There were hardly any conspicuous gainers in the market on Wednesday as anxiety compelled an early setback to indices and prompted volatility.

Just few minutes after trading commenced, the 30-share BSE Sensex slumped 33 points to 3,211.71. But it witnessed a recovery immediately after that poor start. However, that recovery, itself, was not sustained and selling pressure emerged once again.

An oscillating L&T, perhaps, had much to do with the initial bout of volatility. The scrip of the cement, engineering and construction conglomerate gained 4% to Rs 204.45 after opening slightly in the red at Rs 195 (its Tuesday's close was Rs 196.40). However, it soon came off that high to Rs 198.50 (up by just a little over 1%).

The market, itself, was held back by concerns over FII inflows being throttled due to a regulation over participatory note activity and a weakness in global markets.

Some of the Sensex's top losers were MTNL (down 2.4% to Rs 95.85), Hindalco Industries (down 1.6% to Rs 582), ACC (down 1.5% to Rs 147.60), HPCL (down 1.3% to Rs 305.10), Reliance Industries (down 1.3% to Rs 288.20), HCL Technologies (down 1.2% to Rs 164.90), Telco (down 1.5% to Rs 153.75), GlaxoSmithKline Pharmaceutical (down 1.4% to Rs 302), Satyam Computer (down 1.3% to Rs 215), SBI (down 1.1% to Rs 284.60), Dr Reddy's Laboratories (down 1% to Rs 878), Infosys Technologies (down 1% to Rs 4,112) and Zee Telefilms (down 1.7% to Rs 78.70).

In non-Sensex stocks, Engineers India (down 4.6% to rs 240), Aksh Optifibre (down 5% to Rs 18.80), Bank of Baroda (down 3% to Rs 82.15) and Kale Consultants (down 3.4% to Rs 31.20) were among the major losers.

The market has been dogged by concerns related to FII investment through participatory notes over the last 2-3 trading sessions. On Tuesday, the Sensex dropped 31.97 points, or 0.97%, to 3,245.30 as a result of broad-based weakness. The NSE S & P CNX Nifty Index shed 12.25 points to close at 1,046.60.

The Securities & Exchange Board of India, in its discussion paper on a code of conduct for FIIs, mentioned that FIIs should not deal with any derivatives instruments issued outside India wherein the underlying security is Indian, either directly or indirectly. According to market men, this typically happens when FIIs invest in the Indian market through the participatory note. Those FIIs who are not registered in India (like hedge funds that do not want to go through registering procedures and are typically short-term investors) invest in India through participatory notes that are issued by foreign brokerages.

Dealers say hedge funds that are short-term investors (who get in and get out very fast) use the P-note route. The process involves hedge funds approaching a foreign brokerage to buy shares in the Indian market as they are not registered as FIIs in India. The foreign broker buys shares on behalf of hedge funds and in turn issues contracts to hedge funds which are known as P-notes.

Dealers say hedge funds are quite active in India. However, market men feel that it would be very difficult for Sebi to crackdown on the P-note issue. A section of the market points to the fact that Sebi has clarified that the discussion paper is not aimed at having any policy change so far as FIIs are concerned and the present set of policies and practices will continue.

But, hedge funds are believed to be pressing sales in the market due to war fears. The US appears not to be too impressed with Baghadad's latest move to destroy its al-Samoud 2 missiles. And, Washington continues to boost troop numbers in the Persian Gulf, some 60,000 have been added lately to make a 310,000-strong force in the region.

However, Washington's plans of using neighbouring Turkey as a springboard into Iraq have been rejected by Ankara. It is reckoned that unless Turkey allows Washington to launch an attack from its bases, any war could be delayed to late March or early April.

US markets took the plunge again Tuesday on global political concerns and weak corporate news. The Dow Jones industrial average plunged 132.99 points or 1.7% to 7704.87, its lowest level since 10 October 2002, when it closed at 7,533.95. The S&P 500 index fell 12.82 points or 1.5% to 821.99 and the Nasdaq composite index slipped 12.52 points to 1307.77. Global oil prices are on the rise amid falling global inventories and war worries.

Equity markets do not like uncertainty and the sooner the war gets over, the better it will be, dealers say. "It would be an opportunity to buy good scrips in the event indices witness a setback due to a war," says a dealer with a local brokerage.

Dealers say, but for war worries, the market would have rallied. The budget too has been fairly impressive, what with the withdrawal of dividend tax in investors' hands and withdrawal of capital gains tax (initially for a period of one year). There has been some disappointment though, over the imposition of 12.5% dividend distribution tax.