MUMBAI The BSE Sensex posted on Friday its biggest daily fall since late February, on a session marked by nerves about foreign selling after India said it plans to review its tax break treaty with Mauritius and as the rupee continued to weaken.
India is considering a review of its double taxation treaty with Mauritius, Minister of State for Finance S.S. Palanimanickam said on Friday, spooking investors given a majority of foreign portfolio inflows are believed to be routed through the East African country.
The potential end of the treaty would open up the prospect of capital tax gains for those foreign investors who have a legal presence in Mauritius.
The news comes as the finance ministry gets ready to submit a bill containing controversial provisions on taxation for foreign investors next week, under the so-called GAAR rules. The government has promised critical concessions, but investors have yet to be comforted.
The worries over foreign outflows are also being reflected by a rupee that continues to plumb four-month lows, given the deep concerns about India's economic and fiscal challenges.
"GAAR is a serious concern for foreign investors. If India changes the terms of tax treaty, then it will discourage investors," said Adrian Mowat, Chief Asian and Emerging Equity Strategist for JP Morgan.
"India is the only country in MSCI indices that tax institutional investors capital gains," Mowat said .
The benchmark 30-share BSE index fell 1.87 percent to 16,831.08 points, its biggest daily fall since Feb 27.
For the week, the Sensex fell 1.8 percent, its biggest weekly fall since mid-April.
The 50-share Nifty ended down 1.96 percent at 5,086.85 points
Technicals for the Nifty are pointing to more falls ahead, after closing below its March low of 5,136, and below the 200-day moving average for the first time since late January.
The index could target 5,081, or the 50 percent retracement of the December 2011 to February 2012 rally. The next support is seen at 4,951, the 61.8 pct retracement of those gains.
Foreign investors have sold a net of about 6.3 billion rupees in April.
Still, they have been net buyers of 3.18 billion rupees so far in May, according to provisional data, while they remain net buyers of 437.01 billion rupees in the year-to-date.
Auto stocks were hit hard for the week after widespread disappointment over their April sales.
Hero MotoCorp fell 4.61 percent on Friday, marking a two-session drop of 11.5 percent, while Bajaj Auto shares ended lower by 3.8 percent.
Banks were also routed after Fitch Ratings and Macquarie said this week's RBI directives on Basel III guidelines could lead to a equity dilution of around $30-35 billion over the next five years.
HDFC Bank(HDBK.NS) lost 3 percent, while SBI retreated 4.22 percent.
Shares of Reliance Industries dropped 1.7 percent, following media reports that the petroleum ministry has struck down its plans to recover $1.2 billion in costs before the energy major starts sharing profits with the government from its gas field off the east coast.
However, among gainers, drug maker Cipla added 2.63 percent after CLSA upgraded the stock to "outperform" from "underperform", because it expects "strong" operating performance from Lexapro, an anxiety and depression drug, and a weaker rupee.