In recent times, Distributed Power Flow Controller is an important device within the family of FACTS Devices. This paper investigates Multi Level Inverter (MLI) based Distributed Power Flow Controller (DPFC) system for voltage sag mitigation and harmonic reduction. The DPFC employs a Shunt based Static Compensator (STATCOM) and multiple series converters to improve the power quality. DPFC was placed at the correct location in the power transmission system to gain advantages like improved voltage profile and reduced power loss. Circuit models are developed for Eight bus system with and without DPFC. The MATLAB/SIMULINK results obtained shows an improved performance in voltage sag mitigation, voltage quality of load busses, power quality improvement, comparison of the bus voltages with and without DPFC and reduction in load voltage harmonics. The results indicate that MLI based DPFC has improved in power quality and reduction in total harmonic reduction.