India’s Market Regulator Probing Plunge in Small, Mid-Caps

India’s stock market regulator said it is probing a crash in shares of some small and medium-sized companies that has erased as much as 76 percent of their value this week.

Core Education & Technologies Ltd., a supplier of software to universities, sank 47 percent to 59.25 rupees at 2:53 p.m. in Mumbai, two days after crashing by a record 62 percent. Rushil Decor Ltd. and Gravita India Ltd. plunged 20 percent each for a second straight day.

“An investigation is on to look at all the aspects of the decline,” S. Ramann, executive director at the Securities & Exchange Board of India, said in a phone interview today.

A dozen companies on the S&P BSE 500 index lost at least 20 percent of their market value in five trading days through today amid speculation the shares pledged by company founders in return for loans have been sold. Core Education has crashed 80 percent, Gravita 38 percent and ABG Shipyard Ltd. 17 percent in the same period. The S&P BSE Mid-Cap index is headed for the biggest monthly decline since December 2011.

“This is not a normal, everyday event,” U.R. Bhat, managing director of Dalton Capital Advisors India Pvt., said by phone from Mumbai. The sell-off “needs to be investigated thoroughly to ascertain whether it is due to pledged shares or because of a company-specific problem. The crash will severely dent confidence, especially that of small investors.”

Founders who have pledged a large chunk of their shares risk losing control of their companies should a drop in equity prices erode the value of the collateral, according to CNI Research Ltd. Borrowing costs in the $1.8 trillion economy are among the highest in Asia.

‘Regular Churn’

Core raised 2.5 billion rupees ($46 million) by pledging 47 percent of the founder’s stake to lenders, Finance Director Nikhil Morsawala said in a Feb. 25 interview. Those shares have not been sold and there’s no change in the business strategy, Executive Director Maya Sinha said in an emailed statement.

“While there has been a large volume movement in the stock, the move was part of the regular churn of the portfolio of the investor and had nothing to do with the business fundamentals,” she said today, without naming the investor.

Gravita Chief Executive Officer Rajat Agrawal wasn’t available at his office for a comment. ABG Shipyard will issue a statement, Preeti Binoy, general manager of group corporate communications, said by phone.