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The BSE Sensex and Nifty fell for a second straight day as resources firms such as Jindal Steel and Power, and public sector lenders that lent to them, slumped after the Supreme Court cancelled most coal blocks allocated since 1993.
Adding to the concerns, foreign investors sold Indian shares worth of $194 million on Tuesday, after buying for the past four sessions, while caution also prevailed ahead of the expiry of monthly derivatives contract on Thursday.
However, losses were trimmed as consumer-related stocks gained as investors preferred to derisk portfolio.
"It's a sensitive industry and ramifications (of the Supreme Court's decision) will be quite big. They (the government) have to take a final stand and have to move quickly," said Jagannadham Thunuguntla, head of research and chief strategist at SMC Global Securities Ltd. "The market is in a consolidation mode. Now, the good companies will stand different and quality of companies will play a role."
The Sensex closed 31.00 points lower at 26,744.69, while the Nifty ended 15.15 points lower at 8,002.40.
The companies that received coal allocations led decliners on Wednesday. Jindal Steel and Power Ltd ended 10.15 per cent lower.
Among other decliners, GMR Infrastructure fell 11.5 per cent, Adani Power closed down 2.1 per cent.
Lenders or financial firms which have loan exposure to the sector were also hit. State Bank of India closed 2.7 per cent lower, while IDBI Bank ended 5.46 per cent lower.
Infrastructure stocks fell, with Larsen and Toubro ending 2.12 per cent lower as investors shifted focus from the sector and added defensive stocks into the portfolio amid risk aversion.
However, among the gainers, Coal India closed 4.8 per cent higher after the top court ruling on coal blocks and on expectations that the state-run firm may be allowed to manage illegal mines until they get re-auctioned.
Shares in Reliance Power gained 5.5 per cent and NTPC added one per cent after the court let off two coal blocks operated by these companies.
