Summary: SEBI has recently approved various rule changes for intermediaries such as stock-brokers, REITs/ InvITs, IAs, RAs, FPIs, and angel funds, with a view to ease entry norms and compliance obligations, provide flexibility and to attract more retail and foreign investments. This paper summarises the key changes and their implications for intermediaries.

Background:

The Securities and Exchange Board of India (“SEBI”), in its Board Meeting held on September 12, 2025, and in other recent papers and circulars, proposed significant market reforms for intermediaries, including Mutual Funds, Stock-Brokers, REITs/ InvITs, Investment Advisers, Research Analysts, Foreign Portfolio Investors (“FPI”), and Angel Funds, with a view to attract foreign investment, ease regulatory compliance and encourage retail participation.

Following is a summary of the said changes and their implications for intermediaries:

Mutual Funds (“MFs”):

With a view to enhance investor protection and promote financial inclusion, SEBI has approved:

• the reduction of the maximum permissible exit load from 5 per cent to 3 per cent;

• the revision of the incentive structure for distributors for new inflows to MF industry from B-30 cities (beyond top 30 cities), by limiting such incentives to only investment / inflows from new individual investors in such cities;

• the introduction of the incentive structure for distributors for on-boarding new women investors, which would be along the same lines as the B-30 incentives detailed in #1(b); and

• the re-classification of Real Estate Investment Trusts (“REITs”) as “equity” and retaining the “hybrid” classification for Infrastructure Investment Trusts (“InvITs”) for the purpose of the MF regulations, to enable greater investment / allocation by MFs into REITs and InvITs.

Market Implications:

• Incentivising distributors for new inflows from B-30 cities will likely result in increased investment from B-30 cities, which stood at only 18 per cent of the total assets under management (“AUM”) of the MF industry as of June 2025.

• Re-classifying investments in REITs will promote net inflows into REITs by MFs, given the ability to allocate a higher percentage of AUM.

Stock Brokers:

In its Consultation Paper of August 13, 2025, SEBI has proposed to:

• define “algorithmic trading” to mean any order generated / placed using automated execution logic;

• define “execution only platform” to mean any digital or online platform that facilitates transactions such as subscription, redemption, and switch transactions in direct plans of schemes of MFs;

• include the requirement to inform SEBI through stock-exchanges of any material change in the information already submitted at the time of registration;

• include the requirement to redress investor grievances promptly no later than 21 days; and

• allow all stock brokers to operate in GIFT-International Financial Services Centres (“IFSC”) as a separate business unit (“SBU”) (instead of having to incorporate a subsidiary in GIFT-IFSC), currently limited to banks and primary dealers.

Market Implications:

• Defining “algorithmic trading” will legitimise and regulate algo / high-frequency trading, potentially accelerating its adoption.

• Enabling stock brokers to operate in GIFT-IFSC as an SBU, will make it easier for stock brokers to set-up vehicles in GIFT-IFSC and drive market participation.

Expansion of scope of “Strategic Investor” in REIT and InvIT Regime:

The current definition of “strategic investor” under the REIT and InvIT regulations covers: (i) non-banking financial company (“NBFC”) – infrastructure finance company; (ii) banks; (ii) multilateral development institutions; (iii) systemically important NBFCs; (iv) FPIs; (v) insurance companies; and (vi) MFs; which invest, either jointly or severally, not less than 5 per cent of the total offer size of the REIT / InvIT.

The concept of strategic investors was introduced in the regulations to enable the InvIT / REIT to have strategic investors in the issue, prior to making an offer of units, to instil confidence in other set of investors.

SEBI has proposed to:

• include the Alternative Investment Funds (“AIFs”), Venture Capital Funds (“VC”), Provident Funds, Pension Funds, National Investment Funds, Insurance Funds set-up by the armed forces and Insurance Funds set-up by the Department of Posts, in the definition of “strategic investor”; and

• amend the definition of “strategic investor”, since the Reserve Bank of India’s (“RBI”) overhaul of the NBFC regime, to include “a middle layer, upper layer, and top layer NBFC registered with RBI”.

Market Implications: Expanding scope of “strategic investor” will increase AUM of REITs and InvITs, with inflows from VCs, AIFs, and Pension Funds.

Investment Advisers (“IAs”) and Research Analysts (“RAs”):

SEBI has approved:

• permission for IAs and RAs to provide details of past performance to clients (in a template to be decided in consultation with the industry standard forum);

• permission for IAs to provide second opinion to clients on the pre-distributed assets subject to fee for such advice being limited to 2.5 per cent of the asset value per annum;

• the relaxation of the education criteria for IAs and Ras, ensuring a graduate in any stream is now eligible for IA / RA registration; and

• the relaxation of the requirement to furnish CIBIL report, net worth / asset liability statement, infrastructure details, and proof of address while seeking registration.

Market Implications: The reforms once implemented, will enable more individuals from diverse educational backgrounds to become IAs / RAs, and will provide existing IAs/ RAs a legitimised roadmap to advertise and solicit clients basis their past performance.

Foreign Portfolio Investors (FPIs):

SEBI has approved:

• retail schemes based in IFSCs permitted to register as FPIs and the alignment of contribution limits to increase resident Indian participation in FPIs;

• the launch of a new website, “India Market Access” (here), developed as a dedicated platform for current and prospective FPIs to serve as a 360-degree digital gateway to facilitate seamless entry and ongoing compliance for foreign investors in India’s securities markets;

• the introduction of “Single Window Automatic & Generalised Access for Trusted Foreign Investors” (SWAGAT-FI) portal to facilitate easier investment access for objectively identified and verifiably low-risk foreign investors (including government, government-related and appropriately regulated public retail funds); including a unified registration process across multiple investment routes for these entities and the minimisation of repeated compliance requirements and documentation for such investors; and

• the relaxation of various compliance requirements for foreign investors exclusively investing in government bonds under the FPI route via Notification dated August 12, 2025, and Circular dated September 10, 2025, including eliminating disclosure of investor group details due to low risk, all of which shall be effective from February 8, 2026. (Further analysis in this regard is available on our blogpost here.)

Market Implications: These reforms are likely to attract greater FPI participation in the Indian markets, especially in government securities, with low-risk FPIs poised to enjoy reduced compliance obligations and documentation requirements.

Angel Funds:

Through Circular dated September 10, 2025, SEBI has:

• raised the investment limit per start-up from INR 100 million to INR 250 million;

• scrapped the 200-investor cap per scheme, allowing more flexible pooling;

• allowed follow-on investments in companies that have ceased to qualify as “start-ups”, provided conditions like pro-rata rights are met;

• eliminated the requirement to file term sheets with SEBI before investment;

• restricted investment in angel funds only to accredited investors; and

• reduced the lock-in requirement to six months (from one year) in case of sale to third party.

Market Implications: The changes will provide greater flexibility to investors and managers of angel funds and enable larger seed rounds. SEBI has, however, balanced the risk involved by limiting the participation in such funds to only accredited investors.

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