MUMBAI: Indian shares fell 1.8 percent to their lowest close in nearly two months, as uncertainty over short-term capital gain taxes for some derivative products sold to foreign investors sparked fears over widespread selling.
Brokers warned on Monday certain provisions in the 2012/13 federal budget announced earlier this month raised the prospect the government could tax so-called participatory notes, or P-Notes, under a provision of the General Anti-Avoidance Rule (GAAR) intended to crack down on tax evasion.
P-Notes are derivative products that allow foreign investors to invest into Indian equities via countries such asMauritiusthat have tax treaties withIndia.
Financial shares such as ICICI Bank were among the hardest hit, as higher crude prices have reduced hopes of a possible rate cut next month, while investors also await government's borrowing plan for April-September due this week.
"Today's crack in the market was due to GAAR. There was a anxiety factor in the market, which led to selling," Ambareesh Baliga, COO of brokerage Way2Wealth.
The main 30-share BSE index dropped 1.8 percent to 17,052.78 points, its lowest close since Jan. 30.
The SENSEX has now dropped 3.9 percent so far in March, though that is in line with the fall in the MSCI Asia-Pacific index excludingJapan.
The 50-share Nifty index lost 1.8 percent to 5,184.25 points, a lso its lowest close since Jan. 30.
Despite the recent falls, analysts said indexes remain supported by the 200-day moving average, which was at 1,560 points for the Nifty.
Financial shares were among the top decliners as the tax uncertainty led to concerns of foreign selling, while traders also discussed the prospect of delays in domestic interest rate cuts as production disruptions from countries such asIrankeep oil prices elevated.
The government is also expected to announce this week the composition of its borrowing for fiscal 2012/13, after earlier this month announcing a higher-than-expected plan to borrow 5.7 trillion rupees, which had sparked fears the central bank would have to keep policy on hold.
"The sector is down as growth, margin improvement issues persist, and as the government has put the borrowing figure higher that market expectations," said Manish Ostwal, a banking analyst at brokerage KR Chokesy.
Among financial firms, ICICI Bank fell 4.2 percent, while State Bank ofIndialost 2.3 percent.
Also among decliners, real-estate companies with sizeable exposure to Mumbai fell after newspaper Times of India reported the state government of Maharashtra was planning to increase stamp duties in the city by as much as 160 times for residential and commercial properties.
Housing Development and Infrastructure Ltd fell 6.9 percent, while DB Realty dropped 8.3 percent.
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