In a major reform, Government announces measures to deepen G-Sec market and facilitate greater Foreign Portfolio Investment (FPI) in equity segment

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G-Sec Market Deepening & FPI Equity Liberalisation — June 2026 Reforms

1. At a Glance

• Package of reforms by Ministry of Finance, announced 5 June 2026, to deepen the G-Sec (Government Securities) market and ease FPI and individual PROI (Person Resident Outside India) access to Indian equities/debt [S1].
• Combines FEMA-route liberalisation (PROI portfolio limits), tax rationalisation on FPI G-Sec income, and expansion of the Fully Accessible Route (FAR) [S1].
• Examinable for Prelims (institutional/quantitative facts) and Mains GS-III (capital markets, external sector, mobilisation of resources).

2. Why in the News

• On 05 June 2026, Ministry of Finance announced a multi-pronged reform to attract stable long-term foreign capital into equities and G-Secs [S1].
• Follows the Union Budget 2026-27 (presented Feb 2026) thrust on positioning India as a leading global investment destination [S1].

3. Background & Evolution

• FPI regime: governed by SEBI (FPI) Regulations, 2019, replacing the FII framework; investment routed via FEMA, 1999 and RBI's debt routes.
• Fully Accessible Route (FAR) for G-Secs: introduced by RBI in March 2020 — specified securities with no FPI investment ceiling; enabled India's inclusion in JPMorgan GBI-EM index (phased from June 2024).
• PROI Portfolio Investment Scheme (PIS): under FEMA, individual non-residents previously capped at 5% per company and aggregate 10% of paid-up capital [S1].
• Successive liberalisations: increase in FPI G-Sec investment limits, voluntary retention route (VRR), and FAR expansion — current reform extends this trajectory.

4. Core Static Facts

• Issuing ministry: Ministry of Finance (Department of Economic Affairs); operationalised via RBI (FEMA/debt) and SEBI (equity FPI) [S1].
• Enabling law: Foreign Exchange Management Act (FEMA), 1999; FPI rules under SEBI Act, 1992.
• PROI individual limit: raised from 5% → 10% per listed company; aggregate cap raised from 10% → 24% [S1].
• Tax change: FPI interest & capital gains on G-Secs exempt from income tax for income arising on/after 01.04.2026 [S1].
• FAR expansion: now covers new G-Sec issuances of 15-, 30-, 40-year tenors and Sovereign Green Bonds (SGrBs) [S1].
• General Route for FPI debt: three restrictions removed — short-term investment limit, concentration limit, security-wise limit; retained 6% of outstanding Central G-Secs and 2% of State G-Secs aggregate cap [S1].

5. Multi-Dimensional Analysis

Economic - Deeper, more liquid G-Sec market lowers sovereign borrowing cost and yield curve distortion at long end (15/30/40-yr) [S1]. - Tax exemption on FPI G-Sec income improves post-tax yield, aiding inclusion in global bond indices (Bloomberg, FTSE Russell) beyond JPMorgan GBI-EM. - Higher PROI equity caps channel NRI/OCI savings into listed Indian companies [S1].

Legal / Regulatory - Operates through FEMA (Non-debt Instruments) Rules, 2019 amendment for equity caps; FEMA (Debt Instruments) Regulations for G-Sec routes. - Tax exemption requires amendment to relevant sections of the Income-tax Act, 1961.

Geopolitical / Strategic - Supports rupee stability and BoP resilience amid global rate-cycle volatility. - Strengthens India's pitch as alternative EM destination vis-à-vis China.

Governance / Administrative - Multi-regulator coordination: MoF (policy), RBI (FEMA/G-Sec), SEBI (FPI registration), CBDT (tax notifications). - Risk: hot-money volatility if short-term limit removal increases churn in debt segment.

6. Recent Developments (last 12-18 months)

• June 2024: India included in JPMorgan GBI-EM Global Diversified Index via FAR securities.
• Feb 2026: Union Budget 2026-27 signalled deeper capital-market reforms [S1].
• 05 Jun 2026: Present reform package announced [S1].

7. Prelims Hooks

• Reform announced by Ministry of Finance on 5 June 2026 [S1].
• PROI individual cap: raised to 10% per listed Indian company [S1].
• PROI aggregate cap: raised to 24% (from 10%) [S1].
• FPI G-Sec tax exemption effective for income on/after 01 April 2026 [S1].
• FAR now includes G-Secs of tenor 15, 30, 40 years and Sovereign Green Bonds [S1].
• General Route retains aggregate cap: 6% of outstanding Central G-Secs, 2% of State G-Secs [S1].
• Three FPI debt limits scrapped: short-term, concentration, security-wise [S1].
• FAR was introduced by RBI in March 2020.
• FPI regime is governed by SEBI (FPI) Regulations, 2019.
• Statutory base for non-resident investment: FEMA, 1999.
• PROI investments routed via Portfolio Investment Scheme (PIS) under FEMA [S1].

8. Mains Relevance

• GS-III: Indian Economy — Mobilisation of resources; Capital markets; External sector.
• GS-II (peripheral): Government policies and interventions.
• Probable stems: 1. "Discuss how liberalisation of FPI access to G-Secs deepens India's debt market while heightening external vulnerability." 2. "Examine the role of the Fully Accessible Route in integrating India into global bond indices." 3. "Critically evaluate the recent measures to widen Person Resident Outside India participation in Indian equities."

9. Related Topics to Study Next

• Fully Accessible Route (FAR) — core mechanism for FPI G-Sec access.
• JPMorgan GBI-EM inclusion (June 2024) — flagship outcome.
• Sovereign Green Bonds (SGrBs) — newly under FAR.
• FEMA, 1999 & NDI Rules 2019 — statutory backbone.
• SEBI (FPI) Regulations, 2019 — equity-side regime.
• Voluntary Retention Route (VRR) — alternative FPI debt route.
• GIFT-IFSC — parallel offshore investment channel.
• Tarapore Committee on Capital Account Convertibility — historical context.

10. Common Errors / Trap Areas

• Confusing FAR with VRR — both are FPI debt routes but FAR has no ceiling on specified securities; VRR requires retention commitment.
• Mixing PROI (individual) with FPI (institutional) — separate caps and routes.
• The 24% aggregate PROI cap is for all individual PROIs combined, not per investor.
• Assuming tax exemption applies to all FPI income — it is specific to G-Sec interest/capital gains from 01.04.2026 [S1].
• Attributing the reform to RBI/SEBI — the announcement is by Ministry of Finance; RBI/SEBI will operationalise [S1].

11. Sources

• [S1] In a major reform, Government announces measures to deepen G-Sec market and facilitate greater Foreign Portfolio Investment (FPI) in equity segment — https://www.pib.gov.in/PressReleasePage.aspx?PRID=2269169 — (tier: 1)