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August 2002 Tokyo Stock Exchange Board Report

Date 01/10/2002

Revision to TSE's 1st and 2nd Section Listing Systems

In recent years TSE has experienced an increase in the number of companies that have delisted in Japan's increasingly harsh economy. In particular, companies that have delisted due to bankruptcy have increased steadily over the past 3 years. During this difficult period TSE recognizes the need to establish effective measures that maintain and increase investors' trust in the market, such as measures that allow for the expedited delisting of companies with poor finances or companies that are given lowered value by the market. This matter is also outlined in the Prime Minister's Cabinet's 2002 basic policy, which called for the creation of stricter deslisting criteria for the Japanese securities market.

The first aim of these revisions is to increase the trust in TSE's 1st and 2nd Sections by reviewing its delisting criteria. Furthermore, there presently exist some companies that, although in the midst of temporary financial loss to factors like company restructuring, have been given a high value by the market due to their present activities and future potential. By permitting listing of such attractive companies TSE can help contribute to the revitalization of Japan's economy. Therefore, the second aim of these revisions is to preserve investment opportunities in highly valued, attractive companies. TSE expects these revisions to increase the support for TSE's 1st and 2nd Sections by investors and listed companies as well as contribute to the strengthening of TSE's international competitiveness.

The first part of these revisions is to make more stringent TSE's delisting criteria concerning excessive debt. Currently TSE's standard is to delist a company that exhibited excessive debt for 3 years in a row in its non-consolidated and consolidated financial sheets. TSE will change that standard so that only consolidated financial sheets will be examined, and it will decrease the time scope of examination from 3 years to 2 years. These revisions will be applied at an appropriate time in order to avoid any confusion brought on by these system changes. Next, TSE will create new criteria for delisting based on market capitalization. Any company whose market capitalization has fallen below 1 billion yen yen will be given a grace period of 9 months to increase their value above 1 billion yen yen. Those companies that cannot fulfill this requirement within the grace period will be delisted. TSE will place this criterion into effect from April of next year.

Next, TSE will enact revisions to its criteria for transferring a company from its 1st section to its 2nd section. The new regulations will stipulate that any company that has carried excessive debt for the latest one year period or has market value below 2 billion yen yen will be transferred to the 2nd section. This revision will increase the trust in 1st section issues by removing companies with a worsened financial condition and a consistently unfulfilled market value.

TSE will establish other new criteria as well. First is the establishment of new standards for 1st Section placement and listing examination concerning market capitalization. In order to preserve the stability of listed products, TSE will demand a market capitalization of above 2 billion yen yen for a new listing and a market capitalization of above 4 billion yen yen for 1st Section placement. Next, TSE will revise its delisting criteria with regards to shares held by the "special few". ("Special few" is a term given to an issue's 10 largest shareholders, persons having a special interest in the issuer, and the issuer itself if it also holds shares.) Currently TSE's places any company with a "special few" shareholder percentage greater than 80% in a one year grace period in which the company could work to reduce that percentage. However, if that percentage were to exceed 90% due to, for example, a take over bid, thereby causing liquidity in that security to drop dramatically, TSE will now delist that company without a grace period. Furthermore, TSE will shorten the amount of time it places a company in the post for stocks to be delisted. Whereas TSE has placed companies in this post for 3 months to allow investors a chance to withdraw their money from these stocks, TSE will, due to trading conditions in this post, shorten that time to one month.

TSE will also conduct revisions on selection of market section and disclosure fulfillment for rebuilding plans.

Next, TSE has also reviewed its listing examination standards for companies that are presently in the red due to restructuring and the like but have received a high value from the market. TSE will work to preserve opportunities for expedient listing. TSE will not examine prelisting income results for companies with a market value above 100 billion yen yen and net sales exceeding 10 billion yen at the time of listing. However, with regards to companies that have not booked a profit before listing, in order to preserve the trust of the market TSE will conduct stricter examinations on income conditions after listing and will only accept the listing of those companies for which a suitable profit can be expected a short time after listing.

TSE plans to place these revisions in effect in early October after a period of public comment.

Revisions to TSE's Clearing Systems following the Transfer to a Unified Clearing and Settlement System

Japan's new unified clearing and settlement system, Japan Securities Clearing Corporation, Inc., is set to begin operations in January of next year. In preparation for its launch, TSE will make all necessary revisions to its systems to accommodate this change.

TSE's Response to the Securities Market Reform Promotion Program

The Securities Market Reform Promotion Program, which the FSA announced on August 6, consists of three main goals: creating a market that is easy to invest in, establishing a market that investors can trust, and constructing a market that is efficient and competitive. This program also contains requests for Japan's securities exchanges and other financial institutions, and TSE's response to these requests is explained below.

The program first calls for a strengthening of corporate governance. Within this request is, first, a demand for fuller disclosure of corporate governance by making necessary the disclosure of governance related information within financial summaries. TSE already requests listed companies to explain how they are dealing with corporate governance in their financial summaries, but beginning with the March 2003 summary such information will become a necessary requirement of the summary. TSE will allow each company to independently decide what to write in these reports, but after examining the information on governance in a variety of financial statements it will publish guidelines for governance disclosure in its Timely Disclosure Guidebook. The program also calls for the enhancement of listed company governance, under which 2 points are raised. The first point calls for an examination on effective ways to enhance corporate governance. For this TSE will organize a committee of academics and business professionals and solicit their opinions and ideas on the type of corporate governance that is desirable within listed companies. The second point regards voting rights. TSE will work to create an environment that encourages listed companies to promote the exercise of voting rights among their investors, and it will study what roles it can fulfill for this as the market operator.

The program next requests the creation of a practice manual to enhance disclosure of quarterly financial and business information. TSE already announced on June 27th its action program for the disclosure of quarterly financial information and, along with this, will consult and cooperate with various related organizations in dealing with this issue. Next, related organizations were asked to explore effective policy in order to secure the properness of timely disclosure. TSE already demands the timely disclosure of material information from listed companies, but it will review these operations as well as strengthen its post-disclosure check systems.

TSE's response to the third request, making stricter delisting criteria, is explained above in "Revisions to TSE's 1st and 2nd Section Listing Systems".

Fourth, FSA calls for a lowering of stocks' trading units. TSE has already begun an effort to encourage listed companies to lower their stock trading units through the release of its Action Program in September 2001, and will continue to implement this program while encouraging greater cooperation from listed companies.

Finally, regarding the fifth request for investor information, within this year TSE will look for ways to enhance the information it provides to investors.

TSE's London Seminar

On September 5th TSE held a seminar in London titled, "The Change in Japan's Securities Market - One Year after TSE's Demutualization."

As foreign participation in TSE's market has grown dramatically in recent years, TSE used this seminar to explain to a wide variety of European investors and financial institutions the present condition of Tokyo's market, TSE's aims for listing in 2005, its economic policy and its future prospects.

Recruitment of Listing Advisors

TSE is presently underway with preparations for its 2005 listing. As it advances with capital policy and financial strategy decisions, TSE recognizes that the use of Securities Companies' know how would be appropriate in its preparations. Therefore, TSE plans to recruit a listing advisor from among these companies to help in its preparations for listing. After an initial recruitment period, TSE will choose its advisor based on the applications submitted.

TSE expects the advisor to help TSE with capital policy, financial strategy, IR activities, and the like.