Stock Exchange, Under Investigations for Wash Sales, Plans New Share Sale


The Osaka Securities Exchange, the Tokyo Stock Exchange's poor cousin, plans to raise about JPY400 million by selling new shares, mainly to Kansai-based companies with listings on the Exchange. The OSE has always longed to bridge the gap with the TSE, who boasts trading volumes 25 times larger than the OSE. This desperation to get size and respect had them as early adopters of index futures contracts (Nikkei 225), and tying up with NASDAQ and Softbank's Son to attract venture capital companies.
NASDAQ's decision to withdraw from Japan was a blow to the OSE, and their "Hercules" replacement is looking pretty whimpy. As a reflection of their desperation, they have been accused by Japan's Securities Exchange Surveillance Commission of conducting "wash sales" to artificially boost trading volumes.


(TT's Take) The OSE, who as a public market place for the "fair and open" exchange of stock in listed companies, itself stands accused of manipulating the rules, and now is "trying to improve its image" with an issue of new stock!? Fact is, they need the money to put some vitamin drink in Hercules, but unless a miracle occurs in the foreseeable future, markets for emerging new companies will remain depressed, and trading volumes will continue to shrink, as the Koizumi Administration continues to deliver as they promised--i.e., pain (lots of pain) before (possible, maybe, perhaps) gains. What really needs to be done is to consolidate all the "big board" listings, i.e., the OSE 1 and OSE 2 with the TSE 1 and TSE 2, and all the emerging company markets--i.e., Mothers, Hercules, wannabes, etc. In the age of instant internet-based information, geographical distance means nothing in financial markets, be it three hours by Bullet train, or half a world away.

TSE Relaxes Delisting Requirements for Companies with Net Negative Equity


Now that the Industrial Revitalization Corporation (IRC) is up and running, the TSE has relaxed delisting requirements for companies that will be under the revitalization program. For companies for which the IRC purchases their non-performing loans from non-main banks, the TSE will extend the grace period to delisting by one year. Even companies that apply for Reconstruction under the civil reconstruction law (kind of like a Chapter 11 in the US), if they satisfy certain requirements, they can maintain their listing.


(TT's Take) The IRC is expected to buy up some JPY7 trillion of such NPLs over the next two years. The TSE has been pressured to ease their delisting requirements to accomodate these revitalizations. It is however possible that such de-facto bankrupt companies will get the grace period, only to eventually sold off to the RCC (Resolution and Collection Corporation). Where the IRC is designed as a "corporate hospital", the RCC is the corporate "graveyard" where the company's debts are dumped at 10-20% of their face value. If the IRC can't turn around a company in their target 3-year time frame, the next step is to pass it on to the RCC.


Thus these relaxed listing standards are a "caveat emptor" for investors, as the listed stock ostensibly would be traded, while details (disclosure) of the progress of the revitalization efforts could be limited. On second thought, however, it wouldn't be much worse than the major banks, who although effectively bankrupt, have just finished shoving some JPY2 trillion of new script down the throats of reluctant investors, and amazingly having non of their existing shareholders take them to court or even vote to boot out management at the shareholders' meeting.

Sarbanes Oxley is Driving Japanese Firms From the US Market


Ito Yokado has become the first Japanese firm to decide to delist from the US market, ostensibly because of the stringent provisions in the new Sarbanes Oxley law. There are presently 19 Japanese firms listed on the big board in New York, and 14 on the NASDAQ. Ito Yokado was one of the earlier US listers, but has decided to cease being traded on the NASDAQ from May of this year, and will cease preparing their financial accounts according to SEC standards, instead reverting back to Japanese standards, as early as 2004, due to declining numbers of US investors.


Ito Yokado's stock has slipped under JPY3,000 for the first time in 17 years, partially because foreign investors are dumping the stock. As of February of this year, foreigners owned some 19.3% of the company. For the reporting year to 2/2003, US-based operating profit was JPY1178.4 billion, compared to a reported JPY201.3 billion for Japan-based GAAP operating profits. The difference was that special losses recorded as special losses under Japanese standards from the closure of outlets is recorded in the US as operating expenses. Thus, even without Sarbanes Oxley, there is evidently dissatisfaction with the differences in reported numbers, the slack turnover, and the general lack of interest in Japanese stocks in the US. Average ADR trading volume for Sony, which has the largest local trading volume in the US, is only some 9% of Tokyo trading volumes. Compare this to a South African company like AngloGold, where US ADR trading volume is over 60% of their total trading volume. Part of the reason is that institutional investors are increasingly going directly to the Japanese market to trade Japanese stocks, thus bypassing the ADRs.


(TT's Take) Ito Yokado management confesses they haven't a clue why their stock dropped so sharply after deciding to delist in the US. The reason, however, is fairly straight forward. To foreign investors, this represents a reversal of the general trend for Japanese companies increasing their disclosure, as Japanese accounting standards approach global generally accepted accounting standards. In addition, there is no reason for local ADR market makers to hold ADR trading inventories for arbitrage positions. Ito Yokado management is correct in coming to the conclusion that the cost of listing in the US is not justified by the trading volumes, and the possible legal exposure to Sarbanes Oxley is not worth the risk if a US-listing does not significantly enhance their capital procurement strategies.


Other Japanese companies are currently considering delisting, because they seriously object to the requirement for an audit committee composed of outside auditors, the legal responsibility of management in vouching for the accuracy of the numbers they publish, and the requirement that foreign public accounting firms be subject to the supervisory authority of the US. To investors, however, who are increasingly focusing on the corporate governance regimes of both US and foreign companies as assurance that they will not get "hoodwinked" by schenanigans like WorldCom and Enron, this withdrawal from the global stage means that even heretofore progressive Japanese companies are becoming more insular. It is ironic to note that Ito Yokado at one time had what was considered one of the best financial reporting disclosure regimes in Japan.