SEBI Proposes Market Reforms to Halt Foreign Capital Flight from India
India’s securities regulator is advancing trading reforms to lower costs and improve market accessibility, aiming to stem a $50 billion exodus of foreign capital and boost the country's weight in global indices.
The Securities and Exchange Board of India is advancing a series of market reforms designed to attract institutional investors and reverse a prolonged sell-off by foreign funds. The proposed changes include reducing collateral requirements for cash equities and expanding the availability of longer-dated derivatives.
This initiative arrives as foreign ownership of Indian equities reaches a 17-year low. Data from the National Stock Exchange shows foreign investors sold over $50 billion in Indian equities between October 2024 and June 2026. As a result, India’s weighting in the MSCI emerging markets index has fallen below 12 percent, a sharp decline from its September 2024 peak of 21 percent.
A central component of the proposal involves cutting collateral requirements for trades in highly liquid stocks. Regulatory sources indicate this move could reduce upfront capital needs by 15 to 20 percent. The regulator is also weighing lower upfront collateral for derivatives contracts expiring after a year, addressing complaints that the current system overly favors weekly contracts and stifles longer-term hedging.
Aligning with Global Standards
Industry participants have welcomed the direction of the proposals. Steve Lawrence, chief investment officer at Balfour Capital Group, noted that the moves suggest the regulator has listened to the institutional investment community and focused on practical issues. The reforms also aim to nearly double the number of shares eligible for lending and borrowing, bringing India closer to the mature securities frameworks of China, South Korea, and Taiwan.
This push for institutional deepening follows a two-year regulatory effort to curb speculative retail derivatives trading, which has generated losses for five consecutive years. Retail investors currently account for more than 35 percent of trading activity in India, compared to roughly 20 percent in the United States, where professional investors dominate volume.
Implementation risks remain evident as the regulator navigates recent market turbulence. SEBI recently managed sharp volatility in the benchmark Nifty 50 index following the rollout of a new closing price calculation method for stocks with derivatives contracts. The transition initially saw limited participation from market makers and investors.
Angela Lan, a senior strategist at State Street Investment Management, observed that early participation in the closing auction session has been relatively modest. While acknowledging that such changes should eventually reduce execution frictions, Lan cautioned that the reforms alone are not expected to drive a meaningful increase in passive allocations to India.
