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Unprecedented decline in Sensex

Special Correspondent

CBDT circular among reasons cited for the steep fall of 826 points

MUMBAI: In an unprecedented fall, the Bombay Stock Exchange 30 share Sensitive index (Sensex) shed 826.38 points on Thursday, the highest ever fall in the history of Indian stock markets. While some argued it as a reaction to an instruction directed at foreign institutional investors (FIIs) by the Central Board of Direct Taxes (CBDT), others are having a view that the fall is in tune with other global markets.

"It is only a reaction to the sentiment on the international markets. Basically, the metals have fallen and it is in tune with that,'' said A. Rama Mohan Rao, Managing Director, UTI Securities Ltd. However, "I believe it is an opportunity for investors with a long-term objective.'' According to him, the CBDT circular, which was widely discussed, is not having much impact. "The CBDT circular is not the core reason for this reaction. Percentage-wise, we have to be ready for such a correction.'' The maximum fall in a day till date is at around 12 per cent. Today it is only 7 per cent. "We should not panic over absolute numbers. One needs to look at the percentage of fall,'' Mr. Rao added.

The Sensex lost 826.38 points or 6.7 per cent to settle at 11391.43. The other major index, NSE Nifty, lost 246.20 points or 6.77 per cent to settle at 3388.90.

From a low of 7685.64 on October 28, 2005, the Sensex shot up by 4926.74 points or 64 per cent to an all time closing high of 12612.38 on May 10. From that level, the Sensex lost 1220.95 points or 9.6 per cent to today's close of 11391.43.

The CBDT had issued instructions in August 31, 1989 laying down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. Inviting comments, the CBDT now proposed to issue supplementary instructions in this regard to provide further guidelines for determining whether a person is a trader in stocks or an investor in stocks. Before issuing instructions, the CBDT has invited comments from interested parties by May 25. This raised concerns that the tax liabilities for FIIs are likely to go up if their profits are treated as trading profits. As per the current taxation laws, foreign companies are taxed at the rate of 40 per cent and there were apprehensions that FIIs too would be brought into the same tax bracket. As per the existing norms, profits from sales of shares are taxed at 10 per cent if it is a short-term capital gain (for shares held for a period of less than one year). Long term capital gains, which are considered as `shares held as investment' (if held for a period of one year or more), the tax is zero at present.

In the intra-day on Thursday Sensex lost 887.36 points to hit a low of 11330.45. It was the steepest fall ever in a single trading session.

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