Those were the days. On September 26, 2024, the Sensex closed at an all-time high of 85,836.12 points. Multibaggers were everywhere, compounders were fashionable, and valuations were an inconvenience best left to old-fashioned investors. Two years later, benchmark indices are down about 13 per cent, with individual stocks suffering far greater damage, including corrections of 50-60 per cent. 

Six out of 10 BSE 500 stocks have delivered no positive returns since September 2024, while nearly 7 out of 10 have failed to beat bank fixed deposits. Evidently, the much-celebrated power of compounding has been taking a rather extended holiday. But a new explanation for this disappointment is gaining currency. The problem, apparently, is taxation. 

Ahead of the Union Budget consultation process, sections of the market intensified demands for relief from Securities Transaction Tax (STT) and Long-Term Capital Gains (LTCG) tax. The clamour peaked on October 13 when Finance Minister Nirmala Sitharaman expressed her willingness to hear the debate, even though she didn’t promise any change. Markets nevertheless found reason to celebrate, gaining 3.5 per cent in the next few sessions.  Even an invitation to debate taxation is apparently worth a rally. 

Forgotten wisdom 

Benjamin Graham, the father of value investing, warned nearly a century ago against believing that good stocks remained sound investments regardless of price, calling it a rationalisation of speculative excess. 

Had Graham visited Dalal Street in September 2024, he would have found material for another ‘Security Analysis’. The Nifty 50 traded at about 24 times earnings (NSE), while its constituents averaged a staggering 44 times, as per Capitaline.  

Consider the stock-specific valuations investors enthusiastically accepted. Trent commanded around 221 times earnings, Tata Consumer Products 90 times, Nestlé India 82 times, Britannia 68 times and Asian Paints 62 times, according to Capitaline. What extraordinary wealth have these extraordinary valuations created since? Trent is down 43 per cent, Britannia 24 per cent, Asian Paints 29 per cent, Tata Consumer 19 per cent and Nestle India 8 per cent. The businesses did not suddenly become worthless. Investors had paid prices leaving little room for slower growth. 

The celebrated IT industry offered another example. IT giants TCS, Infosys and Wipro traded at 25-33 times earnings, growth valuations difficult to reconcile with their maturity and emerging AI disruption. Their sharply negative 32-43 per cent returns underline the danger of assigning growth multiples to mature businesses. Excessive valuations can also reduce pressure on managements to innovate. When investors reward the status quo with premium multiples, dividends and buybacks become easier responses than difficult investments in innovation.  

Expensive everywhere 

The problem extended beyond large-caps. In September 2024, the Nifty 500 traded at 28 times earnings, Nifty Smallcap 250 at 32 times and Nifty Midcap 150 at an extraordinary 45 times. Two years later, the latter two indices are down 4 and 3 per cent, respectively. 

The relationship between starting valuations and subsequent returns is revealing. The set of stocks trading above 28 times earnings in September 2024 have delivered an average return of just 3 per cent in the ensuing period. Those below that threshold have gained 13 per cent on average. 

The biggest casualties include PB Fintech, Sobha, Inox Wind, Adani Green, Kaynes, Jubilant FoodWorks, Voltas, D-Mart, Thermax, Whirlpool India, Havells, Varun Beverages and Godrej Properties. Their P/Es ranged from 80 to 741 times in September 2024, preceding declines of 31-72 per cent. 

Of course, valuations alone cannot explain every subsequent decline. Earnings disappointments, business conditions and shifting investor expectations also matter. But paying extravagant prices leaves precious little room for any of these to go wrong.  

Convenient scapegoat 

Until recently, India was apparently losing out because it lacked a compelling artificial intelligence (AI) story. Now, taxation has emerged as the explanation for foreign selling. Between September 26, 2024 and October 15, 2026, FIIs sold a net ₹5.7 lakh crore ($63 billion) across 496 sessions, averaging ₹1,150 crore daily. Mind you this coincided with shifting US yields, a firmer dollar and global rotation trades. 

But were these foreign investors always so allergic to Indian taxes? FIIs invested ₹1.77 lakh crore in equities in calendar 2023 and ₹2.08 lakh crore in FY24, when global interest rates were still cheap and liquidity in flow. Even after the LTCG rate rose from 10 to 12.5 per cent in July 2024, they invested another ₹61,471 crore in equities during August and September. Apparently, the same taxes that were perfectly tolerable during a bull market became unbearable when valuations stopped making sense.  

India’s 12.5 per cent headline LTCG rate on qualifying listed equities is also hardly extraordinary internationally. In the US, combined federal, state and local capital gains taxation can exceed 35 per cent for wealthy investors in high-tax jurisdictions. 

Even as foreign capital went elsewhere, relentless domestic SIP inflows have somewhat absorbed the deluge, effectively funding the exit of offshore funds at elevated multiples while retail investors have indirectly funded the ‘Atmanirbhar market’ dream. 

None of this means equity taxes are irrelevant. STT raises transaction costs and LTCG tax reduces returns. But the 2019 corporate tax cuts, intended partly to encourage investment, did not immediately unleash the much-awaited private capex boom. Yes, tax concessions can improve profitability and investment incentives, but they cannot create demand or attractive business opportunities. So, there is little reason to assume that reducing stock market taxes will somehow produce better corporate earnings or justify excessive valuations. 

Published on October 17, 2026