In a significant move to liberalize its capital markets, India has announced that it will now allow individual foreign investors direct access to the Indian equity market. This policy shift, unveiled during the Union Budget 2026 presentation on Sunday, aims to broaden foreign participation, deepen investment engagement, and foster long-term capital formation in the country.

Finance Minister Nirmala Sitharaman stated that persons residing outside India (PROI) will be permitted to invest directly in Indian equities through the Portfolio Investment Scheme (PIS). This removes the necessity of routing investments through Foreign Portfolio Investors (FPIs) or Non-Resident Indian (NRI) channels, which often involve complex compliance requirements and multiple intermediaries. The expanded PROI category now includes NRIs, Overseas Citizens of India (OCI) cardholders, foreign nationals, and entities incorporated outside India.

To further incentivize investment, the individual shareholding cap will be raised from 5% to 10%, and the aggregate limit for all such foreign individual investors will increase from 10% to 24%. This doubling of individual ceilings gives overseas investors the opportunity to own a more meaningful stake in Indian companies. The Reserve Bank of India (RBI) will operationalize this new route under its existing PIS. Prospective investors will need to complete their KYC (Know Your Customer) procedures with a designated bank and will receive a unique investor code that links their overseas remittance accounts to domestic brokerages.

Shashank Udupa, a SEBI-registered research analyst and fund manager at Smallcase, believes that this reform will enhance market liquidity, improve price discovery, and expand the pool of long-term capital available to Indian companies. He also noted that increased PROI participation could lead to better valuations and more stable ownership structures, particularly in large-cap stocks and index-heavy sectors such as banking, financial services, capital goods, and technology.

Market strategists anticipate incremental inflows of USD 3-4 billion in FY 2027, which should support liquidity around mid-cap counters. From a macroeconomic perspective, higher portfolio inflows are expected to support currency stability and lower the cost of equity capital for corporations.

While experts have generally welcomed the move, some caution that existing structural tax issues, such as India's source-based capital gains taxation framework, may continue to deter certain foreign capital. Legal firms also warn that anti-money-laundering checks will be strict, and investors must adhere to existing sectoral foreign-ownership caps.

This initiative is part of a broader strategy to strengthen market infrastructure. A market-making framework for corporate bonds and a review of the Foreign Exchange Management framework are also expected to boost liquidity and investor confidence. This move signals India's intention to integrate its domestic markets more closely with global capital flows.

This reform is particularly beneficial for India's 35-million-strong diaspora, who can now directly purchase shares on Indian stock exchanges. It also simplifies the process for expatriate CXOs working in India to participate directly in employee stock-option plans without complex trust structures and allows returning Indians who retain foreign tax residence to continue investing seamlessly.