFs and IFSC-based structures.

On January 16, 2026, SEBI issued a consultation paper proposing to permit netting of funds for outright cash-market transactions by FPIs, which was subsequently operationalised through a SEBI circular dated April 24, 2026. The framework is intended to enhance operational efficiency and reduce funding costs for FPIs by allowing their purchase and sale obligations to be netted. Previously, FPIs were required to fund cash-market purchases with their custodians on a gross basis, even where they had sold securities of equivalent or greater value on the same day, resulting in unnecessary funding requirements and associated costs.

The circular permits “netting of funds” by allowing the proceeds from an FPI’s same-day cash-market sale transactions to be used to fund its same-day purchase transactions. Accordingly, for eligible “outright transactions” i.e., transactions where the FPI only purchases or only sells a particular security during the relevant settlement cycle, the FPI is required to meet only its net fund obligation, rather than funding purchases on a gross basis. However, securities that are both purchased and sold within the same settlement cycle are excluded from the netting mechanism and continue to be settled on a gross basis.

Please find our detailed Hotline on FPI fund netting here.

On August 11, 2026, SEBI released a consultation paper on FPI participation in exchange traded commodity derivatives(“ETCD”), proposing (a) access for FPIs to non-agricultural index derivatives regardless of the settlement type of the underlying, and (b) access for FPIs to physically settled non-agricultural commodity derivatives. On September 24, 2026, the SEBI Board approved the proposal to permit FPI participation in ETCDs, with the stated objective of deepening liquidity in the commodity derivatives market. The Board approved both limbs of the proposal, i.e., FPI participation in non-agricultural index derivatives contracts irrespective of whether the underlying is cash-settled, and in non-cash settled non-agricultural commodity derivatives contracts. The circular operationalising same is awaited.

On February 6, 2026, RBI announced a reform under which the ₹2.5 lakh crore cap on the Voluntary Retention Route (“VRR”) was removed and the VRR limits were subsumed into the general route limits, with effect from April 1, 2026. FPIs which had committed to longer retention periods can now exit after the minimum retention period.

Please find our detailed Hotline on VRR limits subsumed under the general route here.

Previously, the Schedule III route under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 was available only to Non-Resident Indians (“NRIs”) and Overseas Citizens of India (“OCIs”) investing in equity instruments of listed Indian companies. This excluded other Persons Resident Outside India (“PROIs”) who did not hold Indian citizenship or an OCI card from investing through this route.

To broaden access, the Ministry of Finance, on June 12, 2026, amended the framework through the Foreign Exchange Management (Non-Debt Instruments) (Third Amendment) Rules, 2026, extending the Schedule III route to individual PROIs. PROIs that are entities remain outside the scope of Schedule III and may continue to invest through other applicable routes, including the foreign portfolio investment route under Schedule II.

The amendment also increases the investment limits for individual PROIs: the individual limit in any listed Indian company is raised from 5% to 10%, while the aggregate limit for all individual PROIs is increased from 10% to 24%.

The amendment also introduces a cross-aggregation requirement. An individual PROI's holdings in a company across the Schedule II (FPI) and Schedule III (PROI) routes are now added together, and the combined holding must remain below the 10% individual threshold. In effect, an individual cannot hold up to the limit under each route separately. If the combined holding crosses the threshold, the excess must be divested, and if the breach is not cured within the prescribed cure period, the entire holding is reclassified as Foreign Direct Investment.

Additionally, investments or transfers by individual PROIs under this route that result in a transfer of ownership or control of a listed Indian company to entities or citizens of land-border countries (or where the beneficial owner is such a citizen) require prior government approval.

The most far-reaching development of the period is the draft Foreign Exchange Management (Foreign Investment) Rules, 2026 (“Draft FI Rules”), released by RBI for public consultation. If notified, the Draft FI Rules would supersede the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”) in their entirety (save for actions already taken or grandfathered).

The most consequential change is definitional. Under the NDI Rules, any foreign equity investment in an unlisted Indian company is FDI regardless of quantum, while for a listed company, the classification turns on whether the investment, crosses the 10% threshold. The Draft FI Rules do away with this listed/unlisted distinction altogether, applying a single, uniform 10% threshold: foreign investment of 10% or more in the equity of a company or LLP is FDI, and investment below that threshold is FPI, irrespective of whether the investee is listed.

The Draft FI Rules propose a series of new changes, please find our detailed Hotline on the same here.

On June 6, 2026, the Government announced, through a press release, a series of reforms to increase FPI participation in Government Securities (“G-Secs”). This was operationalised by the Taxation and Other Laws (Amendment) Bill, 2026, which was passed as an act on August 18, 2026. Under the amended provisions, foreign institutional investors and the Bank for International Settlements are exempt from income tax on interest income and capital gains (both long-term and short-term) arising from investments in G-Secs, with the exemption applying to income arising on or after April 1, 2026.

The Finance Act, 2026, enacted on March 30, 2026, omitted clause (b) of sub-section (8) of Section 13 of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), which earlier treated intermediary services supplied from India to foreign clients as having their place of supply in India. As a result, Indian intermediaries such as stockbrokers serving overseas clients, including FPIs, faced an 18% GST liability even on cross-border transactions, since the place of supply was treated as the location of the service provider. Following the omission, the place of supply is determined by the location of the client. For Indian stockbrokers serving FPIs based abroad, the place of supply therefore shifts outside India, and such services can now qualify as exports and be zero-rated under GST materially reducing the cost of transacting through Indian intermediaries for FPIs based abroad

SEBI through circular dated September 7,2026, eased the compliance requirements applicable to FPIs investing exclusively in Government Securities (“G-Secs”) by amending Paragraph 1 of Part A of the FPI Master Circular. Under the amended framework, FPIs investing solely in G-Secs are not required to furnish investor group details. The relaxation is effective immediately, with depositories, custodians and Designated Depository Participants (“DDPs”) directed to make the necessary system changes to give effect to the revised requirement.

The first nine months of 2026 show India's FPI regime moving from reform design to delivery, and the overall mood is clearly facilitative. What distinguishes this period is that the effort is no longer confined to SEBI: the RBI's merger of VRR limits into the General Route, the CBDT's PAN relaxations, the G-Sec tax exemption and the omission of the IGST place of supply provision point to a coordinated, cross-regulatory attempt to address the cost and friction points foreign investors have long raised. The introduction of the SWAGAT-FI framework reflects a concerted regulatory effort to facilitate foreign investment and make onboarding seamless for eligible investors. By identifying low-risk, regulated investors and extending differentiated treatment to them, the framework reduces registration and ongoing compliance friction.

However, the changes bought in NDI rules might create lead to some increase structuring diligence for foreign investors. On structuring, the extension of Schedule III to individual PROIs widens access but introduces a cross-aggregation requirement with Schedule II holdings, under which an uncured breach of the 10% threshold results in the entire holding being reclassified as FDI. This overlap between the FPI and Schedule III routes will need to be read together when structuring offshore funds, and investors should assess carefully which route best suits their objectives. The uniform 10% threshold in the draft FEMA (Foreign Investment) Rules, 2026, if adopted, would also require existing and proposed holdings to be re-examined for FPI–FDI classification.

On balance, 2026 is a welcome step towards a simpler, more differentiated and more digitally enabled regime, and the real test will be the consistency with which these changes are implemented across regulators.

This article was authored by Priyansh Tiwari, Harit Gandhi, and Chandrashekhar K