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October 2006

Update : Dec. 01, 2006


1. Semiannual Financial Results for the Fiscal Year Ending March 2007

For the first half of the fiscal year ending March 2007, consolidated operating revenue of the Tokyo Stock Exchange (TSE) was JPY 36.947 billion, up 26.2% from the corresponding period of the previous year, and consolidated operating profit was JPY 16.75 billion, up 78.6%. Consolidated current profit for the same period was JPY 17.193 billion, up 67.0%, while consolidated semiannual net profit was JPY 10.014 billion, up 60.5%.

The breakdown of these figures is as follows.
For operating revenue, trading participant fees were up 36.7% compared with those for the previous year, due to more buoyant market conditions on the TSE than in the previous year. Listing-related revenue was up 10.1% from the previous year, partly due to an increase in annual listing fees linked to an increase in market capitalization; also information services-related revenue was up 18.7% from the previous year due in large part to an increase in the number of Market Information System real-time terminals. In addition, securities settlement-related revenue was also up 33.3% from the previous year, which is attributed to an increase in clearing fees linked to an increase in trading value.

Operating expenses were up only 1.7%, almost unchanged from the previous year due to efforts of general cost curtailment despite an increase in depreciation allowance.

These financial results stand at the highest level since 2001 when the TSE was demutualized.

2. Improvement of the Listing System, based on Our Comprehensive Improvement Program for the Listing System

The TSE published a public discussion paper last March to gather a wide range of opinions on its listing system. Based on its results, the TSE announced an implementation plan last June entitled "Comprehensive Improvement Program for the Listing System". The TSE will carry out improvements to its Listing System through the themes outlined in the "Items to be implemented immediately", shown in (1).

In tandem with the enactment of the Corporate Law last May, the TSE conducted an overall review of its listing system. During the six months since then, the TSE has discovered various other items to be reviewed in business practices.
Items 1 to 3 under the "General Overview" on page 2 of your documents correspond to the Comprehensive Improvement Program's "Items to be implemented immediately"

(1) Items to be Implemented Immediately

Share Splitting

The TSE will make a provision for listed companies to make efforts to avoid causing disruption in the secondary market when conducting a share split. For some time, the TSE has asked all its listed companies to refrain from share splitting with a ratio of over five-for-one, or when the stock split would cause the investment unit to be lower than 10,000 yen.
On the other hand, thanks to the efforts of the Japan Securities Depositary Center, Inc., since January of this year new shares can be applied to settlement items starting from the day following the split record date. This move aims to help substantially reduce concerns over fluctuating stock prices caused by an imbalance between supply and demand, and speculation over the imbalance after share splitting. It is under these circumstances that the TSE will replace the current voluntary restraint practiced by all the listed companies with an item to be respected in its listing rules.

Establishment of a Desirable Investment Unit Standard

The TSE previously set the desirable investment unit standard to "JPY 500, 000 or less". However, the TSE will revise the standard to "between JPY 50,000 and JPY 500,000". This is because, with only the upper limit of "JPY 500,000 or less", there is a risk that an extremely low investment unit might be recognized as an investment unit recommended by the TSE.
Currently, the investment unit level of "JPY 500,000" has been established as a reference mark to some extent. In the event that a listed company whose investment unit exceeds this level hopes to lower its investment unit, the company would usually take the option of reviewing the number of shares in one trading unit instead of share splitting. In many cases, however, the investment unit is reduced to one-tenth, for example from 1,000 shares to 100 shares. Even in this situation, the TSE sets the lower limit to JPY 50,000 which corresponds to one-tenth of JPY 500,000, to avoid the minimum investment unit from falling below the desirable investment unit standard.

Establishment of Inspection System Pertaining to Business Improvement Reports

In the event that a company violates the rules of timely disclosure of corporate information and is obliged to improve its business, the TSE requires the company to file a business improvement report. It has also decided to establish a system to inspect whether the company adequately undertakes business improvement measures as mentioned in the report. Six months after the business improvement report is filed, the TSE requires the company to file a "report on the state of improvement", outlining how the business has improved during that period. The report on the state of improvement must be submitted as necessary for five years following the filing of a business improvement report. In the event that the state of improvement is found to be inadequate, the TSE will be able to request the company to file a business improvement report once again.

Establishment of System of Issuing Cautionary Notices

Currently, in the event that a listed company makes false statements in its securities report or other documents required to be filed by law, the listed company may be delisted on rare occasions if the TSE determines that the statement may have a significant impact on the market. In many cases, however, only delisting examinations are conducted.
In the future, in the event that a surcharge system pertaining to disclosure documents required to be filed by law is fully implemented, resulting in government imposing certain penalties on listed companies, the TSE considers it necessary to issue a cautionary notice to investors.
In the case that a listed company makes false statements in its securities report, the TSE will be able to issue a cautionary notice which it will also make public.

