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Listing system

In June 2006, the Tokyo Stock Exchange (TSE) published a basic action plan and guidelines to improve its listing system.

Following this, the TSE established an advisory group to implement the programme. The advisory group published its interim report on March 27 2007 and, on the basis of this report, the TSE's revised plan, "Comprehensive Improvement Programme for the Listing System 2007", was published on April 24 2007.

The new programme discusses a number of items aimed at improving the listing system. These goals could be classified as items: (i) to be immediately implemented; (ii) to be implemented after deliberation and consideration of practical options; and (iii) to be considered on an ongoing basis.

In the first category of items are those to be implemented in or before September this year. Their implementation is intended to coincide with the Financial Instruments and Exchange Law (FIEL), which is expected to come into effect later this year and was enacted through an amendment to the Securities and Exchange Law. The new programme, however, does not include detailed regulations. The drafts of the detailed regulations will be published one by one.

The new programme focuses on improvements to the system in relation to corporate activities. It seeks to compel listed companies to disclose more information than ever before, including the purposes a company has for offering moving strike convertible bonds (MSCB) and for issuing new shares to a small number of investors. As regards these disclosures, the new programme seeks to update the system for ongoing disclosures to make it fit better with the quarterly reporting system introduced under the FIEL.

As well as improving disclosures by listed companies, the new programme seeks to establish a corporate code of conduct, as part of the listing rules, to guarantee that listed companies pursue appropriate corporate activities. The new programme will integrate pre-existing TSE obligations and other requirements of listed companies stipulated by the old rules. The code will also impose other requirements for listed companies regarding corporate governance activities, such as: (i) the establishment of a board of corporate auditors or an audit committee and accounting auditor; (ii) establishment of an internal control system under the Companies Act; and (iii) delivery of reference documents for the shareholders' meeting. These stipulations apply even to items not covered by the Companies Act, which in certain cases does not impose these requirements on some companies. The new programme addresses the listing of parent-owned companies and class stocks other than common stocks, as well as internal control systems under the FIEL.

The new programme also aims to improve the market system. It requires that the Mothers Board (a market established by the TSE) be the market segment for companies during their initial stages of growth as they work toward the meeting listing criteria for the TSE's first or second sections, intended for more established and stable companies. A number of measures will be undertaken to achieve these goals, including abolishing the old listing rules governing reassignment from other markets to Mothers.

Another subject for revision is a simplification of the complex system of trading units that exists for shares. There are more than seven types of equity units and the situation has been criticized as adversely affecting trading, due to the confusion it causes, which leads to erroneous orders for shares and other problems. To fix this problem, the TSE will seek opinions on how to best achieve the revision from concerned parties such as listed companies, securities companies, transfer agents and the central clearing system company that is, Japan Securities Depository Centre (Jasdec).

The liquidity requirement for the maintenance of listing has also been changed to permit companies less share liquidity without facing delisting. For example, these companies will not be delisted unless the "special few" own more than 95% of the company's shares. The special few is defined as: (i) the top 10 shareholders; (ii) board members and their relatives in the second degree; or (iii) the issuer itself (although this definition is also being revised).

The new listing rules are expected to stipulate additional means of enforcement. The main method of enforcement is delisting. But the new programme is going to introduce two other methods of enforcement: monetary penalties and the establishment of a separate market for companies that seriously violate the listing rules and require improvements but do not meet delisting criteria, and for companies that are found to require improvements through the confirmation of the internal management system by the TSE.

Lastly, the new programme seeks to establish a new listing system for various financial instruments such as funds, exchange-traded funds (ETFs) and Japanese depositary receipts (JDRs), many of which are listed on ordinary markets in the US and Europe.

A copy of the new programme can be found on the TSE website (www.tse.or.jp).

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