Schrödinger’s Paradox in India’s Capital Markets: Liberalization or Lock-In?

[Snigdha is a student at Gujarat National Law University.]

Capital markets in India can be regarded as the fastest growing investment destinations in the world with a strong domestic investor participation rate, high profile IPOs and steady influx of foreign capital. However, its regulatory environment has been called into question multiple times and as the guardian of the securities market, Securities and Exchange Board of India (SEBI) has as recent as of 12 September 2025, introduced significant reforms aimed at making IPOs more flexible and foreign investor entry smoother. This blog aims to take a look at the strategic shift in how India is trying to positions itself in the global market and facing competition head on vis-a-vis markets like Singapore. 

Addressing IPO and FPI Bottlenecks

In the historical context, India has often been criticized for being stringent and borderline inflexible when it comes to IPO norms and foreign investors. Regardless of investor interest or market conditions, large corporations have to dilute at least 5% of their IPOs. Additionally, they had three years to attain a 25% public stake, which frequently pressured promoters to sell off shares before their time. Also, India was less appealing to foreign portfolio investors (FPIs) than Southeast Asian economies since they had to deal with several levels of compliance and permissions. These revisions were both important and timely, as India sought to solidify its position as a capital market hub and there were approximately 15,000 cases outstanding before the National Company Law Tribunal as of March 2025.

Now, we come to what this reforms package is. Essentially, there are certain key changes which the reforms have brought about in light of the recent announcement, these include:

First, lowering the minimum IPO dilution, that is, for those companies whose post-listing market capitalization was above INR 5 trillion, the minimum offer size has been reduced from 5% to 2.5%. This enables big businesses to go public without significant dilution, particularly in the infrastructure and technology sectors. 

Second, the fact that earlier those firms with INR 1 lakh crore capital had to reach 25% public shareholding within 3 years of listing and now this gap has been extended to about 5 years and for bigger companies to up to 10 years. This relaxed timeline will allow promoters and corporate boards to gain flexibility to schedule follow-on sales or block offers at times that optimize value and minimize market disruption.

Third, SEBI has gone a step ahead to introduce single window clearance system for sovereign wealth funds and certain overseas retail investors. Basically it has simplified and streamlined the Foreign Investors entry to cut red tape bureaucracy. By drawing in long-term institutional capital (pension funds, insurers, and sovereign investors), easier and faster access for sovereign and large regulated foreign funds should increase the number of investors in Indian stocks and possibly stabilize capital flows. 

Lastly, SEBI has also decided to target the mechanics of IPO, specifically anchor investor rules and the disclosure/compliance burden by rationalizing anchor participation and adopting a scale-based approach to the same. More targeted disclosure thresholds and exemptions for low-value related-party transactions will reduce compliance cost for routine business.

Implications for Companies, Investors, and the Market

In terms of implications on the companies, it allows for better flexibility and longer runway to achieve public shareholding targets. So earlier firms above INR 5 trillion valuation were compelled to sell off a minimum of 5% of the IPO’s shares. Because promoters worried losing too much control or undervaluing shares under market pressure, this frequently deterred IT giants, digital-first businesses, and infrastructure conglomerates from going public. Companies can now “test the waters with a smaller float”, maintain strategic control for longer, and yet benefit from listing by lowering the required dilution to 2.5%. For businesses led by founders or those operating in industries with high growth rates like tech, renewable energy, infrastructure, this is especially alluring. Further, businesses had only three years to increase their share of the public float to 25%. This frequently compelled promoters to hurry into secondary offers or dump shares at unfavourable times, which could have lowered prices. Promoters are now able to stagger sales in accordance with business cycles and market sentiment by extending the timeframe to five years (and up to ten for mega-caps). In addition to preventing panic selling and promoting corporate planning, it also helps to maintain healthier valuations, which gives promoters peace of mind that they won’t lose too much power too soon. 

For investors, India is now a more accessible market due to the introduction of a single-window clearance system for pension funds, sovereign wealth funds, and some foreign retail investors. In the past, smaller or time-sensitive participants were turned off by the intricate FPI registration procedures. Now, easier access reduces resistance and attracts larger global financial pools. For Indian investors, this also translates into increased foreign involvement in secondary markets and IPOs, which tends to raise values and give assurance that international organisations view India as a growth hub. High-profile companies that were hesitant to list like that of fintech companies, tech unicorns, or major infrastructure firms are now more likely to do so with lenient dilution standards and flexible deadlines. 

