Key points
- The tradable-share ratio is the ratio of the number of shares considered to be circulating in the market divided by the number of listed shares. The criteria for maintaining listing is 35% or more for Prime and 25% or more for Standard and Growth.
- In principle, stocks held by domestic banks, insurance companies, business corporations, etc. are excluded from tradable shares. However, if the holding purpose is pure investment and the trading history within the past five years can be confirmed, the shares may be included in tradable shares if they meet the requirements of the TSE.
- Simply purchasing company stock from cross-shareholding shareholders will not immediately increase the ratio. Since treasury stock is included in the denominator of the number of listed shares, the improvement effect will, in principle, only be seen after cancellation.
What is the tradable-share ratio?
tradable shares are stocks that TSE recognizes as having a high probability of being traded on the market, based on its listing standards. It is not an index that only counts stocks that are actually bought and sold on a daily basis. Calculated by excluding shares that are likely to be stably held based on shareholder attributes, shareholding ratio, purpose of holding, etc.
The calculation formula is as follows.
tradable-share ratio = Number of tradable shares ÷ Number of listed shares × 100
Listing maintenance criteria uses tradable shares in the following three ways.
| market | Number of tradable shares | Market capitalization of tradable shares | tradable-share ratio |
|---|---|---|---|
| prime | 20,000 units or more | 10 billion yen or more | 35% or more |
| standard | 2,000 units or more | 1 billion yen or more | 25% or more |
| growth | 1,000 units or more | 500 million yen or more | 25% or more |
The market capitalization of tradable shares is calculated by multiplying the number of tradable shares by the average daily closing price on the TSE market for three months prior to the end of the fiscal year. The number of tradable shares and the tradable-share ratio are affected by the shareholder composition, and the market capitalization of tradable shares is determined by the stock price factor.
What is excluded from tradable shares?
Under the current system, the following stocks are mainly excluded from tradable shares:
- Shares held by shareholders holding 10% or more of the listed shares. However, there are certain exceptions, such as stocks included in investment trusts and pension trusts.
- Shareholdings of Directors and Special Interests. This includes directors, auditors, executive officers, officers' shareholding associations, as well as close relatives of officers, affiliated companies, etc.
- Treasury stock.
- Shares held by domestic banks, insurance companies, business corporations, etc. In principle, companies are excluded even if their holding ratio is less than 10%.
There are exceptions to the last category. If it is clear from the large-volume holding report or the holding status report prescribed by the TSE that the purpose of holding the stock is pure investment or other purpose with a high probability of distribution in the market, and if the transaction history within the last five years can be confirmed, the TSE may recognize the stock as tradable shares. However, this exception does not apply to shareholders, officers, etc. who own 10% or more.
Therefore, it is not accurate to understand that “stocks of banks, insurance companies, and business corporations are uncirculated without exception.” What is important is not only the name of the shareholder, but also can you prove the purpose of ownership and trading history to the TSE.
The meaning of the 2022 review
The concept of tradable shares existed even before the market reorganization. However, under the 2022 system, holdings by domestic banks, insurance companies, business corporations, etc. will be treated more strictly, and the number of tradable shares, market capitalization, and ratio will be incorporated into each market's continued listing criteria.
The direct purpose of the system is to ensure appropriate liquidity for each market and to create a market that is easy for investors to buy and sell. On the other hand, when applied to the shareholder structure of Japanese companies, the tradable-share ratio is calculated to be lower for companies with more stable holdings based on cross-shareholdings or business relationships. As a result, the system had the effect of encouraging the sale of cross-shareholdings and the release of founding families' and parent company's equity to the market.
This is not a mechanism that directly prohibits cross-shareholdings. Even if a company can explain the rationale for cross-shareholdings, it does not necessarily mean that the shares will be counted as tradable shares. The rationality of ownership based on governance and the liquidity based on listing standards are different judgments.
