The Securities and Exchange Board of India (Sebi) plans to release a consultation paper on Foreign Institutional Investor (FII) compliance requirements within the coming weeks. Chairman Tuhin Kanta Pandey confirmed the move in Kolkata, aiming to align domestic regulatory frameworks with global standards as the market faces a net outflow of $31.4 billion in foreign capital this year.
Strategic Priorities for Regulatory Reform
- Compliance Overhaul: The regulator is reviewing onerous requirements to align India with international jurisdictions, targeting a more proportionate, risk-based approach to FII oversight.
- Governance Capacity: Sebi is developing a network involving professional bodies and academia to enhance the effectiveness of independent directors.
- Market Infrastructure: While the regulator maintains no prohibition on new bourses, it mandates that the dormant Calcutta Stock Exchange must settle outstanding dues and modernize infrastructure before any potential revival.
The $31.4 billion net withdrawal by FIIs this year has been driven by the comparative strength of the U.S. dollar and rising U.S. Treasury yields in the backdrop of unabated geopolitical uncertainties as they seek to maximise returns in safe-haven assets. These safe-haven assets have drawn capital away from emerging markets, exacerbating the decline in local stock indices.
Aligning Indian Compliance with Global Standards
The forthcoming paper seeks to address structural frictions that investors have identified as “more onerous” than those in other major markets. Currently, India remains one of the few jurisdictions maintaining a Securities Transaction Tax (STT). The Long-Term Capital Gains (LTCG) tax, reintroduced in 2018, saw its rate increased to 12.5% last year. By reviewing these regulatory processes, Sebi aims to improve operational efficiency and reduce the compliance burden that may be discouraging foreign participation.
Chairman Pandey emphasized that the regulator’s objective is to maintain high standards of market integrity while ensuring regulations do not unnecessarily impede capital flow. This consultative approach extends to the role of independent directors, where Sebi plans to foster a capacity-building network to better equip board members to handle corporate governance responsibilities.
Operational Challenges at the Calcutta Stock Exchange
Regarding regional market infrastructure, the status of the Calcutta Stock Exchange remains a point of regulatory scrutiny. Trading at the bourse has been suspended since April 2013. Pandey noted that any revival efforts are contingent upon the exchange settling historical dues and implementing a modern, online screen-based trading system. When questioned on the necessity of adding new exchanges to deepen the domestic market, Pandey indicated that existing infrastructure possesses sufficient capacity to handle increased volumes, though he clarified that no regulations currently prohibit the establishment of new bourses.
| Metric | Status/Data |
|---|---|
| FII Net Outflow | $31.4 Billion |
| LTCG Tax Rate | 12.5% (as of last year) |
| Calcutta Stock Exchange Status | Suspended since April 2013 |
| Regulatory Focus | Proportionate, risk-based compliance |
Market Implications and Future Trajectory
The upcoming consultation paper represents a response to the persistent downward pressure on domestic indices. By addressing the specific compliance hurdles that distinguish the Indian market from global peers, Sebi is attempting to mitigate the impact of the current macroeconomic environment, characterized by dollar strength and the reallocation of capital toward safer assets.
