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Fuzzy delisting rules put Toshiba's fate in bourse's hands

TSE safeguards not designed for drawn-out corporate crises

TOKYO -- The possibility of Toshiba getting kicked off the Tokyo Stock Exchange has investors on edge even after the conglomerate delivered a long-delayed earnings report, as guidelines for administering that harsh fate leave much to the bourse's discretion.

Shares in the fallen Japanese blue chip might seem a bargain, considering the value of its flash memory business. But the math was not enough to convince a British asset manager responsible for more than $36 billion. Given the difficulty of predicting whether Toshiba will remain listed, the fund cannot take the risk, its Japan-equities chief said.

Confusion surrounding the sale of Toshiba Memory poses the largest unknown. If Toshiba cannot close on the transaction and book the proceeds by the end of March 2018, the company will end its second fiscal year in a row with negative shareholders' equity. This clear violation of TSE rules would trigger delisting.

But other delisting criteria are tougher to puzzle out. If an auditor gives a company's accounts the thumbs-down or refuses to issue an opinion, for example, the company would face removal if the bourse "deems that it is clearly difficult to maintain order in the market" without an immediate delisting. But what would influence this judgement is left unstated.

Unforeseen consequences

The status of "security on alert," given to Toshiba's stock in September 2015, involves other ambiguities. Companies so labeled risk delisting until Japan Exchange Group's self-regulation arm completes a screening and allows the designation to be lifted. If the bourse "deems that the listed company has not improved its internal management system," the company would be delisted. But just how much improvement the TSE expects is opaque, leaving investors unsure of their footing. Toshiba's shares, demoted to the TSE's second section this month, are limping along as a result.

When the "security on alert" designation was introduced in 2007, it was intended as a safeguard against immediate delisting when companies were caught behaving badly. Seibu Railway -- now part of Seibu Holdings -- was delisted in 2004 amid a scandal over falsified shareholder records. Cosmetics maker Kanebo was shown the door in 2005 for accounting fraud and later acquired by Kao. But punishing companies in this way hurts general shareholders, too, by robbing them of a chance to trade their stock. The thinking behind the probation period is that it is better to hold companies under supervision and prod them to shape up, for the good of shareholders.

This system rests on the assumption that companies can rehabilitate themselves in fairly short order. But Toshiba seems to lurch from one crisis to another. Its accounting scandal had barely subsided before massive losses at an American nuclear unit came to light. Ongoing squabbles over the Toshiba Memory sale have raised even more questions. Some market insiders are calling for changes to how the scheme of safeguards operates, to better handle such edge cases if another crops up.


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