Indian shares fall 5.8 pct as budget disappoints

* Biggest drop in 6 months, at lowest close since May 26

* Higher govt borrowing spikes bond yields, hits banks

* Spending plans fail to cheer infrastructure firms

* Divestment target seen paltry

* ITC rises after duty on cigarettes unchanged
(Updates close)

By Janaki Krishnan & Narayanan Somasundaram

MUMBAI, July 6 (Reuters) - Indian shares fell 5.8 percent
on Monday in their biggest drop in six months after the annual
budget disappointed investors and raised concerns about the
government's finances.

Banks were among the big losers as a higher fiscal deficit
and borrowing plan sent bond yields sharply higher, which could
hurt treasury income for lenders.

The budget fell short of expectation on infrastructure
spending, ignored financial sector reform, raised a minimum
alternate tax for companies and set a paltry stake sale target
unnerving investors, traders said.

For more stories on the budget, click on [ID:nSP190820]

"There is a mismatch between market expectations and what
was delivered. There were hopes the government would be bolder,
but it has only gone for spending," said Deepak Jasani, head of
retail research at HDFC Securities

"On most counts, there are a lot of general statements of
intent, without any specific targets or timelines."

The 30-share BSE index .BSESN ended 5.83 percent lower at
14,043.40, its sharpest fall since Jan. 7 when it slumped 7.25
percent after Satyam Computer Services (SATY.BO), now renamed
Mahindra Satyam, unveiled a billion-dollar accounting scandal.

It was the lowest close since May 26. The index had risen
as much as 1.2 percent early.

The benchmark is still up three-fourths from its 2009 low
in early March.

Investors had betted on a market-friendly budget after
Prime Minister Manmohan Singh's ruling coalition was re-elected
in mid-May with a bigger mandate. The BSE index soared a record
17 percent on one day after the election verdict, and is still
up 15.4 percent since that result.

Finance Minister Pranab Mukherjee said the fiscal deficit
for 2009/10 was expected to rise to a 16-year high of 6.8
percent of gross domestic product from 6.2 percent in the last
fiscal year. [ID:nCOL544329]

Except for two stocks all other components in the index
fell as a sharp 21 basis points jump in bond yields posed a
challenge to cheap credit for companies.

Some traders said the fall was overdone.

"I think the market seems to be over-reacting. There's
definitely disappointment ... (but) at the same time there are
welcome announcements focusing on infrastructure," said Sanjay
Sinha, chief executive of DBS Cholamandalam Asset Management.

Diversified ITC (ITC.BO) bucked the trend and rose 3.1
percent to 197.8 rupees as the budget left taxes on its main
product, cigarettes, untouched. Hindustan Unilever (HLL.BO)
rose 1 percent to 275.90 rupees.

Bank shares led the slide on concerns high bond yields
would dent treasury income for lenders.

Commercial banks in India are required to hold at least 24
percent of their deposits in government securities and profits
from trading in bonds form a substantial part of their revenue.

A sharp drop in bond prices, which move inversely to
yields, would lower the value of bond holdings for banks.

Traders said sentiment was also hit after the finance
minister was silent on raising foreign investment limit in
insurance firms to 49 percent from 26 percent. Most banks run
insurance joint ventures.

Top lender State Bank of India (SBI.BO) dropped 8.6 percent
to 1,655 rupees, No. 2 ICICI Bank (ICBK.BO) fell 10.1 percent
to 678 rupees -- both registering their sharpest fall since
March 30.

Top mortgage firm Housing Development Finance Corp
(HDFC.BO) fell 9 percent to 2,353.55 rupees.

The budget increased allocation for highways by 23 percent
and said state-owned India Infrastructure Finance Co would
refinance loans of commercial banks but remained silent on
equity capital requirements.

"This is a vision without milestones, which does not
communicate much," said A Subba Rao, group chief financial
officer at GMR Infrastructure (GMRI.BO).

"They have eased financing through debt but they have not
provided for equity flows for projects."

Top construction and engineering firm Larsen & Toubro
(LART.BO) fell 8.9 percent to 1,464 rupees, its sharpest fall
in nine months.

A paltry target of 11.2 billion rupees for stake sale in
state-run firms also upset investors and they punished
government firms such as Oil and Natural Gas Corp (ONGC.BO) and
Bharat Heavy Electricals (BHEL.BO).

"The target has disappointed investors big time. They were
looking at a low five-digit target in the worst case," said
Sanjeev Patkar, head of research at Dolat Investments.

In the broader market losers swamped gainers by more than 3
to 1 on high volumes of 544.8 million shares.

The broader NSE Index fell 5.8 percent to 4,165.70
points, its sharpest fall in six months.

MAIN TOP THREE STOCKS BY VOLUME

* Unitech Ltd (UNTE.BO) on 26.5 million shares

* Suzlon Energy (SUZL.BO) on 22.1 million shares

* GVK Power (GVKP.BO) on 19.6 million shares

STOCKS THAT MOVED

* Titan Industries (TITN.BO) rose nearly 3 percent to
1,237.80 rupees after the budget scrapped excise duty on
branded jewellery.

* A rise in minimum alternate tax, a levy to ensure
companies did not avoid tax by claiming exemptions, hit firms
such as energy giant Reliance Industries (RELI.BO) and top
telecoms firm Bharti Airtel (BRTI.BO).

Traders said these firms could see their earnings eroded by
the tax. Reliance shares fell 6.5 percent to 1,893.60 rupees
and Bharti dropped 4.1 percent to 783.60 rupees.

FACTORS TO WATCH
* For technical analysis, double click on
www.reutersindia.net
* India mkts tumble on worries over growing govt deficit
[INR/]
* FOREX-Yen, dollar gain on economic recovery doubts
[FRX/]
* Oil falls to around $64 a barrel
[O/R]
* Resurgent worries about U.S. economy hit stocks
[MKTS/GLOB]
* U.S. stock futures signal losses as oil tumbles
[.N]
* For closing rates of Indian ADRs
INADR
(Editing by Ranjit Gangadharan)