1.Improvement to Listing System based on "Comprehensive Improvement Program for Listing System 2007"
In the “Comprehensive Improvement Program for Listing System 2007” publicized by Tokyo Stock Exchange, Inc. (TSE) last April, the Exchange has finalized the implementation outline for themes classified as “Items to be implemented immediately”. The essence of these themes is as follows.
(1) Improving the System Regarding Corporate Activities
The TSE will systematically incorporate the “Corporate Code of Conduct”, which listed companies are required to observe, into its rules and regulations. Some may argue to what extent the Exchange is able to restrict corporate activities that are permitted by law. However, it will be necessary to construct some frameworks which prevent “abuse of freedom” for the TSE to maintain confidence in the market as a market operator in light of the case of Livedoor. Therefore, the TSE will systematically arrange items to be respected regarding moving strike convertible bonds (MSCBs) to develop the “Corporate Code of Conduct”.
In the “Corporate Code of Conduct”, the TSE will create “Items to be respected regarding the issuance of moving strike convertible bonds (MSCBs), etc.” to ensure the effectiveness of the rules in consistence with the resolution adopted at the Board of Directors of the Japan Securities Dealers Association. If a listed company violates this “Corporate Code of Conduct”, the TSE will warn the company and publicize details of the warning.
(2) Improvements to the Market System
The TSE has determined to operate Mothers as a market closely combined with the First/Second Sections, not as a market parallel to the First/Second Sections. Specifically, the TSE will abolish the system of transfer from the First/Second Section to Mothers.
Also, for instance, bio-ventures, etc. sometimes have growth potential but are unable to record sales for a short period of time. The TSE will abolish the listing examination criteria for sales and at the same time will not apply the delisting criteria for sales for a period of five years after listing.
The criteria for the number of shareholders have become confusing due to the introduction of various preferential treatments. Therefore the TSE will simplify the criteria, for instance, by setting a uniform number of 800 shareholders or more in the listing examination criteria.
In place of the ratio of the number of shares held by the Special Few, the TSE will newly define the ratio of floating shares, and require it be 30% or more in the listing examination criteria.
We often see that the Special Few includes foreign shareholders and investment funds who are holders of floating shares. Considering these investors as holders of non-floating shares is worlds apart from the reality of the situation. Therefore, the TSE has determined to define shares held by shareholders who individually hold 10% or more of the number of listed shares as non-floating shares, and the remaining shares as floating shares.
The 10% level has come from the concept of a “major shareholder” under the Securities and Exchange Law, who is generally a holder of non-floating shares.
In addition, in order to not impede trading opportunities to the maximum possible extent, shares will be delisted only in the case of extremely lopsided share distribution in which the above ratio falls below 5%.
As for Mothers, there have been no criteria set for the ratio of the number of shares held by the Special Few. In order to improve liquidity in Mothers, the TSE will require that the floating share ratio be 25% or more in the listing examination criteria.
(3) Measures to Ensure Effectiveness of Listing Rules and Regulations
When a listed company is likely to be delisted due to, for instance, any “false description” in the Securities Report, the stock issued by such company is assigned to the Supervision Post for the purpose of the TSE’s materiality examination. In this instance, if materiality is confirmed by the Exchange, the stock will be delisted. Otherwise the stock is removed from the Supervision Post and returned to normal trading. Market users, etc. have pointed out that there is too large a gap between the former case and the latter case.
Therefore when the TSE confirms no materiality with respect to the false description, but finds high necessity for improving the internal management system of the company, the Exchange will assign such stocks to the newly established “Special Warning Market” for the purpose of continuous supervision. The TSE will require submission of written confirmation regarding the internal management system at one year intervals beginning from when the stock is assigned to this market. If it finds no particular problem at this point, the TSE will remove the stock from the Special Warning Market. However, if problems still remain even after the third submission of the written confirmation, the TSE will delist the stock.
In relation to the above, the TSE has designated the system for fines as the “secondary item for implementation” and will provide details on its ideas for such later on.
(4) Response to listing of various financial instruments
Currently, the TSE has listed only 11 ETFs such as those tracking the movements of stock indices including TOPIX, Nikkei 225, and narrow-based indices (sector indices). With respect to in-kind contribution type domestic ETFs, fund creators are only allowed to create ETFs tracking the movements of 11 stock indices as specified by the Commissioner of the Financial Services Agency due to restriction under the Investment Trust Law. These stock indices have to be solely composed of stocks, excluding REITs and other financial instruments. Furthermore, ETFs subject to taxation on dividend income and taxation on capital gain are also limited to those tracking the movements of these 11 stock indices. It is under these circumstances that the number of listed ETFs has not been growing and currently remains at 11.
On the other hand, the regulations of foreign ETFs are very loose for those that have requirements similar to those for domestic ETFs. For example, stock indices are not required to be those specified by the Commissioner of the Financial Services Agency, and REITs may be included in stock indices. In addition, if the ETFs are listed on one or more foreign exchanges, preferential tax treatments under the Special Taxation Measures Law are applicable to these ETFs. However, since the requirements of the assets to be invested in must be the same as those for domestic ETFs, foreign ETFs to be invested in cash products, such as gold and oil, may not be listed on the TSE market.
Under these circumstances, the Exchange will first aim to list foreign ETFs that are subject to these loose regulations.
Underlying indices will be those including REITs, commodity indices, and indices tracking the movement of commodity prices.
For listing application, the foreign ETF will have to fulfill requirements similar to domestic ETFs, and when determining whether or not this is so, the TSE will comprehensively take into consideration the underlying index, details of the specific assets to be invested in, etc. In addition, the foreign ETF will have to be listed on one or more foreign stock exchanges. Therefore, the trading and settlement systems for foreign ETFs will be the same as those for foreign stocks.
In the event that a foreign company is unable to have its share certificates listed on a stock exchange in a foreign country, the company in some cases deposits the share certificates to a custodian such as a trust bank, which then issues depositary receipts (DRs) which are listed on said foreign exchange. For example, Indian companies list ADRs and GDRs as they are not able to list underlying stocks on foreign stock exchanges.
In view of promoting the listing of foreign companies, the TSE will develop a listing system for Japanese Depositary Receipts (JDRs) to enable companies in countries such as India (which restrict the listing of underlying stocks) to use the system as a tool for listing on the TSE market.
Some market participants have also requested to list foreign exchange traded fund beneficiary certificates (foreign ETFs) using the listing system for JDRs, therefore, foreign ETFs will be traded in the same manner as foreign stocks as JDR underlying assets.
The listing examination system for JDRs will be equivalent to the existing listing system for depositary receipts. The trading system will be equivalent to that for foreign stocks or foreign ETFs which are underlying assets while the settlement system will be equivalent to that for domestic stocks, as JDRs are domestic securities.
The TSE will set forth a period for comments and suggestions by the public to implement the above development of the listing system in October 2007.
2.Creating New Logo Marks in Tandem with Changes in Organizational Structure
The TSE has created new logo marks for “Tokyo Stock Exchange Group, Inc.”, “Tokyo Stock Exchange, Inc.” and “Tokyo Stock Exchange Regulation”. Making a separate design for each logo mark, the TSE will express its willingness to strengthen the independence of its self-regulatory functions, one of the purposes for changes in organizational structure, and at the same time maintain the current logo design, which is familiar to the public as a symbol of the TSE, as the common identity of these three companies. These logo marks display the TSE’s stance that the three companies will energetically work as one in collaboration with one another, to strengthen the functions and enhance the attractiveness of the TSE market.
