India Relaxes Asset Management Rules: Portfolio Management Industry Approved for Overseas Investment and Short Selling Stocks for the First Time

The Indian securities market is undergoing major reforms.

On Thursday, India’s market regulator announced that the $463 billion portfolio management services (PMS) industry will, for the first time, be allowed to invest in overseas securities and engage in short selling in equity options, marking a comprehensive expansion of investment powers in the sector.

Following a board meeting, the Securities and Exchange Board of India (SEBI) stated in a press release that portfolio management entities will be permitted to invest in unlisted debt securities and can allocate up to 1.25 times of client assets in exchange-traded derivatives.

The regulator also stated that PMS entities may hold unhedged short positions within prescribed limits, though the exact ceiling has yet to be announced.

This reform opens up new channels for India’s wealthy to access global markets, which is significant for overseas assets that have recently attracted heightened investor attention, driven by AI-related developments.

At the same time, this move also clears the way for foreign portfolio investors (FPI) to participate in non-cash settled, non-agricultural commodity derivatives markets, a step expected to further boost trading activity in these segments.

SEBI has also approved a new type of PMS product tailored for mutual funds, with a minimum investment threshold of 2.5 million rupees—half of the standard PMS product threshold of 5 million rupees—which is likely to attract a broader base of investors.

In the commodities space, SEBI will allow foreign portfolio investors to take part in non-cash settled, non-agricultural commodity derivative trading, seen as one of the most significant reforms to date in this segment.

The regulator stated that FPIs must close out their positions before any physical delivery obligations arise. This move is expected to inject more institutional capital into the commodity derivatives market, where retail participation has significantly increased recently, thereby deepening market liquidity.

The reforms target an industry that has expanded rapidly in recent years.

According to SEBI data, as of August this year, PMS entities in India managed around 44.4 trillion rupees (about $463 billion) in assets, a notable rise from 40 trillion rupees a year earlier—and more than double the size seen in 2020.

As India’s wealthy class continues to seek specialized, customized investment products, growth in this sector is expected to persist in the near term.

This round of rule changes originated from a SEBI consultation paper released in July and its formal adoption now marks a systemic upgrade in the sector’s policy framework.

Under SEBI’s new arrangements, overseas equity and debt investments made by PMS entities will proceed under the Liberalized Remittance Scheme—which allows Indian residents to remit up to $250,000 per fiscal year overseas.

Currently, Indian individual investors already have access to overseas investments through this channel, and the mutual fund industry previously held a $7 billion overseas investment quota, which was used up several years ago.

It’s notable that this opening for overseas investment comes at a delicate time—recent outflows of foreign capital have pressured the Indian rupee, weakening its exchange rate against the US dollar. Large-scale capital outflows could intensify this trend, potentially putting further pressure on the rupee’s value—a risk that the market should watch closely.