Budget 2026 Unveils Major FEMA Reforms to Attract Global Capital
The Union government has proposed a comprehensive overhaul of foreign exchange regulations aimed at significantly boosting foreign investment inflows into India. Finance Minister Nirmala Sitharaman announced these measures during her FY26-27 budget speech, signaling a strategic push to make India a more attractive destination for global capital.
Revamping FEMA for Contemporary Economic Needs
At the heart of these proposals lies a thorough review of the Foreign Exchange Management Act (FEMA) regulations governing non-debt instruments. This legislative framework, which controls how international financial and strategic investors operate within India, is set for modernization to align with the country's evolving economic priorities.
"The central government has proposed a comprehensive review of the foreign exchange management non-debt instruments rules to create a more contemporary and user-friendly framework for foreign investments," Sitharaman stated in her parliamentary address.
Simplifying Cross-Border Transactions and M&As
The proposed reforms are expected to:
- Streamline cross-border mergers and acquisitions
- Enhance transparency in international transaction flows
- Reduce compliance burdens for foreign investors
- Facilitate smoother execution of complex financial deals
Industry experts have welcomed these measures as timely interventions that could significantly impact India's investment landscape. Sameer Sah, partner at Khaitan & Co., emphasized that "the government's decision to modernize the foreign investment framework will help global investors structure deals with greater predictability and materially ease cross-border M&A execution."
Boosting Corporate Bond Market and Patient Capital
These regulatory changes come at a crucial juncture for India's financial markets. While the corporate bond market has shown growth, its penetration remains substantially lower than global benchmarks. The proposed liberalization of non-debt rules, including provisions for total return swaps on corporate bonds, aims to address this gap.
Divaspati Singh, another partner at Khaitan & Co., explained: "The announcements to liberalize the non-debt rules will certainly iron out any regulatory creases impacting growth. This ties in with the government's aim to deepen the corporate bond market and could increase penetration in convertible instruments."
Expanding Investment Opportunities for Overseas Indians
In a significant move, the budget also proposed expanding investment avenues for Persons Residing Outside India (PROI). The government plans to:
- Permit PROIs to invest in equity instruments of listed Indian companies through the portfolio investment scheme
- Increase individual investment limits from 5% to 10%
- Raise the overall investment ceiling for all individual PROIs from 10% to 24%
These changes represent a strategic effort to tap into the financial resources of the Indian diaspora while providing them with enhanced investment opportunities in their home country.
Building on Recent Investment Momentum
The regulatory overhaul comes against the backdrop of several high-profile international investments in India, including:
- Japan's MUFG acquiring a stake in Shriram Finance for $4.4 billion
- Abu Dhabi-based International Holding Co.'s billion-dollar deal with Samman Capital
- Japanese financial institutions Mizuho and Sumitomo Mitsui Banking Corp. investing in Avendus and Yes Bank respectively
Anshul Jain, partner at PwC India, noted that "depending on the coverage of the review, it could help ease many issues that could help smooth FDI into the country and related compliances."
The proposed FEMA reforms represent a continuation of the government's gradual easing of capital account restrictions and its broader strategy to position India as a premier destination for long-term, patient capital from global investors.