Improvement of Information Disclosure

Taking into consideration the result of discussions held at the "Consolidated Earnings Digest Research Meeting" last March, in order to simplify earnings digests, the TSE will ask listed companies to disclose their "Policies on Lowering Investment Units" and "Items Related to Parent Companies and the like", which appears on the next page, separately from their earnings announcement. In the event that a listed company changes its earnings forecasts more than 10% in sales and 30% in current profits, the TSE requires the company to disclose such revisions. In addition to sales and current profits, the TSE proposes to include operating profits in the items to be disclosed if there is any revision.

(2) Development of Listing System for Foreign Companies

The development of the listing system for foreign companies is classified under "Others" in our Comprehensive Improvement Program for the Listing System. When establishing our foreign stock market in 1973, the TSE developed its listing system on the premise that major blue-chip companies already listed on a US or European stock exchange would also list on the TSE. However, the need to establish a future system for the primary listing of foreign companies on the TSE has now become necessary in order to actively encourage companies of Asian countries in particular.
In the event that foreign companies are listed on the TSE as their primary exchange, the TSE will impose the following four requirements on them, providing there is no legal restriction imposed by their home countries.
First, the TSE requires foreign companies to station a chief information officer in Japan as well as in their home countries. This is because it is assumed that there are a number of shareholders in Japan in the case that the company is listed on the TSE as its main market.
The second point is to oblige foreign companies to encourage shareholders in Japan to execute their voting rights by a letter of trust or in writing. The TSE has adopted the example of this system that already exists in Singapore and Hong Kong.
The third point is to request foreign companies to file a written document, based on the report on corporate governance which the TSE currently requires domestic listed companies to submit.
The fourth point is to apply timely disclosure regulations to those companies equivalent to an affiliate or subsidiary of the foreign listed company.
This is because, at present, companies subject to timely disclosure regulations are assumed to be those which have capital ties with foreign listed companies (for example, a consolidated subsidiary). However, some Chinese business corporations, so-called red-chip companies, substantially control their affiliated or subsidiary companies not by capital, but by contract. As such, the TSE will require these foreign companies to provide timely disclose of decisions taken by and facts arising relative to the contracted companies.

(3) Examination of Independence from Parent Company

The examination of a listed company's independence from its parent company was not taken into consideration when TSE's foreign stock market was established, since the TSE assumed at that time that only large-scale foreign companies would be listed. In order to align its rules with the Mothers market, which already subjects companies to an examination of independence from a parent company, the TSE will apply the same rule to companies listed on its First and Second sections.

(4) Treatment of Foreign Companies Already Listed on a Market other than the TSE

The TSE will forgo some of the substantial listing examinations it currently conducts in the event that the development of the legal systems and regulations in the foreign company's main market are adequately reliable.

(5) Review of Quarterly Report

According to Mothers market regulations, if a company applying for new listing is a foreign company, it is required to attach a review report in which CPAs express their opinions, along with a written document outlining its quarterly financial results and performance. In the future, the TSE will determine whether or not the report must be attached, taking into consideration the legal system of the home country.

(6) Review of Fee Structure for New Listings

Currently, in the case of listing on Mothers, the same listing fees are applied to both foreign and domestic companies. In the case of listing on the First or Second Section of the TSE, foreign companies receive a substantial discount in comparison with domestic companies. In the case of a foreign company whose main market is the TSE, however, the company is treated in the same way as a domestic company in terms of listing management, etc., therefore, the TSE has decided to impose the same listing fees on foreign companies as domestic companies.

(7) Strengthening of Function to Provide Information on Risk Factors

The number of primary listings on the TSE by foreign companies, mainly from Asia, is expected to rise in the future. We therefore consider it necessary to provide more information to foreign companies regarding specific risk factors including governing laws and corporate structures. In addition, the TSE is proposing that foreign companies listed on Mothers are displayed in a "Mothers Foreign Section", separately from domestic issuers.

(8) Improvement of Examination System

When a company is listed on the First Section of the TSE, it automatically becomes a TOPIX component issue. Currently, the TSE specifies the date when a company will move from the Second Section to the First Section. Therefore, some market participants point out that transactions carried out by investors speculating when a company may move to the First Section can cause adverse effects such as the disruption of the secondary market. To avoid these negative effects on the market, the TSE will accept listing examination applications for the First Section as needed, without specifying the date of listing.
When conducting listing examinations for the First Section, the TSE will require both the applicant company and a securities company to submit written confirmations stating their non-involvement with antisocial organizations.

(9) Letter of Recommendation Requirement

The TSE will require companies to submit a letter of recommendation when applying to list on Mothers, in the same way that it is required on the First or Second Sections.

(10) Review of Listing Examination Fees

While there have been increasing calls to improve and strengthen the process of listing examinations recently, the amount of fees paid to attorneys and legal professionals outside companies has been rising significantly. It is under these circumstances that the TSE has revised its listing examination fees from the current JPY2 million to JPY4 million, while listing examination fees for Mothers will rise from the current JPY 1 million to JPY 2 million.
We intend to implement these revisions by the end of December after gathering public comments.

(11) Number of Order Executions in the Current Trading Systems

The TSE previously announced that it would increase the number of executions in its current trading system to 14 million. Since preparations for this went smoothly, the system capacity increase took place on Monday, November 6 as scheduled.


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