Fear of tax on derivative products pulls market down

The Sensex falls 1.8% to 17,052.78 points, while the Nifty loses 1.8% to 5,184.25 points

Shares fell 1.8 per cent 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.

The main 30-share Bombay Stock Exchange bechmark Sensex dropped 1.8 per cent to 17,052.78 points, its lowest close since January 30.

The Sensex has now dropped 3.9 per cent so far in March, though that is in line with the fall in the MSCI Asia-Pacific index excluding Japan. The 50-share National Stock Exchange index Nifty index lost 1.8 per cent to 5,184.25 points, also its lowest close since January 30.

Brokers warned today of certain provisions in the 2012/13 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 allowing foreign investors to invest into Indian equities via countries like Mauritius, which have tax treaties with India.

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.

Despite the recent falls, analysts said indexes remain supported by the 200-day moving average, which was at 5,160 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 as Iran keep 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 Rs 5.7 trillion, 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 Choksey.

Among financial firms, ICICI Bank fell 4.2 per cent, while the State Bank of India lost 2.3 per cent. Also among decliners, real-estate companies with sizeable exposure to Mumbai fell after a newspaper reported the 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 per cent, while DB Realty dropped 8.3 per cent.