Leading broker R.S. Jhaveri was declared in default Saturday after failing to pay 135 million rupees ($4.2 million) for three settlements.
India's Sunday Times said it was the largest default ever on the bourse, capitalised at $127.5 billion.
Nervous brokers stood outside the doors of the exchange's 26th-floor boardroom where the governing board was sitting in a marathon meeting to sort out the crisis.
"There is a lot of nervousness. We are concerned whether the authorities will be able to solve the crisis," Sunil Kothari of brokers Nagindas Kothari said.
Officials said it remained unclear whether trading would resume Tuesday owing to the default, which could affect some 80 brokers.
Analysts said suspension of stocks trade in Bombay could undermine the confidence of investors who had begun queuing up after India launched bold economic reforms in 1991.
"It is a bad signal for us who are overall quite bullish about India," said Dick Daden of the London-based Chescor Ltd.
Foreign institutions, who have so far invested $3.14 billion in Indian stock markets since they were opened to foreigners in September 1992, have repeatedly complained about the country's poor custodial services, sluggish share transfer system and poor accounting methods.
Brokers said Bombay's latest troubles were caused by an inefficient regulatory mechanism on India's 22 bourses.
"The default is a direct result of an administration lapse on the part of the Bombay Stock Exchange," former exchange director Sanat Dalal said. Jhaveri was declared in default on the weekend after he failed to meet his commitments over large positions he had built in shares of MS Shoes East, a Delhi-based firm which was planning a 4.28 billion rupee issue of convertible debentures.
Market sources said Jhaveri had been supporting the share price of MS Shoes ahead of the issue but ran into difficulties when the Securities and Exchange Board of India suggested the company had been misleading investors.
Brokers said it was common to find prices of Indian shares rising sharply just ahead of a public offer of equity.
"Brokers are quite often invited by companies to support the price of their shares whenever they face the prospects of raising public money," said Dalal, now a senior broker.
Analysts said arbitrary pricing of share issues was just one of many shortcomings in India's capital markets.
Indian stock prices, sliding since September last year when the Bombay Stock Exchange index hit an all-time high of 4,630.54, were set for recovery after last week's federal budget, analysts said.
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