Liquor stocks such as United Spirits and Radico Khaitan witnessed selloff after Bihar Chief Minister Nitish Kumar announced that alcohol will be banned in the state from April 1 next year.
Diageo-controlled United Spirits fell as much as 6 per cent, while UP-based Radico Khaitan slumped as much as 12.7 per cent when the news broke. United Breweries dropped almost 3 per cent, before recovering some lost ground.
A ban on alcohol consumption in Bihar, the country's third-most populous state, is expected to impact sales of spirits makers, analysts said.
In India, only a handful of districts and states have an outright ban on alcohol. Prohibition has been in place in Gujarat since 1960. Alcohol is also banned in Nagaland, Manipur and Lakshwadeep.
Last year, the Congress-led government in Kerala announced that it will be totally alcohol-free within 10 years. Hundreds of bars were forced to shut down across the state, and alcohol is now served only in five-star hotels. After protests, bars were recently allowed to sell beer and wine.
"More than the obvious financial impact, this is a directional negative if rest of the state governments emulate Bihar and Kerala, in our view," analysts at brokerage house Motilal Oswal said.
Bihar has a population of around 100 million, more than Germany's. In the run-up to state elections, Nitish Kumar had reached out to women voters, who had led protests against rising alcohol consumption, promising them he would ban alcohol, if re-elected.
It was not immediately clear whether a possible ban would include all alcohol or be limited to homemade or country liquor.
The Bihar government earned nearly Rs. 3,500 crore last year through taxes on the sale of alcohol, sources say. It is not known how the government plans to make up for this loss of revenue.
United Spirits shares closed 4.7 per cent lower at Rs 3,211.45, while Radico Khaitan shares closed 7 per cent lower at Rs 114.25 in a Mumbai market that closed 0.7 per cent higher.
(With inputs from Reuters)
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