The Securities and Exchange Board of India (SEBI) will allow domestic stock bourses to list subject to certain conditions, including limits on ownership so that 51 percent of each exchange is held by the public.
The long-awaited move from SEBI provides a blueprint for potential listings by the country's two biggest stock market operators, the National Stock Exchange and the Bombay Stock Exchange.
Indian stock exchanges have attracted strong interest from foreign investors with NSE partly owned by Singapore's Temasek, while Deutsche Boerse, Singapore Exchange and U.S. billionaire George Soros holding small stakes in BSE.
Any listing by Indian stock exchanges, however, would have to wait for a minimum of three years from the time of SEBI's final approval and would have to meet a list of criteria spelled out by the regulator in a statement on its website.
Among these, stock market operators would not be allowed to list on their own stock exchanges, while they would need a minimum net worth of 1 billion rupees.
Clearing corporations for the exchanges would need minimal capital of 3 billion rupees, while depository bodies would need a minimum of 1 billion rupees, the SEBI said in a statement after a board meeting.
No single investor would be allowed to hold more than 5 percent in the exchange, a rule currently in place for the private stakeholders in India's stock exchanges, which has limited foreign investors to bit sized investments.
However, the stock exchange and certain financial institutions including insurance and banking companies would be allowed to hold up to 15 percent, the regulator said, while 51 percent of the entire exchange would have to be held by the public.
The market capitalisation of companies listed on the BSE, the oldest exchange in Asia, and the NSE totals more than $1 trillion each.