Whalesbook
Foreign portfolio investors (FPIs) are facing a major obstacle in bringing new capital into Indian markets due to prolonged delays in obtaining Permanent Account Numbers (PANs). This operational gridlock, caused by recent changes to the integrated application system, highlights issues with India's digital market access and comes at a difficult time when foreign capital is already pulling back.
PAN Application Delays Freeze New Accounts
Foreign portfolio investors are currently experiencing significant delays, often stretching to nearly a month, in obtaining PANs – a crucial requirement for market participation. The halt stems from recent updates to the Common Application Form (CAF) process, a system intended to simplify FPI registration, PAN applications, and account openings. New PAN application forms and system validations, implemented by the Income Tax Department from April 1, have reportedly led to errors in data validation and mismatches. This administrative failure means at least 20 newly registered FPIs cannot open trading or demat accounts, freezing their investment plans. Further delays are caused by a disagreement between the Securities and Exchange Board of India (SEBI) and the Central Board of Direct Taxes (CBDT) over appointing 'authorised representatives.' Many professionals are hesitant to take on this role due to personal tax risks, prompting SEBI to suggest using 'authorised signatories' instead. This administrative mess comes as FPIs have already withdrawn approximately ₹2 lakh crore from Indian equities year-to-date, a trend driven by ongoing global economic uncertainty, inflation fears, and geopolitical risks. The total outflow this year has now surpassed the ₹1.66 lakh crore withdrawn during all of 2025.
Digital Systems Struggle with New Rules
This PAN application bottleneck reveals a gap between India's goal of integrating digital systems in its financial markets and how these complex systems work in practice. SEBI has been working to speed up digital transformation, aiming to cut FPI registration times to as little as five days from the current average of 30 days. Initiatives like the SWAGAT-FI system, designed for trusted foreign investors, are scheduled to launch by May 30. However, the current situation shows that even basic identification processes can face significant delays when new systems are introduced. The reliance on updated system validations and the struggle to align tax rules with operational needs suggest that the readiness of technology and procedures for easier market access may be lagging behind policy goals.
Administrative Issues Fuel Capital Flight Fears
The current administrative deadlock in FPI onboarding worsens the negative sentiment around Indian equities. With foreign investors already net sellers for most of this year, and their equity stake falling to a nearly 14-year low, any added friction can increase capital outflows. Competing markets like South Korea and Taiwan are attracting significant FPI flows, reportedly due to booming sectors like artificial intelligence. The administrative delays, alongside the unresolved dispute over the 'authorised representative' role, introduce a specific risk. This uncertainty about representative liability could deter sophisticated FPIs who value clarity and operational efficiency. Past experiences where administrative hurdles impacted market sentiment offer a warning: this current gridlock could prolong or deepen the ongoing outflow trend if not resolved quickly.
Regulators Working to Resolve PAN Issues
SEBI is working with the CBDT and other parties to speed up the resolution of the PAN issuance and 'authorised representative' issues. The proposed move to allow 'authorised signatories' could ease some immediate concerns about the representative role. The regulator's stated aims of digitalizing workflows and consolidating requirements are meant to improve the onboarding experience, but the current administrative breakdown shows the difficulty in coordinating government bodies and updating digital systems. Market participants are waiting for clear updates on SEBI's discussions with the CBDT, as a quick resolution is essential to restore confidence and encourage foreign investment.