Update : Dec. 28, 2010
Tokyo Stock Exchange (TSE) made a recent decision to improve the listing rules to increase confidence in Mothers and invigorate the market.
In 1999, TSE established Mothers as a market for growing companies with the aim of nurturing new industries in Japan by providing a venue for emerging corporations to raise funds for growth. However, misconduct and regrettable incidents concerning some listed companies led TSE to implement more stringent listing examination criteria as well as enhance investor protection measures such as improving quarterly reporting and the internal control report system based on the Financial Instruments and Exchange Act. Despite these efforts, several cases of false statements being made in the financial statements since before gaining a listing have been discovered in 2010. These developments have led to a loss of confidence in Mothers and a continued lack of new listing activity in the market since last year.
In order to maintain the sustained growth of the Japanese economy, the market for emerging companies needs to fulfill the function of nurturing new industries through providing growing companies with fund-raising opportunities and providing investors with attractive investment options. Earlier this month, the Japanese government also indicated its intent to proceed with a "Study of Policies for Restoring Confidence in and Stimulation of Markets for Growing Companies" in the "New Growth Strategy" based on the cabinet decision in June 2010. "The Action Plan for the New Growth Strategy" (Action Plan) specifically indicated a broad range of matters to be considered.
Under these circumstances, TSE will henceforth make improvements to the listing rules. These improvements shall comprise the three aspects of "increasing market reliability", "attracting new listings", and "invigorating the secondary market".
(Increasing market reliability)
- Increasing the reliability of financial statements
TSE will require companies seeking to be listed on Mothers to be subject to audit by a Listed Company Audit Firm, in the same way as a listed company. Such audit firms are recognized by the Japan Institute of Certified Public Accountants (JICPA) as having a certain level of quality control. Considering the recent cases of false statements and such regrettable acts by listed companies, TSE will also request the JICPA to continue appropriate operations of its Registration System for Listed Company Audit Firms and Quality Control Review System.
- Strengthening collaboration with market-related parties to enhance effectiveness of listing examination
When TSE receives a listing application, TSE will notify not only managing securities companies and accounting auditors of such applicant, but also securities companies or auditors which submitted written recommendations in the past three years. After receiving this notification, they are required to notify TSE of information which has or is likely to have a significant impact on the decision on the suitability of an initial listing applicant, thereby diversifying TSE's source of information on listing applicants.
If TSE receives significant information through this means, other than utilizing such information in the listing examination, TSE will also share this information with related parties such as the lead managing securities company, accounting auditor, and the financial bureau and collaborate to exclude companies whose listing suitability is questionable.
Other than the measures mentioned above, TSE will immediately commence operations where possible, such as utilizing external professionals and research institutions to enhance the effectiveness of listing examinations. TSE will also continue to strive to strengthen its collaboration, including the actual operation of such rules, with market-related parties.
- Clarifying the market concept
From the viewpoint of clarifying the market concept of Mothers being a market for growing and emerging companies, the delisting criteria is less stringent than those of the "main markets", the First and Second Sections. However, with regard to Mothers-listed companies which have been listed for more than ten years, TSE will apply the delisting criteria equivalent to that for the main markets.
In addition, TSE will establish a process to check suitability with the market concept for Mothers-listed companies which have been listed for more than ten years. Specifically, such companies will submit an application form to choose to either remain listed on Mothers or alter its listing market to the Second Section. If a company chooses to remain listed on Mothers, it will be required to attach a written confirmation pertaining to its suitability for the market concept and high growth potential prepared by the managing trading participant to the application form. With regard to companies already listed on Mothers on the date of establishing this process, this provision shall apply after three years from such implementation date.
TSE will increase the attractiveness of Mothers and fulfill the market functions by implementing these measures for improving the market confidence. At the same time, TSE will aggressively implement measures focusing on invigorating the market, considering a continued stagnation of initial public offerings in the market.
(Attracting new listings)
- Introducing listing examination methods in line with the market concept
With regard to the "reasonableness of the business plan", a Mothers listing examination item, TSE will 1) clarify that good business performance forecast immediately after listing is not a requirement, and 2) change the evaluation method to one where TSE evaluates the possibility of achieving business plans from a long-term perspective.
- Increasing the efficiency of the listing examination process
TSE will conduct a comprehensive review of various issues regarding listing rules and business operations from the perspective of shortening the examination period and increasing initial listing applicants' possibility of awareness of the period required for a listing examination. For example, TSE currently requests managing trading participants to submit the "written recommendation" when applying for an initial listing on Mothers. In the revisions, it shall be considered sufficient to submit it by the time when TSE approves the corresponding listing. This will enable TSE to conduct part of listing examinations in parallel with the managing trading participant's underwriting examinations, thereby shortening the overall listing examination period which includes the underwriting examination period.
TSE will set a standard listing examination period at two months and present in advance a specific schedule for a listing examination to an initial listing applicant to increase its possibility of awareness of the period required for a listing examination of Mothers. In addition, TSE will implement a wide range of measures to enhance the efficiency and transparency of the listing examination process. For example, if an applicant fails to be listed on Mothers, TSE will clearly explain the reasons in writing to help the company reapply for listing.
- Improving conditions by implementing retroactive audits
It has been pointed out that "retroactive audits on past financial statements have rarely been conducted in Japan, and this has prolonged a listing preparation period from a global standpoint". Currently, at least two and half years are required for an applicant to be listed in Japan after executing an audit contract. In Asian countries, however, retroactive audits enable public offerings even during a listing preparation period, for example, in one or one and a half years. Some pointed out that "this is one of the reasons why growing companies which seek to raise funds at an early stage proactively consider listing on Asian markets". With regard to retroactive audits, the Financial Services Agency also indicated its intent in the Action Plan to proceed with discussions with market-related parties. Based on the discussions, TSE will also make necessary adjustments to the listing rules. In addition, TSE will request the JICPA to improve conditions for conducting retroactive audits.
(Invigorating the secondary market)
In our efforts for existing Mothers-listed companies, TSE will work to increase liquidity in Mothers issues by seeking to increase analyst coverage, and providing IR support for new companies in the market.
Out of the measures mentioned above, TSE will solicit public comments regarding the matters which require revisions to the listing rules from December 21, 2010 to January 31, 2011 through a draft system outline. Following this period, TSE will revise the listing rules and implement them by the end of March 2011.