India’s Capital Market Revolution: Seven Reforms Reshaping Investment Dynamics

The Indian capital markets are going through remarkable changes. As we look at the landscape in 2025, several key reforms are transforming how investors, companies, and institutions interact with markets. These changes are not just technical adjustments but fundamental shifts that are positioning India as a global financial powerhouse.

I’ve always believed that understanding market reforms requires looking beyond headlines to see their practical impact on different stakeholders. Let’s explore seven critical capital market reforms that are boosting India’s investment landscape in unique ways.

The first major shift comes with India’s move to a T+1 settlement cycle. This change has significantly improved market liquidity by reducing the time between trading and settlement to just one day. For retail investors, this means faster access to funds and securities, while for institutions, it translates to more efficient capital deployment. The reduction in settlement time has decreased systemic risk by limiting the exposure period between transaction parties.

What makes this particularly impressive is how smoothly India implemented this transition compared to other major markets that are still considering similar moves. The question worth asking is: How has this faster settlement cycle changed your investment strategy?

“Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.” - George Soros

The second reform focuses on account segregation norms. These new regulations create clear separation between broker assets and client securities, essentially eliminating the possibility of misuse of investor holdings. This protection is particularly valuable for retail investors who previously had limited visibility into how their assets were being handled.

This reform addresses a critical trust gap in the market. Many investors have historically been cautious about market participation due to concerns about broker insolvency or misconduct. The new framework creates multiple safeguards and verification mechanisms for how securities move between accounts.

Consider this: When you transfer money to your broker, do you know exactly how your assets are protected until they’re invested?

The third significant change involves Alternative Investment Fund (AIF) regulations. India has made substantial progress in creating a more flexible framework for startup financing through AIFs. These vehicles now have clearer operational guidelines, tax transparency, and expanded investment categories that allow for more sophisticated funding strategies.

The Indian market has seen remarkable growth in AIF assets under management, with specialized funds targeting sectors from deep tech to sustainable infrastructure. This has created new capital sources for early-stage companies that previously relied heavily on foreign venture capital or limited domestic options.

“The best investment opportunities come not from following the crowd but from recognizing where capital is scarce and needed most.” - Howard Marks

The fourth area of reform centers on developing India’s corporate bond market. Despite being a $4.27 trillion economy in 2025, India’s corporate bond market has historically been underdeveloped compared to equity markets[5]. Recent initiatives have focused on creating more standardized issuance procedures, improving rating frameworks, and establishing more efficient trading platforms.

These changes are particularly important for infrastructure financing, where long-term debt instruments are essential. The reforms have reduced the cost of capital for many corporations while giving investors access to a wider range of fixed-income products with different risk-return profiles.

Have you considered how a more developed corporate bond market might change your asset allocation strategy?

The fifth reform addresses foreign portfolio investment limits. India has carefully balanced opening its markets to global capital while maintaining appropriate safeguards. Recent changes have streamlined registration procedures, expanded sectoral limits, and created special investment routes for long-term foreign investors.

These adjustments have attracted significant international capital to Indian markets. By April 2025, India’s equity markets had crossed the $5 trillion market capitalization milestone, reflecting both domestic economic growth and increased foreign investor confidence[5].

“Capital will always flow toward opportunity, and there is an abundance of that in India.” - Warren Buffett

The sixth area focuses on market-making mechanisms for illiquid securities. New frameworks encourage designated market makers to provide continuous buy and sell quotes for less actively traded stocks. This has substantially improved price discovery and trading volumes for mid-sized and smaller companies.

This reform directly addresses the liquidity premium that smaller companies typically face. By ensuring reliable trading mechanisms, these businesses can attract a broader investor base and potentially lower their cost of equity capital. For investors, it means being able to enter and exit positions in smaller companies with greater confidence about fair pricing.

The seventh significant reform involves modifications to the block deal window for institutional investors. The revised system provides more flexibility in timing and pricing parameters while maintaining appropriate transparency. This has made it easier for large institutions to execute significant position changes without causing excessive market impact.

When large positions change hands, they can create price distortions that affect all market participants. The refined block deal mechanism creates a more efficient process for these transactions while still providing appropriate market information.

What’s truly fascinating about these reforms is how they work together as an integrated system rather than isolated changes. For example, the T+1 settlement cycle increases market efficiency, which supports more active market-making for illiquid securities. Similarly, improved account segregation norms build investor confidence, which attracts more foreign capital under the revised investment limits.

“The true measure of a market’s sophistication isn’t its size but how well it allocates capital to its most productive uses.” - Raghuram Rajan

These reforms are happening against a backdrop of significant economic growth. Deloitte has revised India’s annual GDP growth projection to between 6.5% and 6.8% in this fiscal year, and between 6.7% and 7.3% in the following one[2]. This economic expansion provides a strong foundation for capital market development.

The changes are also aligned with India’s broader ambition to become a global financial hub. Last year, India became the world’s leading market for IPOs, the largest equity derivatives market by volume, and the second largest in terms of equity capital market activity and fund raising[5].

What makes these developments particularly remarkable is their timing. What the Securities and Exchange Board of India (SEBI) considered “opportune” in 2018 has become even more relevant today[5]. The market infrastructure and regulatory framework have evolved to support India’s position as the world’s fifth largest economy, with ambitions to become the third largest by the end of this decade[5].

I believe these reforms represent more than technical adjustments—they signal India’s commitment to creating world-class capital markets that serve both domestic and international investors. The changes reflect a thoughtful balance between market liberalization and appropriate investor protection.

Have you noticed how these reforms are changing the behavior of different market participants?

For retail investors, the combined effect of these reforms means greater protection, more investment options, and improved liquidity. For companies, particularly mid-sized enterprises, the changes offer better access to capital and potentially lower financing costs. For institutional investors, both domestic and foreign, the reforms create a more efficient operating environment with reduced friction costs.

The long-term implications extend beyond the financial markets themselves. More efficient capital allocation supports economic growth by directing resources to their most productive uses. Better-functioning markets also tend to improve corporate governance as companies respond to investor expectations for transparency and accountability.

“Financial markets don’t just reflect economic reality; they help create it through the signals they send about value and risk.” - Michael Lewis

The path forward isn’t without challenges. Maintaining regulatory consistency while continuing to innovate requires careful balancing. Technology integration, particularly for market surveillance and compliance monitoring, remains an ongoing process. And as markets become more sophisticated, ensuring appropriate investor education becomes increasingly important.

Yet the trajectory is clear: India’s capital markets are becoming more mature, more efficient, and more globally integrated. The seven reforms we’ve explored represent critical steps in this evolution, creating a stronger foundation for investment and economic growth.

What’s your perspective on these changes? Are you experiencing their effects in your investment activities? The transformation of India’s capital markets is not just a story of regulatory changes but of creating new opportunities for companies to raise capital, for individuals to build wealth, and for the economy to access the resources it needs for continued growth.

As we look toward the future, these reforms position India to play an increasingly significant role in global financial markets, matching its growing economic importance. For investors, businesses, and policymakers alike, understanding these changes is essential for navigating the evolving landscape of India’s capital markets.