Shares in broadcaster Sun TV fell more than 31% on Thursday after media reports said the founder's brother, textiles minister Dayanidhi Maran, was named in a lawsuit related to the telecoms probe, further embarassing a coalition government mired in a series of scandals.
The Central Bureau of Investigation (CBI) has started a "preliminary investigation" against Dayanidhi Maran, who was telecom minister from 2004 to 2007, an official in the CBI, who declined to be named, said.
Maran allegedly favoured Malaysia's Maxis Communications, which owns a controlling stake in Indian mobile carrier Aircel, in return for which the Malaysian firm invested in Maran's family business, media reports said, citing the lawsuit.
Maran denied favouring any company during his stint as telecom minister. Meanwhile, the main opposition Bharatiya Janata Party, and the new chief minister of Maran's home state Tamil Nadu, have called for his resignation.
Shares in Sun TV and budget carrier Spicejet, controlled by Maran's elder brother, fell as much as 31.1% and 13.5%, respectively.
"There are rumours of a potential probe. Investors are concerned and are cutting down positions," said Suresh Parmar, associate vice president of institutional equities at KJMC Capital Markets.
Sun TV and Spicejet did not immediately comment.
Maran belongs to the regional DMK party, which is the second-biggest partner in Prime Minister Manmohan Singh's government.
Police have already arrested Andimuthu Raja, who had taken over from Maran as telecom minister, and Kanimozhi, the lawmaker daughter of the DMK chief, over the huge telecom licensing scandal in 2007-08 that state auditor CAG said cost the exchequer upto $39 billion in potential revenue.
This has strained ties between prime minister Singh's Congress party and DMK, although few expect the DMK to pull out of the government as the party is weakened following the loss in elections in its bastion state of Tamil Nadu last month.
The telecom scandal is the largest of several that have emerged in Singh''s second term and has weakened the government's political authority and spooked investors.
Shares in Sun TV were down 30.3% and Spicejet had lost 12.8% by 0630 GMT, in a Mumbai market that was down 0.5%.