Sebi bets on trading reforms to reverse outflow of foreign capital

From October 2024 until June 2026, foreigners' selling of Indian equities crossed $50 billion, National Stock Exchange data showed (Photo: Reuters)

India's markets regulator is set to overhaul decades-old rules and stem soaring outflows of foreign funds, three sources said, in a move some investors say would help the South Asian nation beef up its weighting in global stock market indexes.

The changes, if finalised, will come as foreign ownership of Indian stocks has hit ​a 17-year low and the rupee, down about 6 per cent this year, ranks among one of Asia's worst performers, hit by worries about ​a steeper import bill and anemic capital flows.

The reforms planned by the regulator, the Securities and Exchange Board of India, include lowering collateral requirements in cash equities and encouraging ‌longer-dated derivatives, three regulatory sources said.

"That suggests Sebi has listened to the institutional investment community and focused on the practical issues investors face," said Steve Lawrence, CIO of US-based Balfour Capital Group, which manages more than $463 million in assets.

The measures, being reported for the first time, will add to plans to boost the cash equities market by making shorting of stocks easier, nearly doubling the number of shares eligible for lending and borrowing.

The regulator plans to roll out the changes in nine months, after consultation with industry and giving market participants time to change existing systems, added the sources, who warned of short-term disruptions stemming from some changes.

The sources spoke on condition of anonymity as the talks are confidential.

Sebi did not respond to a Reuters request for comment sent on Wednesday.

India wants to increase its weightage in global stock market indices and the reforms now being considered stand to benefit its ratings and re-ratings, said one of the sources.

India's weighting in the MSCI emerging markets index has fallen below 12 per cent, from a peak of 21 per cent in September 2024.

From October 2024 until June 2026, foreigners' selling of Indian equities crossed $50 billion, National Stock Exchange data showed.

Foreign investors have sought the proposed reforms for some time as a way to pull India in line with major regional markets such as China, ‌South Korea and Taiwan, which already have mature securities lending and borrowing arrangements and closing auction to determine prices.

Global index provider MSCI said that it would monitor the planned reforms and their effectiveness through feedback from market participants for future global accessibility reviews.