The Bombay Stock Exchange's premier index, the Sensitive Index or Sensex, plummeted by 363 points or 7.18 per cent today, recording the second-largest drop ever, due to across-the-board selling triggered by the sharp fall in NASDAQ and the fear that tax benefits to foreign institutional investors, or FIIs, might be revoked by the government.

The National Stock Exchange's S&P CNX Nifty dipped by 106 points or 6.90 per cent.

This is the lowest level that the Sensex has touched in the new millennium.

Media reports said that tax authorities had sent notices to FIIs, questioning the use of tax shelters by them. This led to fears that all investments by FIIs through Mauritius would be taxable in India.

No move to revoke benefits to FIIs, says Finance Ministry

India's Finance Ministry, however, today clarified that there is no move on the part of government to revoke or modify the agreement on avoidance of double taxation with Mauritius, which would take away the benefits conferred on investors by this treaty.

The statement said that the cases where notices have been issued, have been going on for some time, and the views taken by the assessing officers pertain to the specifics of each cases and do not constitute any across-the-board denial of tax benefit or a policy shift.

The Central Board of Direct Taxes is examining this matter and inviting the representatives of FIIs operating in India to allay their doubts on this subject.

The Sensex opened at 4907.41 points, against its previous close at 5053 points. It went on to touch the day's high of 4907.41 points, only to dip to 4667 points. It closed at 4690 points.

The Nifty opened at 1534 points, against its previous close of 1535 points. It touched a day's high of 1554 points, and plummeted to 1430 points. It closed at 1429 points.

As many as 47 stocks were locked in the lower circuit in afternoon trade. These included infotech stocks like Infosys Technologies, Himachal Futuristic, HCL Technologies, Global Tele-Systems, DSQ Software, SSI, Satyam Computer, and Rolta India.

Paradoxically, however, the FII inflows into the Indian markets showed a positive trend and stood at $ 178 million.

Mutual funds hit hard

Fund managers said that mutual funds are most likely to be adversely hit by the panic selling in the markets. Especially infotech-oriented funds, for it will be very difficult for them to exit the sector to meet redemption demands, they added.

Most investors were unable to sell their holdings as the stocks were locked on the down circuit, with no buyers in sight. Investor-favourites like Infosys Technologies and Satyam Computer too found themselves plummeting as the negative sentiment spread all around, said operators.

Further fall likely, say operators

With investors and mutual funds looking to offload their holdings, a further fall in prices of infotech stocks is most likely, said market players.

Operators in the market, however, said that the timing of the tax notices was especially wrong since it added to the string of bad news that had kept the bourses subdued.

Good opportunity to buy, say fund managers

However, several fund managers said that the huge fall in the bourses actually offered an opportunity to buy across-the-board, from a relatively long-term view. They said that investors could make money by the time the monsoons arrive, if they held their positions till then.

A section of the market said that the markets fell because of a re-rating of technology stocks that had soared at the bourses. They felt that this was a correction of sorts in the markets.

Market operators said that the tax notices might not lead to heavy selling by the funds. However, since these funds did not like uncertainties, chances of new investment coming in are slim.

NASDAQ fall pulls down Indian bourses

Meanwhile, infotech stocks in the US plummeted last night, with the NASDAQ composite index recording the largest single-session fall. This led to heavy selling by operators. It fell by 348 points, following a judgement against Microsoft Corporation in the antitrust case.

The Indian markets, which have been driven in the past few months largely by the infotech, telecommunications and entertainment stocks, closely follow the movement of the NASDAQ. Any ripple in the US bourse has a direct bearing on the Sensex, as investors tend to follow the American markets, said operators.

As the NASDAQ slipped, brokers demanded that investors -- who borrowed through margin debt -- cough up more money. Due to this demand, many investors were left with no choice but to sell their holdings.

Microsoft, the most heavily traded stock on the NASDAQ, fell by almost 15 per cent, losing as much as $80 billion in its market value after its efforts to settle the antitrust case against it failed.

Judge Thomas P Jackson, passing the judgement, said that Microsoft had "maintained its monopoly power by anti-competitive means and attempted to monopolise the Web browser market".

He ruled that Microsoft violated US antitrust law by monopolising the market for personal computer operating system software and using its dominance against competitors.

Meanwhile, Microsoft's owner Bill Gates said that he would appeal against the US court's verdict.

However, benefiting from the fall in NASDAQ and new economy scrips, Dow Jones industrial average gained as much as 300 points, as investors made a beeline for old economy stocks.

Asian, Australian markets tumble, too

The Asian stock markets too found their market capitalisation being eroded as investors moved out of technology stocks, taking a cue from the sharp drop in the NASDAQ.

Tokyo's benchmark Nikkei lost about 0.60 per cent to close at 20,594.93. However, the shock of the NASDAQ fall was limited as most people turned to invest into the old economy stocks.

Stock markets in Hong Kong, Taiwan and Jakarta were closed for holidays on Tuesday. But the Korean markets were down almost 2 per cent at close, mainly on account of heavy selling pressure in the infotech stocks.

The Australian markets too fell by half-a-per cent following offloading of infotech scrips, which according to markets forces feel are overvalued.

Meanwhile, the stock markets in China, Singapore, Kuala Lumpur, Bangkok, Manila, and Karachi too witnessed a plunge.

Additional inputs: UNI

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The BSE Sensex dropped by 363 points 7.3 per cent -- its all-time second largest single-day drop in terms of points, and in the post-Harshad Mehta phase, the second largest drop in terms of percentage.

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