How do we understand the differences with the old system?
| point of view | Before market reorganization | From April 2022 onwards |
|---|---|---|
| market segment | Differences in roles and maintenance standards for each category, such as the First Section of the Market, are unclear. | Clarifying the standards for tradable shares for each Prime Standard Growth |
| Stably held stocks | There was a relatively large scope for less than 10% holdings by banks, insurance companies, and business corporations to be included in tradable shares. | Excluded in principle, only included as an exception if net investment/trading results can be confirmed. |
| Prime equivalent ratio | There was a 35% standard in the First Section of the Market, but the definition and maintenance system were different. | Continue to maintain above 35% under stricter definitions |
| Judgment | Post-continued listing criteria are looser than new listing standards | In principle, judgment is made once a year based on the end of the business year, and if it is not achieved, it will be put into an improvement period. |
Even if the figure of 35% remains the same on the surface, the level of difficulty for the company changes depending on what counts as tradable shares. Even if the shareholder composition did not change, some companies saw a significant drop in the ratio as a result of recalculating using the new definition.
What causes the tradable-share ratio to change?
There are two ways to improve the tradable-share ratio: increase the number of tradable shares, which is the numerator, or reduce the number of listed shares, which is the denominator. However, the ratio does not change depending on any capital policy.
Measures to easily improve the ratio
- Market sale/offering by cross-shareholding shareholders or the founding family: If untradable shares are transferred to general investors, the number of tradable shares will increase.
- Sale of equity by the parent company/major shareholder: If the seller is a secondary shareholder, the numerator increases in the same way.
- Public capital increase or widely diversified sale to third parties: If new shares are held by tradable sharesholders, both the numerator and denominator will increase, but the higher the rate of increase in tradable shares, the higher the ratio will be.
- Treasury stock acquisition and cancellation of untradable shares: Treasury stock is also uncirculated at the time of acquisition and remains in the denominator, so the ratio does not change in principle. It will improve once the number of listed shares decreases through cancellation.
Measures that do not change the ratio in principle
- Stock split/reverse stock split: The ratio usually remains the same, as the tradable shares and listed shares increase or decrease at the same rate.
- Only acquires treasury stock from non-tradable shareholders and does not cancel them: Non-tradable shares is simply replaced by treasury stock.
- Stock price increase: The market capitalization of tradable shares will rise, but the tradable-share ratio itself will not change.
Check with numbers
Consider a company with 100 million issued and listed shares.
| holder | Number of shares | Should it be included in tradable shares? |
|---|---|---|
| Founding family | 30 million shares | No (holding 10% or more) |
| Corresponding bank | 5 million shares | No (strategy holding) |
| insurance company | 4 million shares | No (strategy holding) |
| Business partner corporation | 6 million shares | No (strategy holding) |
| Treasury stock | 5 million shares | don't |
| Domestic and international institutional investors and individuals | 50 million shares | do |
| Total | 100 million shares | 50 million shares outstanding |
The tradable-share ratio of this company is 50 million shares ÷ 100 million shares = 50%.
Compare the changes caused by subsequent measures.
| Measures | Number of tradable shares | Number of listed shares | tradable-share ratio |
|---|---|---|---|
| do nothing | 50 million shares | 100 million shares | 50.0% |
| Insurance company sells 4 million shares on the market | 54 million shares | 100 million shares | 54.0% |
| The company acquired 5 million shares from the bank and did not cancel them. | 50 million shares | 100 million shares | 50.0% |
| Cancellation of the above 5 million shares | 50 million shares | 95 million shares | Approximately 52.6% |
| Issued 10 million new shares to general investors | 60 million shares | 110 million shares | Approximately 54.5% |
As can be seen from this table, even the same "capital policy" has significantly different effects on the tradable-share ratio. The IR department must confirm whether each share counts as a tradable shares after the initiative, not the name of the initiative.
Relationship with cross-shareholdings
There are already multiple systems in place regarding cross-shareholdings.
- annual annual Securities reports require disclosure of the purpose of holding each issue and the quantitative effects of holding it.
- Corporate Governance Code Principle 1.4 requires ownership policies, reduction policies, and individual verification by the board of directors.
- The Stewardship Code encourages investors to engage in dialogue about capital allocation, including cross-shareholdings.
- The tradable shares standard reflects cross-shareholdings in liquidity for maintaining listing.
