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Consumer Discretionary
In a significant move that could potentially revolutionize the landscape of the Indian stock market, the Securities and Exchange Board of India (Sebi) is considering a proposal to grant direct market access (DMA) to foreign investors. This move aims to expand the investor base for Indian risk assets, following a surge in local investor accounts to over 190 million in February 2025 from about 39 million six years ago[1][2]. Sebi's discussions focus on allowing overseas individuals to invest directly in India's stock market, bypassing traditional intermediary routes.
Currently, foreign individuals can invest in Indian markets mainly through foreign portfolio investors (FPIs), specifically under the Category II FPI route, which requires them to use a local sub-custodian in India[1][2]. However, this framework involves significant compliance requirements. Another option is through participatory notes (P-notes), but this route is not favored by regulators due to transparency concerns[1].
Allowing direct access could significantly ease compliance for foreign investors and enhance liquidity in Indian markets by broadening the ownership base[1][2]. This proposal could particularly attract ultra-high net worth individuals who prefer more direct control over their investments, bypassing the need for intermediary funds[2].
Experts emphasize the need for a robust regulatory framework to manage direct access[1]. This includes implementing safeguards to ensure compliance with tax laws and regulations regarding foreign direct investment (FDI)[1]. Deloitte India's Rajesh H Gandhi noted that any simplified route would need "guardrails" and clear responsibility on brokers or bankers to ensure appropriate tax compliance before repatriating funds[1].
In India, DMA is currently available primarily to institutional investors, allowing them to execute trades directly without broker intervention through Computer-to-Computer Link (CTCL) software[3][4]. This facility enhances trading efficiency by providing immediate order execution and greater control over trading strategies[4].
Extending DMA to individual foreign investors could follow a similar framework but would require significant regulatory adjustments and approvals from the finance ministry and the Reserve Bank of India (RBI)[2].
The Indian stock market has experienced fluctuations recently, with FPIs leading selloffs[2]. Enhancing direct market access could stabilize this trend by increasing investor diversity and encouraging more consistent investment flows[1][2]. Sebi's efforts to rationalize regulations and engage more closely with foreign investors are seen as positive steps to support market growth[2].
As Sebi weighs the potential benefits and challenges of offering DMA to foreign investors, the market eagerly awaits further developments. This could be a pivotal moment for India's financial sector, potentially boosting foreign investment and market liquidity while requiring careful management to ensure regulatory compliance.
