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Tokyo Stock Exchange to allow fast-track promotion to big board

Controversial rule change seen as rescue for demoted Toshiba

The Tokyo Stock Exchange has been criticized for the way it has handled governance failures at Toshiba. (Photo by Toshiki Sasazu)

TOKYO -- The Tokyo Stock Exchange will ease requirements for promotion to its main market as early as next year, Nikkei has learned, a controversial move that goes against an ongoing debate to tighten listing standards.

Under the proposed new rules, to be announced as soon as this month, a company would need only two years of auditor-approved financial reports to move from the exchange's second section to the first section, against the current requirement of five years' filings.

For Toshiba, which suffered a demotion to the second section in 2017, the easing would create a faster path for returning to the big board.

Toshiba's fall, which was on the verge of delisting following an accounting scandal and huge losses, removed the industrial group from both the benchmark Nikkei Stock Average and the broader Topix.

The prospect of Toshiba's comeback as a blue chip has been closely watched. But the TSE drew criticism for its handling of the company's governance failures, and could face accusations of favoritism now.

"This is a blatant rescue of Toshiba," a market insider said of the exchange's proposal.

The rule change also risks running contrary to parallel discussions on tightening requirements for the first section, which critics say has become bloated with globally uncompetitive companies.

The stated aim of quicker promotion from the second section is to correct disparities among the exchange's several boards.

Companies can already move from the startup-heavy Mothers and Jasdaq to the first section with only two years' worth of approved financial reports. The five-year requirement pertaining to the second section has remained in place for about half a century.

But this is only one of the debates surrounding the first section, which has swelled to hold about 60% of all Japan's listed companies.

A Financial Services Agency council has proposed recasting Japan's leading stock exchange into to three tiers, topped by a selective "prime" market consisting of global blue chips.The Ministry of Economy, Trade and Industry believes the bourse should move quickly on some apsects of reform that are easy to gain consensus. In line with the ministry's position, the TSE could adopt new promption rules as early as 2020.

The FSA council envisions creating a more exclusive big board with stringent requirements on governance. Reducing the length of years of financial reports needed for promotion appears to contradict this intention.

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