Govt, Sebi Meet Foreign Investors To Boost FPI Inflows; Funds Seek LTCG Tax Relief, Easier Rule: Report

The Indian government and the Securities and Exchange Board of India (Sebi) have started discussions with foreign portfolio investors (FPIs) as part of efforts to attract overseas capital back into domestic markets.

According to a report by Moneycontrol, officials from multiple ministries, along with market regulators, have been meeting select large FPIs, custodian banks and consultants to understand concerns related to taxation, compliance requirements and regulatory processes.

The discussions come at a time when Indian equities have faced pressure due to aggressive selling by foreign investors. While FPIs purchased shares worth around ₹30,000 crore over the past two months, total foreign outflows from Indian markets in 2026 have remained high at nearly ₹2.4 lakh crore, according to depository data.

The meetings are being attended by representatives of major global investment firms, with a large US-based asset manager leading the industry delegation. The government is seeking suggestions on simplifying regulations and improving the investment environment for foreign funds.

FPIs Seek Tax Reforms, Lower Trading Costs

One of the major concerns raised by foreign investors during the discussions is taxation. FPIs have reportedly requested the government to remove the Long-Term Capital Gains (LTCG) tax on listed securities and reduce Securities Transaction Tax (STT) rates, particularly for derivatives trading.

Listed securities were exempt from LTCG tax until 2017, after which the government reintroduced the tax. The rate was later increased to 12.5% in the July 2024 Union Budget.

The government also increased STT rates on futures and options (F&O) transactions in the FY27 Budget. The tax on futures contracts was raised by 150%, increasing from 0.02% to 0.05%.

Foreign investors have pointed to recent policy changes in the debt market, where tax exemptions for foreign investors on profits from debt securities helped attract fresh investments. According to officials, FPIs believe similar measures in the equity market could encourage greater inflows.

Investors Seek Clarity On Tax Rules And KYC Norms

Some foreign funds with private equity operations have also sought clarity on the impact of the Supreme Court’s ruling in the Tiger Global tax case.

The January 2026 verdict stated that certain Mauritius-based foreign funds could be liable to pay Indian taxes on profits from investments made before 2017 if the entities were using Mauritius primarily for tax benefits.

Although the Central Board of Direct Taxes (CBDT) issued a clarification stating that anti-avoidance rules would not apply to pre-2017 investments by Mauritius-based investors, FPIs are seeking a more explicit government directive regarding protection of legacy investments.

Investors have argued that when the India-Mauritius tax treaty was revised in 2017, assurances were provided regarding grandfathering of older investments. They are seeking greater certainty over whether these investments will continue receiving tax protection.

Apart from taxation concerns, FPIs have requested Sebi to simplify Know Your Customer (KYC) procedures by allowing digital documentation during fund registration. They have also sought faster processing of tax refunds.

Experts believe reducing tax complexities and improving regulatory clarity could help India attract more patient foreign capital from sovereign wealth funds, pension funds and global investment institutions.

Nehal Sampat, Partner at Price Waterhouse & Co LLP, said reviewing the tax structure, restoring LTCG exemptions and reducing STT rates could encourage greater participation from liquidity providers, hedge funds and high-frequency trading firms.

The government’s ongoing engagement with FPIs signals an attempt to strengthen India’s position as an attractive destination for global investors amid increasing competition for international capital.