India's IPO landscape is witnessing a notable power shift, with domestic funds increasingly taking charge as Foreign Portfolio Investors (FPIs) adjust their investment strategies. This transition reflects the growing maturity and resilience of India's domestic institutions, which are playing a vital role in stabilizing the market during periods of foreign divestment.

In the fiscal year 2024-25, domestic institutional investors (DIIs) invested a record ₹6.0 trillion, with mutual funds accounting for approximately 86% of the total. This surge in domestic investment has provided a strong counterbalance to foreign outflows in the equity market. In contrast, FPIs withdrew a net amount of ₹1.27 trillion from the Indian equity segment during the same period, marking the second-largest annual equity outflow on record. This reversal in FPI sentiment was driven by escalating global uncertainties, including rising trade tensions, elevated U.S. bond yields, and a weakening corporate earnings outlook.

However, in July 2025, FPIs showed renewed interest in the Indian primary market, injecting ₹14,247 crore amid a surge in IPO activity. The number of IPOs at 13 was the highest in any month of the current calendar year, collectively raising ₹16,127 crore. Despite this primary market activity, FPIs turned net sellers in the secondary market due to global uncertainties, resulting in a net outflow when considering both primary and secondary markets.

The Securities and Exchange Board of India (SEBI) is proactively taking steps to further bolster domestic participation in the FPI framework. SEBI has proposed measures to facilitate greater participation of resident Indians in the Foreign Portfolio Investors (FPIs) framework. These proposals include enabling retail schemes based in International Financial Services Centres (IFSCs) in India, with resident Indian non-individuals acting as sponsors or managers, to register as FPIs. SEBI has also suggested that the term "sponsor or manager" for IFSC-based FPIs may be replaced with "Fund Management Entity (FME) or its associate". Furthermore, resident Indian non-individuals as FME or its associate in Alternative Investment Funds (AIFs) and retail schemes in IFSCs may contribute up to 10 per cent of the fund's corpus or assets under management for retail schemes.

These measures are designed to create a more inclusive investment environment, particularly for Indian non-individuals and mutual funds, and allow them to play a more important role in international investment schemes. By expanding the scope of FPI participation by resident Indians, SEBI aims to pave the way for a broader range of investment options and offer Indian investors increased opportunities to diversify their portfolios globally. These proposals align India's financial regulations with international standards, fostering a dynamic and globally connected investment environment. If implemented, these reforms could bridge the gap between India's domestic savings pool and international opportunities. The market regulator is seeking public feedback on the proposals until August 29, 2025.