Tokyo Stock Exchange’s equity market structure set for major overhaul

Maria Nikolova

There will be three market sections – Prime Market, Standard Market, and Growth Market, with each company to be able to choose the most suited market section for its listing.

The Expert Study Group on Capital Markets in Japan of the Financial System Council has discussed and deliberated on the market structure of Tokyo Stock Exchange six times since May 2019. Today, the Expert Study Group published its Final Report.

The report outlines two key reforms: reorganization into three market sections, and TOPIX overhaul.

According to Reform 1 (Reorganization into Three Market Sections), the sections will be Prime Market, Standard Market, and Growth Market. Each company will be able to choose the most suited market section for its listing.

  • Prime Market
  1. This section will be for companies with a high level of market capitalization, a high level of free float, and a high quality of corporate governance, committing to improving corporate value through constructive dialogue with investors.
  2. Listing/delisting criteria on market capitalization will be revised stricter.
  3. Higher standards of the Corporate Governance Code will be applied.
  4. Companies with certain types of business model (e.g., e-commerce companies) can get listed in the Prime Market under additional conditions even where they run deficit.
  5. Companies currently listed in the 1st section can choose listing in the Prime Market under certain conditions.
  • Standard Market
  1. This section is for companies with a standard level of market capitalization, free float, and corporate governance.
  2. All the General Principles, Principles and Supplementary Principles of the Corporate Governance Code will be applied.
  • Growth Market
  1. This section is for companies with higher growth potential but higher risks.
  2. Current listing criteria on market capitalization will be maintained in order to facilitate access to risk capital.

The second reform envisages TOPIX overhaul, that is delinking the composition of TOPIX from the TSE market structure (i.e., any of the market sections), and selecting comprising companies with more emphasis on market liquidity while ensuring continuity from the current version of TOPIX.

Akira Kiyota, CEO of Japan Exchange Group, Inc., commented on the report:

“With the conclusion of the Specialized Study Group’s discussion, we will promptly start drafting a concrete and detailed design of the new market based on the proposals made by the Study Group, to which the transition is to be completed around the earlier half of year 2022. In order to facilitate smooth transition, the plan is to first publish the outline of the new structure around next February, so that listed companies and market participants can start their preparation”.

“Additionally, in parallel with the re-designing of market structure, we will proceed with our discussion regarding the review of indices (TOPIX etc.), taking into account comments and feedbacks from index users etc”, he added.

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