Japan may take a tougher stance on trading before and during share sales, responding to criticism from investors who allege information leaks on financing plans are eroding confidence in the stock market. The Financial Services Agency is studying whether Japan should apply laws on insider trading to those with second-hand or third-hand knowledge of undisclosed company news, said two people with knowledge of the matter who requested anonymity. The regulator is also considering a U.S.-style rule that limits short sales of shares in companies selling new stock, they said. Shares in companies including Nippon Sheet Glass Co., Tokyo Electric Power Co. and Inpex Corp. plunged before stock-sale announcements this year or during the period leading up to pricing. The Tokyo Stock Exchange said last month it’s investigating suspicious trading of shares that fell before companies announced fundraising plans. “The credibility of Japan’s stock market is being questioned,” said Takao Saga, a professor at Waseda University and commissioner at Japan Securities Research Institute. “It’s positive to see the government considering tougher rules for insider trading and short selling.” Regulators are considering whether insider trading laws should be expanded to encompass investors with indirect knowledge of a future offering, in addition to company executives, employees and underwriters, the officials said. “This whole insider-trading scandal is a hindrance for investors participating in Japan,” said Hiromichi Tsuyukubo, a hedge-fund manager at Myojo Asset Management Japan Co. in Tokyo, who oversees about $50 million. “Whatever it takes, I want the regulators and the exchange to straighten things out.” Regulation M The regulator is also considering whether to implement a U.S.-style rule barring investors from short-selling shares of companies issuing new equity during the final days before pricing, the people said. In a short sale, an investor sells a borrowed stock with the intention of repurchasing it later at a lower price and returning it to the lender, pocketing the difference. Under the U.S. Regulation M, investors who buy shares in a company’s secondary offering are barred from shorting the stock during a restricted period, typically five days, before the pricing. The Securities and Exchange Surveillance Commission is providing the Financial Services Agency with data on U.S. insider trading cases and rule breaches under Regulation M, the officials said. The FSA and SESC officials declined to comment on the specific issues they are studying. ‘Excessive Regulation’ Japan has the necessary rules in place, and additional restrictions on short-selling may drive away investors, Hirofumi Uchio, general manager of a self-regulation division at Japan Securities Dealers Association, said in an interview today. “Market participants observe rules and trade fairly in the market as we have sufficient pre-hearing rules,” said Uchio. “Excessive regulations on short selling may urge investors to exit from Japan. The companies selling shares should rather explain fully why they needed to raise capital.” Sumitomo Mitsui Financial Group Inc., Japan’s second- largest bank, and 92 other Japanese companies have sold stock or equity-linked securities in public offerings in 2010 worth a combined 5.3 trillion yen ($64 billion), data compiled by Bloomberg show. Tokyo Electric, Asia’s largest utility, raised about 450 billion yen in a stock sale last month. The shares fell 9.7 percent during the two weeks from the company’s announcement of the offer to the Oct. 12 pricing, while the Nikkei 225 Stock Average slid 1.8 percent in the same period. Inpex, the operator of a proposed $20 billion natural-gas project in northern Australia, raised about 520 billion yen selling stock. The company’s shares slumped 10 percent in the two weeks following the announcement. To contact the reporter on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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