The Tokyo Stock Exchange on Tuesday introduced tougher requirements for listed companies and those wishing to join them, gauging the firms by market capitalization or the value of their total shares on the market.
Under the new rules, firms listed on the TSE’s first section will be demoted to the second section if their market capitalization stands below 2 billion yen for nine straight months.
Companies listed on either section will be forced off the bourse if their stocks fall below a combined 1 billion yen in market value.
The move is aimed at dispelling growing distrust in the TSE after a series of bankruptcies involving listed companies, including the construction firm Sato Kogyo Co., TSE officials said.
The number of listed companies that have gone bankrupt this year stood at 20 as of Aug. 19, a sharp increase from five in all of 2001, according to TSE data.
Previously, the TSE used listing criteria that many experts said was not strict enough to accurately gauge financial health, resulting in the exchange allowing some troubled firms to stay listed.
“We expect the new measure to help investors avoid seeing listed companies going bankrupt all of a sudden,” a TSE official said.
The TSE has also tightened listing requirements in terms of company finance.
The bourse will delist firms if their debts exceed assets for two straight years, a change from the current three years. Firms listed on the first section will also be demoted to the second section if they incur negative net worth for a year.
Brokerage officials, however, said the new requirements are far less strict than those in the United States and other developed countries.
They say between 20 and 30 listed firms are expected to be either demoted to the second section from the first section or kicked off the exchange under the new rules.
These companies have small market capitalization or poor earnings records and liabilities exceeding assets, a brokerage official said.
The TSE previously did not expel listed firms from the market unless they had negative net worth for three straight years.
The TSE has also taken into account such factors as the number of shareholders and turnover of shares before deciding on a demotion.
The new measures are expected to make the TSE more attractive to investors by attracting promising companies, even if they are currently in the red but are expected to boost their market capitalization above 100 billion yen upon listing.
Their earnings must also be expected to post a sharp recovery after listing.
Some analysts say the TSE has apparently begun to attract growing companies listed on the Jasdaq over-the-counter market and the Nasdaq Japan market. Many of the listed firms on those markets have set a goal to have their stocks eventually traded on the TSE’s first section.