Whalesbook
SEBI Clarifies Tax Liability for Offshore Funds
India's market regulator, SEBI, has clarified that banks and brokers will not be held responsible for the tax liabilities of offshore funds. This directive aims to ease foreign investment by removing a key concern that had emerged after tax authorities requested client data from custodians. The fear was that intermediaries could be liable for their foreign clients' taxes, which had started to slow down new fund applications and launches.
Massive FPI Outflows Hit Indian Equities
This regulatory step follows significant outflows from Indian equities. Foreign portfolio investors (FPIs) have sold roughly ₹2.18 lakh crore ($23 billion) in the first four months of 2026, the largest such outflows in 15 years. FPIs have been net sellers every month in 2026 except February. Key reasons include rising geopolitical tensions, particularly in West Asia, higher global oil prices, the U.S. Federal Reserve's interest rate policy making dollar assets more attractive, and a weaker Indian rupee. These global economic factors have increased investor caution, driving capital towards growth opportunities in markets like South Korea and Taiwan.
Past Tax Rulings Increase Investor Caution
Concerns about tax liabilities are amplified by past events. The Supreme Court's significant ruling in the Tiger Global case earlier in 2026 made foreign investors more wary about tax certainty in India. The court emphasized rules against tax avoidance and the importance of a transaction's commercial reality over its legal form. This reduced the certainty provided by Tax Residency Certificates (TRCs) and indicated that offshore structures without real business substance could face intense review and lose tax treaty benefits. This ruling increased foreign investors' awareness of potential aggressive tax enforcement, making SEBI's recent clarification vital for restoring confidence.
Indian Stocks Face Valuation and Competition Challenges
Even with SEBI's action, the current valuation of Indian stocks poses a challenge. India's main stock indices trade at a Price-to-Earnings (P/E) multiple of about 20.6, with the MSCI India Index at 24.41 in April 2026. This is higher than many European and other emerging markets (trading between 15-19) but still below U.S. tech stocks. However, compared to other emerging markets benefiting from the AI boom, India's higher P/E seems less justified without a similar growth story or stable economic conditions. Heavy foreign selling has also reduced India's share of global market capitalization to below 3%, with its stock indices falling nearly 13% year-to-date in 2026.
Deeper Risks Remain for Foreign Investors
Although SEBI's clarification addresses one issue, deeper risks remain for foreign investors. India's dependence on oil imports makes it vulnerable to geopolitical events that could raise energy prices, impacting inflation and company profits. Also, recent foreign exchange rules by the Reserve Bank of India to stabilize the rupee have raised hedging costs for foreign bond investors, making Indian debt less attractive and currency risk management more complex. The history of strict tax enforcement, highlighted by the Tiger Global ruling, leaves foreign investors skeptical about tax certainty, despite the recent clarification. They now seek a long period of stable policies and predictable results to overcome past disputes. India's current valuation premium over other emerging markets needs strong, consistent earnings growth, which is threatened by global economic factors and domestic costs. Markets focused on the AI revolution offer clearer growth prospects currently attracting global capital.
Outlook: Clarity Helps, But Global Risks Linger
Experts believe SEBI's clarification is a positive move that could help pending applications and ease immediate worries, potentially aiding fund closings. However, most market participants agree that regulatory clarity alone won't stop the ongoing FPI selling. Global economic and geopolitical uncertainties, along with the appeal of AI-focused growth in other countries, are likely to dampen foreign investor sentiment for now. A strong return of FPI flows will probably depend on stabilizing global risks, lower commodity prices, and a clearer domestic growth path that justifies India's current valuation premium without tax concerns. While domestic inflows, especially through Systematic Investment Plans (SIPs), have helped cushion the market from foreign selling and prevent sharp corrections, they cannot fully replace international capital.