Make Prime a top-tier market with attractive stocks in TSE realignment

To attract more funds from overseas investors, it will be important to carefully select companies so that attractive stocks are available on the top-tier stock exchange.

In April next year, the Tokyo Stock Exchange (TSE) plans to abolish its current four sections — the First Section, the Second Section, Mothers and Jasdaq — and reorganize them into three sections — Prime mainly for large companies, Standard for midsize enterprises and Growth for startups.

The TSE said that the aim is to increase investment from overseas by clearly distinguishing the characteristics of each section, which have been ambiguous. It is desirable that the TSE will make the market realignment an effective reform.

The TSE has surveyed about 2,200 companies listed on the First Section as to whether they meet the criteria to be listed on the Prime market. About 30% of the total, or 664 companies, failed to meet the criteria, according to the bourse.

In order for firms to be listed on Prime, they will be required to maintain at least 35% of shares in circulation, meaning that they can be traded freely by individual and other investors in the market. Also, market capitalization of those shares needs to be at least ¥10 billion.

However, the TSE said that companies that fail to meet the listing requirements will be able to tentatively move to Prime if they submit a plan for improvement. As a result, there is a view that most of the companies listed on the First Section will move to Prime.

With such a rescue measure, the market reform must not end up being merely a “signboard replacement.”

There is no indication of how long they will be able to remain in the Prime market on a tentative basis. In order to attract companies suitable for the top-tier market, the TSE needs to set a clear deadline for the transitional measures that allow companies that fail to meet the listing requirements to tentatively remain in Prime. Moreover, it must also thoroughly screen the plans submitted by those companies.

At the same time, each company should use this market realignment as an opportunity to increase their corporate value.

Shares in circulation, which is one of the main listing requirements for Prime, do not include cross-held and other shares held mainly to maintain relationships with business partners. To increase the rate of shares in circulation, it is necessary to reduce cross-held shares.

Cross-held shares are an aspect of corporate culture seen as peculiar to Japan, and financial institutions are also involved in them. There has been strong criticism that having a large number of shareholders with close business and other ties would undermine the monitoring function of management. It is important to steadily eliminate such a corporate culture and advance efforts to strengthen corporate governance.

If the market capitalization of shares in circulation of a company listed on the TSE’s First Section falls below ¥500 million, the company is supposed to be delisted from the section. This criteria will be far stricter in the Prime market.

Companies whose market capitalization of such shares has not reached ¥10 billion need to implement drastic management reforms to ensure their growth. It is vital to draw up a detailed plan to meet the requirements and thoroughly disclose information to shareholders and others.

— The original Japanese article appeared in The Yomiuri Shimbun on July 14, 2021.