On November 11 1999, the Tokyo Stock Exchange (TSE) established a new market named Mothers for high-growth and emerging stocks. Over the course of its 10-year existence, a total of 250 emerging companies listed on Mothers. Because of market and economic changes since its establishment, the TSE has recently announced plans to refocus the objective of Mothers.
When Mothers was first established the TSE's listing requirements were minimal, in order to give more emerging companies an opportunity to list their shares. However, over the past 10 years the requirements for companies choosing to list on Mothers have steadily become more stringent. In addition, because of amendments to the Financial Instruments and Exchange Act, formerly known as the Securities and Exchange Law, companies listed on Mothers are now required to submit a quarterly report as well as an internal control report. As a result of such tightened regulations, it has become increasingly difficult for emerging companies to list their shares on Mothers. Taking this problem into consideration, the TSE has decided to refocus Mothers to be a market for companies with growth potential whose aim is to list on the First Section of the TSE in the near future.
In addition, the TSE plans to address a problem faced by all emerging markets including Mothers: the steady decline in investor confidence. Contributing to this is the fact that some companies choose to list on Mothers primarily to obtain investor funding and, shortly after receiving it, significantly change their business. If the business performs worse as a result, investors that relied on the initial share listing information may be misled. The TSE has decided to take measures to address this and other problems.
The TSE plans to revise its rules regarding Mothers mainly with respect to the following three points. First, the TSE intends to revise the requirements related to the listing of shares on Mothers. Specifically, it will improve the handling of recommendations. Currently, when a company applies to have its stock listed on Mothers, the TSE requires that a recommendation be obtained from a securities company that participates in the TSE and plans to offer the securities of the applicant company. The recommendation must include a determination by the securities firm that the applicant company has high growth potential. The TSE plans to remove this requirement if the applicant company experiences a large profit increase shortly before submission of its listing application. Through this revision, the TSE intends to encourage companies that have a long corporate history to list on Mothers.
Second, the TSE intends to add new delisting criteria for Mothers-listed companies. In particular, when the stock price of a newly listed company falls to less than 10% of the initial public offering price within three years of listing, the TSE will require it to submit a business improvement plan. And if the stock price does not recover within the following nine months, the TSE will delist the company. Under this new rule, the TSE aims to prevent listed companies from taking risky behavior such as changing their business activities and betraying the expectation of shareholders. However, the rule will only apply to companies that elect to list their shares on Mothers after the implementation of the new rule, since the new delisting rule may significantly impact existing companies.
Third, the TSE intends to require listed companies to provide more information to investors. At present, Mothers companies must hold investor relations meetings more than once a year for each of the three years following listing. The TSE intends to revise this rule and request listed companies to hold investor relations meetings at least twice a year for as long as their stocks remain listed on Mothers.
After the TSE has considered public comments on its proposed revisions, it plans to take steps to implement the revisions in November 2009.
Eiji Takao and Akira Matsuda