India Plans New Rules for Companies Pawning Shares to Borrow

India’s capital market regulator will frame stricter rules for companies and owners pledging shares as collateral to borrow funds after uneven disclosures resulted in some small companies plunging 80 percent last month.

The Securities & Exchange Board of India is also planning to overhaul regulations for insider trading, as well as share repurchases, Chairman U.K. Sinha said in Kolkata today. The regulator set up a panel on March 5 to review insider trading rules. Indian companies had pledged as much as 1.5 trillion rupees ($28 billion) of shares to lenders as of Dec. 31, Morgan Stanley said in a report on Feb. 21.

“People have come out with creative solutions with some instruments through which they are pledging shares and they are not informing the stock exchange,” Chairman U.K. Sinha said today in Kolkata, without elaborating. “Very soon we will take measures to ensure that all kinds of encumbrances are reported well in time so the market knows about it.”

Sinha is reviewing regulations to raise corporate governance standards in the $1.2 trillion market. A dozen companies on the S&P BSE500 index plunged last month amid speculation the shares pledged by company’s founders in return for loans have been sold. Core Education & Technologies Ltd. crashed 80 percent, Gravita India Ltd. 38 percent and ABG Shipyard Ltd. 17 percent in the period.

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.

Japanese Rules

Sebi’s move comes on the back of efforts by regulators worldwide to curb insider trading. Japan’s financial regulator is proposing imprisonment as part of stiffer penalties for people who leak information used for insider trading, documents obtained from the Financial Services Agency showed last week.

In October, Rajat Gupta, the former Goldman Sachs Group Inc. director and McKinsey & Co. managing director who rose to the pinnacle of Wall Street, was sentenced to two years in prison for passing inside tips to his business partner.

“Our current regulation on insider trading is very old,” Sinha said. “So in order to reconcile our insider trading regulations with the rest of the world, we are coming out with these guidelines.”

Buyback regulations are also being revamped to safeguard the interests of ordinary shareholders, Sinha said.

“We got the impression that some companies were using the buyback regulations not to reward the shareholders but to manipulate the share price,” he said.