Japanese policymakers may have found the one thing that can force executives to simplify their arcane capital structures — threatening their status in the elite grouping of the nation’s top firms.
With just months to go until a key deadline in the Tokyo Stock Exchange’s once-in-a-generation makeover, companies are being forced to divest stakes, unwind tie-ups or cancel treasury stock to ensure that they remain among the country’s elite listed firms.
The process has been triggered by the reorganization of the Tokyo bourse, in which the bloated First Section will be replaced by a trimmer Prime segment. One requirement to make it into the new section is for firms to have a certain percentage of shares that freely trade — not locked up in cross-shareholdings or held by long-term business partners.
With the exchange itself deciding what counts as tradeable shares, some firms are discovering they might not make the cut. The head of one Japanese bank said he’s seen an uptick in the number of companies reaching out for advice on how to ensure they become members of the Prime market. Executives are weighing the cost of unwinding cross-shareholdings and improving governance, said the bank head, who couldn’t be named as the discussions aren’t public.
Even with more than 2,000 members, being on the First Section carries cachet in Japan. Those that want to make it to its successor will need at least ¥10 billion in “tradeable shares,” which omits large long-term shareholders, treasury stock held by the company itself and other types of stock considered unavailable. Those shares must also make up more than 35% of all stock issued.
This is creating a headache for companies and forcing some to rush to boost their ratio — with everything from buybacks to unwinding long-term capital ties with subsidiaries and partners under consideration.
“We are seeing some companies move to unwind their cross-shareholdings,” wrote SMBC Nikko Securities Inc. analysts including Keiichi Ito earlier this month. “Companies that struggle to meet the criteria may ask some shareholders to divest their shares and are also considering share buybacks or equity issuance.”
Japan Exchange Group Inc. will evaluate if companies have met the criteria on June 30 and notify firms the following month, though there’s a backdoor for those that fail to meet the cut. The reforms will replace five current market segments with three, with Standard and Growth sections rounding out the list.
Some companies aren’t waiting around. In February, Toyota Motor Corp. sold a portion of its shares in unit Toyota Boshoku Corp., a First Section firm that makes auto parts and textiles.
Toyota Boshoku said the sale was to ensure it would be listed on the new top market segment in order “to boost social credibility and visibility, and thereby increase corporate value.”
Askul Corp. is canceling 4 million shares in March, breaking with the precedent of many local firms, which often hold onto treasury stock for years at a time. The office-supply retailer said its tradeable share ratio is expected to increase to over 40% from about 37% with the cancellation.
For companies listed on the First Section, making it to Prime also means an almost-guaranteed membership of the new Topix Index, which will also be revamped in a lengthy transition process set to run until 2025.
“Because removal from Topix will likely trigger significant selling from passive funds, there are significant benefits to be had from boosting tradeable share ratio,” wrote the analysts at SMBC Nikko Securities.
The need becomes even more pressing with the Bank of Japan shifting its buying of exchange-traded funds solely over to the Topix, a move that’s expected to be beneficial for the index’s smaller firms.
There are other reasons why companies would want to be listed in the Prime segment, said Atsushi Kamio, a researcher at Daiwa Institute of Research, citing reasons such as recruiting new employees, the branding power of being listed in the elite section, and high liquidity allowing for easier financing.
And even companies that easily meet the requirements might still be considering corporate actions, Kamio said.
“The tide is turning — even companies that already fulfill Prime and new Topix standards may look at their competitors and want to boost their weight within the new Topix Index,” Kamio said. “In that scenario, they might have to unwind some of these strategic shareholdings.”
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