Both the BSE Sensex and the NSE Nifty closed Tuesday's session in the red. The Sensex dropped 210 points or 0.75 per cent to 27,676.04. The Nifty declined 70 points or 0.83 per cent to 8,377.75.
Stocks sank to their lowest in nearly four weeks on concerns about foreign outflows after Japan's Daiichi Sankyo's $3.6 billon share sale in Sun Pharmaceutical Industries.
Daiichi Sankyo began the sale late on Monday, according to a person directly involved in the deal and a marketing term sheet seen by Reuters.
Worries over retrospective taxation on foreign portfolio investors prompted them to sell stocks worth Rs 1,507 crore ($239.93 million) on Monday, also weighing on sentiment.
"Daiichi's share sale is having some impact but the underlying trend has weakened due to equity-led worries around Jan-March earnings and retrospective taxes on profits of foreign investors," said Subramanian Sharma, director at Greenback Forex.
However, it was not clear whether the entire $3.6 billion in the Daiichi deal would flow out of India or if some of the money would be reinvested with domestic investors including Sun Pharma.
All but two of the BSE sectoral indices were in the red with the major losers being Health care (3.24%), FMCG (1.17%), Auto (1.31%) and Oil and Gas (1.08%).
Only Consumer Durables and Metal managed to finish in the green.
The top gainers on the BSE Sensex were Axis Bank, SSLT, Tata Steel, Coal India and Wipro. The top losers were Sun Pharma, Hindustan Unilever, Hindalco, Maruti and Dr Reddy's.
Sun Pharma lost 8.86 per cent to end at Rs 951.60 on the Sensex. It was the top loser on both the Sensex and the Nifty.
The Sensex had lost 1,158.23 points in the previous four sessions.
Brokers said persistent selling by participants following weak earnings by some companies also dampened the sentiment.