India's markets regulator, the Securities and Exchange Board of India (Sebi), is preparing a comprehensive overhaul of decades-old trading rules to stem soaring outflows of foreign funds. Three regulatory sources confirmed the planned changes, which are being reported publicly for the first time. The reforms are aimed at making Indian markets more accessible and attractive to international institutional investors.
Sebi did not respond to a Reuters request for comment. The sources spoke on condition of anonymity as the talks remain confidential. The regulator plans to roll out the changes within nine months, following consultation with industry participants and allowing time for market systems to be updated.
Foreign Ownership of Indian Stocks at a 17-Year Low
The planned reforms come at a time when foreign ownership of Indian stocks has fallen to a 17-year low. From October 2024 until June 2026, foreigners sold Indian equities worth more than $50 billion, according to National Stock Exchange data. India's weighting in the MSCI emerging markets index has also dropped below 12%, falling sharply from a peak of 21% in September 2024.
The Indian rupee has declined approximately 6% this year, ranking among Asia's worst-performing currencies. Concerns about a steeper import bill and weak capital flows have added further pressure on the currency and on overall market sentiment among foreign investors. These developments have combined to create a sense of urgency within the regulator to act decisively and quickly.
Lower Collateral Rules to Cut Costs for Foreign Funds
A key change under advanced discussion is a reduction in collateral requirements for trades in highly liquid stocks. Two of the sources said this move could reduce upfront capital needs by 15% to 20%. This is expected to make trading in Indian cash equities significantly more cost-efficient for foreign institutional investors, who have long complained about the high cost of participation in Indian markets.
Sebi is also considering lower upfront collateral requirements for derivatives contracts that expire after one year. This change has been driven by feedback from overseas asset managers who say the current system favors weekly derivatives contracts and discourages longer-term hedging strategies. By easing the cost burden on longer-dated instruments, Sebi hopes to encourage a broader range of investment strategies from global fund houses.
Longer Derivatives and Easier Short Selling on the Cards
In addition to collateral reforms, Sebi is weighing measures to encourage longer-dated derivatives. The regulator is also working to boost the cash equities market by making short selling of stocks easier. Plans include nearly doubling the number of shares eligible for the securities lending and borrowing program, a step that market participants have requested for years.
Foreign investors have sought these proposed reforms for some time, viewing them as a way to bring India in line with major regional markets such as China, South Korea, and Taiwan. Those markets already have mature securities lending and borrowing arrangements and use closing auctions to determine stock prices, practices that India is now looking to adopt as part of this broader reform push.
Industry and MSCI React Positively to Sebi's Direction
Steve Lawrence, Chief Investment Officer of U.S.-based Balfour Capital Group, which manages more than $463 million in assets, commented on the planned changes. He said the reforms suggest that Sebi has listened to the institutional investment community and focused on the practical issues investors face in the Indian market. His remarks reflect a broader sense of optimism among foreign fund managers about the direction India's market regulation is taking.
Global index provider MSCI stated that it would monitor the planned reforms and their effectiveness through feedback from market participants for future global accessibility reviews. MSCI noted that measures relating to closing-price formation, margin and collateral efficiency, stock lending, short selling, and hedging tools are directly relevant to market accessibility for international institutional investors. A positive assessment from MSCI could be a significant milestone for India's ambitions in global capital markets.
One of the regulatory sources said that India wants to increase its weightage in global stock market indices. The reforms now being considered are expected to benefit India's ratings and potential re-ratings in those indices. A higher weighting in major benchmarks such as the MSCI emerging markets index would likely attract greater passive fund flows into Indian equities. The sources did warn, however, that some of the planned changes could cause short-term disruptions as market participants update their existing systems. The overall direction of the reforms has nonetheless been welcomed by the institutional investment community as a meaningful step toward aligning Indian markets with global standards.
