Fears that Maharashtra, where the country's two biggest bourses are located, might increase a tax levied on speculative share transactions, could deepen a stock market slump, brokers say.

The Economic Times financial daily reported on Friday that the state government planned to raise the stamp duty on transactions that do not result in the physical delivery of shares to 0.01 per cent.

Before April 1, 2001, this duty applied to all transactions, whether speculative or resulting in the physical exchange of shares. The state government then cut it to 0.002 per cent for speculative deals for just two years -- up to March 31, 2003.

"It will kill intra-day volume and the arbitrage business," said Motilal Oswal, managing director of the eponymous Mumbai-based brokerage.

He said thin volumes tended to have a disproportionate impact on share prices, which would deter institutional participation.

An official of the government of Maharashtra said that a decision about restoring the stamp duty to the earlier, higher level would be taken within the next 15 days.

But the uncertainty spooked the markets, contributing to a fall in the country's most widely tracked equity marker, the 30-issue Bombay Stock Exchange's Sensex, which closed down 1.17 per cent on Friday, its worst close since mid November.

Brokers said it would be yet another blow to already weak sentiment and could encourage foreigners to further scale down portfolio investments in India.

Offshore funds have sold shares worth $5.6 million in March so far, after adding Indian equity worth $221.4 million and $84.6 million to their portfolios in January and February.

Brokers fear that restoring the stamp duty to the earlier higher level from the new fiscal year will severely dent volume, with speculation accounting for about 86 per cent of turnover on the National Stock Exchange between April 1 and December 31 2002.

The National Stock Exchange, the largest bourse by daily turnover, and the Bombay Stock Exchange, the second-largest and also Asia's oldest, are both located in Mumbai.

The state government's stamp duty applies to all transactions carried out on these two bourses, which account for 90 per cent of the country's traded volume.

India allows intra-day speculation, but trades must be closed daily and settled within three days of being executed.