Mumbai bourse sinks amid financial scandal

India's Central Bureau of Investigation arrested officials from eight bank and brokerages, part of a probe into alleged brides and improper loan disbursals.

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The brokerage India Infoline has pushed the Mumbai bourse lower as a corruption scandal threatens to undercut an extended market rally.

India's Central Bureau of Investigation on Wednesday arrested eight bank and brokerage officials as part of an investigation into bribes and improper loan disbursals. The agency has separately been examining the role of a former central government minister in the sale of phone permits for less than their market value.

"Everything that could go wrong appears to be going wrong," Morgan Stanley said in a report. "These events will cause the volatility in Indian equities to intensify." The New York investment bank said stocks in Asia's second-fastest growing economy now faced their "stiffest test" in some time.

Rajesh Sharma, the chairman of the Mumbai company Money Matters Financial Services, was among those arrested this week. India Infoline advised Money Matters for a sale of shares to large investors this year but denied any wrongdoing.

"We did our due diligence but you cannot do an investigation," India Infoline's chairman, Nirmal Jain, said yesterday. "As an investment banker, we did our job."

India Infoline shares sank 15 per cent, the most in 19 months, to 91.30 rupees. Money Matters fell 20 per cent for the second day to 427.05 rupees.

India's benchmark stock index fell to its lowest level in more than two months. The Bombay Stock Exchange's Sensitive Index, or Sensex, lost 141.69, or 0.7 per cent, to 19,318.16. The S&P CNX Nifty Index on the National Stock Exchange retreated 1.1 per cent to 5,799.75. The BSE 200 Index dropped 1.4 per cent to 2,431.62.

The Sensex has slipped 8 per cent from a November 5 record close as inflation in China, Europe's debt crisis, skirmishes between North and South Korea and concern about the strength of USgrowth shook investor confidence.

* with Bloomberg