On March 31 2011, the Tokyo Stock Exchange (TSE) enacted amended listing rules for Mothers (the name is derived from the market of the high-growth and emerging stocks), a securities market established for relatively young, growing companies. Amendments were made from the perspectives of improving the credibility of, and stimulating activity on, Mothers.
The background of this revision stems from the recent discovery that some companies listed on Mothers had window-dressed their financial statements before and after listing; one of these companies went bankrupt as a result of its window-dressing only six months after listing. As a result, the credibility of Mothers was undermined. Additionally, the number of newly-listed companies has remained low, partly due to the time-consuming process of listing examinations, as well as listing costs.
Financial statements to be filed with the TSE must now be audited by a listed company audit firm that is registered with the division for listed company audits set up by the Japanese Institute of Certified Public Accountants and whose audit quality control systems are confirmed as meeting certain standards. In response to the recent cases of window-dressing, this amendment aims to restore credibility in respect of the financial statements of companies listed on Mothers.
In addition, the delisting criteria of the First Section and Second Section of the TSE, which are stricter than those of Mothers, are now to be applied to companies that have been listed on Mothers for more than 10 years. Moreover, when 10 years has passed since a company was initially listed on Mothers, such company must decide whether it will maintain its listing or change the market on which it is listed to the Second Section of the TSE.
If the company chooses the former, it must, in principle, submit certain documents to the TSE. These documents consist of (i) an explanatory document indicating that the company maintains its high growth potential and (ii) a certificate issued by an expert, such as a securities company, auditing firm, M&A adviser or bank, verifying the company's high growth potential.
These amendments aim to clarify the underlying concept of Mothers as a market intended for young, growing companies. A further amendment prescribes that a lead managing underwriter must now submit a document indicating points of particular concern with respect to the listing instructions and the underwriting examination.
In order that companies can be listed according to their desired timing, the rules of the filing examination have been changed from the viewpoint of long-term profitability. Under the previous rules, a company was required to formulate a reasonable business plan, and business results were expected to have been improved by implementing that plan.
However, under the current rules, a company is still required to formulate a reasonable business plan, but it must only, or is expected only to, build a business foundation on which to implement its business plan (including human resources, infrastructure and funds). Specifically, it is not necessary for the company to show profits at the time of the listing or for profits to grow immediately after the listing as compared to previous trends. This amendment will provide for a listing examination with a view to the long-term profitability of the examined companies.
In addition, as a means of shortening the listing preparation period, a recommendation letter from a lead managing underwriter has only to be submitted immediately before the date of the approval of the listing, rather than by the time of the listing application, as was prescribed under the previous rules. As a result of this amendment, part of the underwriting examination will now parallel the TSE listing examination, and this will shorten the listing preparation period.
Furthermore, the normal listing examination period is set to be two months, although it had previously taken just under three months. This amendment will be beneficial for improving the predictability of the examination period.
By implementing the amended rules, it is expected that investors will be more sufficiently protected and that young, growing companies will be more motivated to list. Therefore, it is also expected that Mothers will ultimately become a more attractive market.