In the coming days India is expected to witness a massive influx of foreign capital. The Reserve Bank of India (RBI) is preparing for an unprecedented move by doubling the investment limit for individual foreign investors in listed companies—from the current 5 per cent to 10 per cent. This step aims to boost the flow of overseas funds into the country according to two senior government officials and documents reviewed by Reuters. Recently foreign portfolio investors (FPIs) have been pulling money out of Indian stocks due to disappointing earnings high valuations and concerns over potential US tariffs. Since the Nifty 50 hit its record high in September FPIs have withdrawn over USD 28 billion. To counter this outflow and attract more foreign investment the Indian government plans to extend benefits that were previously available only to Non-Resident Indians (NRIs) to all foreign investors while also raising the permissible investment cap. In a letter sent to the government last week the RBI suggested that these proposals should be implemented as soon as possible. The letter highlighted disruptions in capital flows due to recent global market conditions. The new rule will allow any foreign individual to invest up to 10 per cent in a listed Indian company—double the limit currently allowed under FEMA regulations which cap NRI investments at 5 per cent. According to a Reuters report a second government official speaking on condition of anonymity revealed that the current Foreign Exchange Management rules (FEMA) under Schedule III only cover Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). However the government is now expanding these rules to include all foreign individual investors. In addition the Reserve Bank of India (RBI) plans to raise the combined holding limit for all foreign individual investors in a single listed Indian company from the existing 10% to 24% officials said. The proposal to increase foreign investment limits is in its final stages of discussion between the government RBI and the Securities and Exchange Board of India (SEBI). What are the challenges? While the government and the RBI are backing the move the market regulator SEBI has raised concerns over potential challenges in monitoring compliance with foreign investment limits. SEBI has warned that a single foreign investor with a 10% stake could end up holding more than 34 per cent when combined with affiliates which could trigger takeover regulations. In a letter sent to the RBI last month SEBI cautioned that without proper monitoring of interconnected ownership structures. Under Indian regulations any investor acquiring more than 25% of a company is required to make an open offer to retail shareholders. To prevent foreign investors from bypassing these rules the government and regulators are now reviewing SEBI’s concerns before finalising the reforms. A senior government official mentioned that they are working on simplifying and tightening the rules to avoid the risk of foreign investors influencing company control through complex ownership structures. Why is it needed? Foreign investors have pulled out billions of dollars from the stock market over the past few years. According to NSDL data they have withdrawn around Rs. 1.25 lakh crore so far this year. Although there was a recent inflow of over Rs. 10000 crore in the last two weeks it hasn’t been enough to trigger a market rebound. Notably in the current financial year alone foreign investors have pulled out Rs. 135162 crore. In comparison they invested just Rs. 427 crore in the entire year of 2024. Interestingly since September 27 2024 when the stock market was at its highest foreign investors have withdrawn more than USD 17 billion.