Finally in terms of the market, what is happening is that it gets deeper as more businesses list and as more foreign capital enters. Over time, the longer dilution schedules guarantee greater public participation, even when some IPOs start with a modest float. Better price discovery, more effective capital allocation, and a more robust secondary market are all benefits of increased float. Because they usually take and trade in sizable positions, overseas investors with sizable capital pools also contribute to increased liquidity. This increasing reputation as a capital market hub can also encourage international funds to use Indian exchanges as core allocations in their portfolios rather than only as emerging-market plays.

Through a Comparative Lens: The Case of Singapore

Even though this is undoubtedly a forward looking reform, its actual worth becomes clearer when against the regulatory model of Singapore, which has long been regarded as one of Asia’s premier financial hubs. 

In the matter of IPO dilution, in contrast to reduction to 2.5% in India post listing market capitalization, Singapore does not specify any such limits. In fact, what it does is that the Singapore Exchange assesses IPO requirements on a case-by-case basis, giving issuers much greater discretion in how much equity they wish to part with. This flexibility is often seen as one of Singapore’s competitive advantages, making it easier for companies to tailor their capital-raising strategies to market conditions. Then, in case of public shareholding requirements, companies must ensure 25% public shareholding which showcases how India continues to adopt a more prescriptive model. Singapore, on the other hand, demands a much lower initial public float, often about 10-12%, and gives issuers the opportunity to grow it over time. The lesser requirement in Singapore relieves compliance strain on freshly listed businesses and allows them to manage investor engagement at their own pace. Further, when it comes to foreign investor entry, it is commendable that SEBI came up with single-window clearance for sovereign wealth funds and certain overseas retail investors but still, Singapore remains far ahead in this scenario. its regulators, particularly the Monetary Authority of Singapore, are internationally respected for being efficient, business-friendly, and corruption-free. They have super straightforward entry procedures and market infrastructure whereby investors can set up investment vehicles quickly, open accounts without excessive paperwork, and operate in an environment with stable taxation policies and extensive treaty networks. which make the process seamless.

Balancing Flexibility with Safeguards: Recommendations

The amendment of reduced IPO dilution allows for a very small public float which even though is attractive to promoters, would also mean that fewer shares are available for retail investors, leading to oversubscription, limited allotments, and weaker liquidity in the secondary market. Let’s say if a company like Reliance Jio does IPO under this framework, it could sell only 2.5% and still attract massive demand. Now to tackle this issue, SEBI could reserve like a minimum guarantee portion of X% for retails investors to allow for them to get a fair chance at allocation.

For extending the time limit meant to achieve 25% public shareholding, the promoters will enjoy the control and stability but it would also ensue that shareholders have less influence for a longer period of time, increasing governance concerns such as related-party transactions being completed without proper checks. This can be kept in check by pushing for stringent disclosures linked to float-status like detailed quarterly related-party reporting. Also, expanding veto powers of independent directors in allied matters and mandating meaningful lock-ins by promoters.

As previously stated, the single-window compliance is a welcomed step however, it loses its gravity to market like Singapore due to the heavier practical on-boarding friction that exists in India like tax documentation, custody setup, KYCs, etc. By building a portal that encapsulates SEBI, depository and tax requirements and lets “trusted” foreign entities to complete FPI registrations, custody setups, etc. in single digital workflow could potentially reduce the turnaround from weeks to days.

Conclusion

Bottom line is that SEBI’s announcement is indeed a pragmatic and necessary opening move to attract mega-listings and foreign capital but it does not arrive without its own share of real trade-offs like short-term retail disenfranchisement and liquidity constraints among others. The fact is that these trade-offs can be managed, not by reversing these reforms but by pairing them up with targeted proportional safeguards and by gaining knowledge from other markets like Singapore and bringing about digital onboarding and tax clarity among other measures. If SEBI and the Finance Ministry adopt these mitigations quickly, India can keep the upside of the reforms while limiting the downside risks to minority investors and market quality.