The first three work primarily through explanation and dialogue. The tradable shares standard is directly reflected in the calculation of the listing maintenance standard, independent of the content of the holding explanation. This difference made the 2022 review powerful in practice.
However, one should be cautious about assuming that the TSE changed its definition of tradable shares in order to eliminate cross-shareholdings for policy purposes. The purpose of the official system is to ensure market liquidity, and the reduction in cross-shareholdings can be seen as an important effect of the system on Japan's shareholder structure.
flowchart TD
A["Number of listed shares"] --> B["Deduction: Shareholders holding 10% or more <br/> (certain exceptions apply)"]
B --> C["Deduction: Officers/Special Interested Persons"]
C --> D["Deduction: Treasury stock"]
D --> E["Deduction: Domestic banks, insurance, business corporations, etc. <br/> (with exceptions such as pure investment)"]
E --> F["Number of tradable shares"]
F --> G{"tradable-share ratio"}
G -->|"35% or more"| H["Meets Prime ratio standards"]
G -->|"25% or more but less than 35%"| I["Can meet standard growth <br/> ratio standards"]
G -->|"less than 25%"| J["It is necessary to respond according to the standards of each market."]
classDef pass fill:#e6efe1,stroke:#3d6b3a,color:#1f3a1d
classDef warn fill:#f9eecc,stroke:#a07e3a,color:#3a2d10
classDef fail fill:#f4d5d0,stroke:#8a3f3a,color:#3a1614
class H pass
class I warn
class J fail
Suggestions for IR personnel
- Reproduce your company's ratio using the TSE formula. The "free-float ratio" used by a company or an index company's free-float ratio is not necessarily the same as the TSE's tradable-share ratio.
- Categorize shareholders not only by attributes but also by purpose of ownership. Banks, insurance companies, and business corporations may also be included in tradable shares if they can prove their net investment and trading history. Confirm the required documents with shareholders early.
- Explain share buybacks and cancellations separately. Acquisition alone may not improve the ratio. Board of Directors meeting materials and disclosures to investors will indicate whether or not there will be a cancellation and when it will be implemented.
- Manage in anticipation of judgment at the end of the business year. In principle, TSE reviews the status at the end of each fiscal year once a year. In-house estimates are made every quarter so that we can respond before the reference date.
- Discuss listing maintenance and capital policy together. Sales of cross-shareholdings, secondary offerings by major shareholders, capital increases, cancellation of treasury stock, and changes in market classification are matters that should be jointly determined not only by IR but also by finance, legal affairs, corporate planning, and the board of directors.
Source/reference materials
- Japan Exchange Group “tradable shares – Details of standards for maintaining listing”: https://www.jpx.co.jp/equities/listing/continue/details/02.html
- Japan Exchange Group “Listing Maintenance Standards (Prime Market)”: https://www.jpx.co.jp/equities/listing/continue/outline/01.html
- Japan Exchange Group “Listing Maintenance Standards (Standard Market)”: https://www.jpx.co.jp/equities/listing/continue/outline/02.html
- Japan Exchange Group “Listing Maintenance Standards (Growth Market)”: https://www.jpx.co.jp/equities/listing/continue/outline/03.html
- Japan Exchange Group “Summary of Market Segmentation Review”: https://www.jpx.co.jp/equities/improvements/market-structure/01.html
- Japan Exchange Group "Definition of tradable shares - Exceptional treatment of stocks owned by domestic ordinary banks, insurance companies, business corporations, etc.": https://faq.jpx.co.jp/disclo/tse/web/knowledge8628.html
- Japan Exchange Group “Corporate Governance Code”: https://www.jpx.co.jp/equities/listing/cg/index.html
Related articles
- 3.1---From 4 categories to 3 categories: Market reorganization incorporating tradable shares standards.
- 3.3 - Rules for maintaining listing after completion of transitional measures: Improvement period and procedures up to delisting when standards are not achieved.
- 5.2 -- Final phase of cross-shareholdings: Overall picture of the system surrounding disclosure, individual verification, and reduction.
- 4.1 -- How to read PBR below 1x: Capital cost management in parallel with reviewing capital structure.
- 1.2――Who filled the void after the main bank: Historical background of cross-shareholdings.