Domestic stock markets plunged over 550 points on Monday as worries over curbs on participatory notes (P-notes) and a crash in Chinese equity markets triggered heavy sell-off.
The benchmark S&P BSE Sensex fell nearly 2%, or 550.93 points, to close at 27,561.38.
Last week, the Supreme Court-appointed special investigation team (SIT) on black money had recommended the government to tighten restrictions on P-notes in order to check black money flowing into the country's financial markets.
P-notes enable foreign investors to take exposure in the stock markets without registering with the market regulator, the Securities and Exchange Board of India (Sebi). They also reduce time and costs involved in registration.
Analysts say any curb on P-notes will hamper investment flows from overseas investors into the country's equity markets.
By the end of June, investments through P-notes reached a massive Rs 2.75 lakh crore. It also accounted for 11.5% of the total foreign institutional investment (FII) in the country.
However, the finance minister Arun Jaitley pacified their concerns, saying "the government will not take any steps that will adversely impact the country's investment climate."
A similar move in 2007 saw the Sensex falling by over 10% within minutes of the opening session, bringing trading to a halt. However, the then finance minister P Chidambaram assured the markets by giving clarifications regarding P-notes.
"Typically these issues have tended to get resolved because the government tends to be sensible about not disrupting the market," Prabhat Awasthi, managing director and head of equity at Nomura India, told NDTV Profit.
Further, a crash in Chinese stock markets also weighed on the Indian markets.
The Chinese markets plummeted by over 8% on Monday, witnessing the biggest one-day decline in more than 8 years, as worries grew over the economic health of the country.
The fall in Beijing' stock markets was also due to investors' rush to book profits, triggered by uncertainty over the Chinese government's steps to maintain stability in the markets.