Artificial intelligence (AI) is not a bubble, at least not yet, and AI companies are not a bubble, GQuant Investech Founder
Shankar Sharma told Business Standard's A K Bhattacharya at the Business Standard BFSI Insight Summit 2026 in Mumbai on Wednesday. Edited excerpts:
As a veteran investor, how do you see AI and technology evolving in the coming days?
One of the things that I keep hearing is that AI is a bubble. My view is that it is not a bubble, at least not yet.
First of all, people say that AI companies are now free-cash-flow negative. Having negative free cash flow is not in itself a problem. It means they have investment opportunities that require them to raise more capital than their balance sheets are willing to provide. What is so intrinsically wrong with that? These companies were doing nothing but returning cash to their investors, and suddenly, they have an opportunity in AI.
However, it's going to be a volatile sector.
Are we heading towards a market bubble in India?
The bubble in India's secondary market has already deflated. We have seen negative returns of roughly 25 per cent in dollar terms and 15-18 per cent in rupee terms. In real terms, taking into account the average investor's hurdle rates, we are down at least 25-30 per cent, which means the bubble has shrunk.
However, there is always a bubble forming somewhere. Capital is not created or destroyed; it changes hands, shapes, forms and locations. So, as the secondary market has been squeezed, the bubble has shifted to the IPO market. We have seen several major companies go public, while even smaller companies have been queuing up. This means there is definitely a bubble in the primary market.
In investment banking, winning a mandate to take a company public boils down to two factors: distribution reach and the price at which you can sell the stock. Since distribution reach is more or less the same for most investment bankers, the deciding factor becomes the price they promise.
When people give up buying IPOs in size, it signals a mania. Manias and bubbles are two sides of the same coin. The IPO market is witnessing a mania, with companies at obnoxious valuations attracting massive subscriptions, while similar companies in the secondary market find little investor interest. This tells you there is madness in the market. The madness has shifted from the secondary to the primary market.
Why are valuations in India's secondary market so high?
India is a very interesting market, and anything that is even remotely high-quality is never cheap in India.
In India, the conventional wisdom we follow is that the price-to-earnings (P/E) ratio indicates the number of years a company is going to remain in business. So, quality is always overpriced. It is not just about stocks, but also real estate.
Similar apartments in Dubai can still be bought for one-third of Mumbai prices. This is because India is a financially repressed country. Capital flows towards areas where choices are limited.
How do you view foreign institutional investors (FII) outflows, and are domestic retail investors effectively helping foreign investors exit the Indian market?
I flagged this potential problem 1.5 years ago, when I wrote that we had created a generation of brainwashed investors. That, in itself, is not wrong, but it could lead to a macroeconomic crisis down the road. Now, about one and a half to two years later, we have raised $140 billion recently and have lost almost half of it in two and a half months.
Earlier, when foreign institutional investors (FIIs) and foreign portfolio investors (FPIs) came to India, we gave them easy access to buy stocks. Foreign capital should have easy access to equity markets, but exiting should not be equally comfortable. Earlier, domestic liquidity was not available on this scale, so an FPI wanting to sell its stocks and leave with dollars had to find another FPI to buy its shares.
What is the basic economic logic of a poor person becoming rich? The poor have to sell to the rich to become rich. The poor buying from the rich cannot become rich. This is a basic principle. But here, the wealth transfer is happening in the opposite direction, with the poor or relatively poor transferring their hard-earned savings to the rich. It should always have been the other way around.
We are raising liabilities, such as FCNR deposits, to fund exits instead of using them as a capital buffer. They are being used as a liquidity tool.
What changes in taxation could help attract more foreign investment into India?
I think foreigners should be allowed to invest in India with zero tax.
The US does not impose capital gains tax on foreign investors. As a foreign investor, I have to fill out the W-8 form, and that is enough for me to get a permanent exemption from capital gains tax. This is America, the world's largest capital market. It still incentivises foreigners to bring their dollars into America. Why is India saying no to this?
You want to come in? You're going to pay 12.5 per cent, and with the surcharge, it comes to around 16 per cent. Now, assuming the market delivers 10 per cent or 12 per cent returns in rupee terms, in line with nominal growth, you deduct 15-20 per cent in taxes, leaving you with around 9 per cent. Deduct another 3-4 per cent for rupee depreciation, and you're left with 4-5 per cent, which is what the US Treasury is yielding today. How do you expect foreigners to put in capital?
Apart from taxation, there is also an impression that India is a difficult place to do business. So, make the authorities aware that they should go soft on foreign capital. I think that, in itself, is a good enough message. The rest of the regulations will work around that overarching message.
 "AI is not a bubble yet, but volatility lies ahead, says Shankar Sharma")
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