SEBI eyes global integration with GIFT City reforms, but experts flag misuse concerns

India’s market regulator has taken a decisive step toward integrating the country’s capital markets with the global financial system, proposing to expand the avenues through which resident Indians can invest in foreign portfolio assets via GIFT City.

Experts say the move could boost diversification and bolster India’s cross-border investing credentials, but caution that the opportunity will suit only high-net-worth and market-savvy investors, and must be backed by safeguards to prevent misuse through round-tripping or regulatory arbitrage.

In its latest consultation paper, the Securities and Exchange Board of India (SEBI) has proposed a set of reforms to enable individuals and entities based in India to participate more directly in Foreign Portfolio Investments (FPIs) through International Financial Services Centres (IFSCs) such as GIFT City. While mutual funds already provide limited overseas exposure, the proposed changes would give investors more structured access to global markets, potentially making GIFT City a stronger contender in the race to be a global financial hub.

Madan Sabnavis, Chief Economist at Bank of Baroda, said the move is “a useful way to become global” and fits into the broader idea of capital account convertibility. While he sees no immediate foreign exchange market risk, he stresses the importance of monitoring. Vivek Iyer, Partner and Financial Services Risk Leader at Grant Thornton Bharat, calls the proposal a welcome diversification tool for “sophisticated investors with a good understanding of international markets,” but warns that robust legal oversight will be crucial to prevent regulatory loopholes being exploited.

SEBI’s proposals cover three key areas:

• Easing eligibility: Retail schemes in IFSCs could register as FPIs even if their Fund Management Entity (FME) is a resident Indian non-individual, removing the current requirement for incorporation in the IFSC.

• Raising manager stakes: The cap on FME contributions to the funds they manage would rise to 10% of the corpus, in line with IFSCA’s “skin-in-the-game” norms.

• Allowing Indian MFs in overseas structures: Indian mutual funds could become constituents of FPIs, enabling overseas funds with India exposure to include them in their structures.

The paper also proposes aligning regulatory language with IFSCA norms by replacing “sponsor or manager” with “Fund Management Entity or its associate.”

Vinod Joseph, Partner at Economic Laws Practice, said the changes will help remove mismatches between SEBI and IFSCA frameworks, reducing the risk of regulatory arbitrage. He notes that while FEMA’s Overseas Investment Rules of 2022 clarified permissible structures, IFSCA rules remain stricter — for instance, barring Indian residents from investing in GIFT City funds that reinvest in India. Explicit SEBI approval for resident non-individuals to invest in FPIs could address this.

Public feedback on the paper is open until August 29, 2025. If adopted, the reforms could sharpen GIFT City’s competitive edge, but experts say policymakers must strike a fine balance between liberalisation and risk control to ensure that the gateway to global investing does not become a backdoor for capital misuse.