Cablegate: Tokyo Stock Exchange to Introduce Depositary Receipts But

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RR RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #2946/01 1790913
ZNR UUUUU ZZH
R 280913Z JUN 07
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 5004
INFO RUCPDOC/USDOC WASHDC
RUEATRS/TREASURY DEPT WASHDC
RUEHUL/AMEMBASSY SEOUL 3706
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RUEHFK/AMCONSUL FUKUOKA 1787
RUEHKSO/AMCONSUL SAPPORO 2604
RUEHNAG/AMCONSUL NAGOYA 0909
RUEHGH/AMCONSUL SHANGHAI 0182
RUEHHK/AMCONSUL HONG KONG 6265
RUEHNH/AMCONSUL NAHA 4200
RUEHGV/USMISSION GENEVA 3117
RUEHBS/USEU BRUSSELS
RUEAWJA/USDOJ WASHDC

UNCLAS SECTION 01 OF 02 TOKYO 002946

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EAP/J AND EB/OIA
USDOC FOR 4410/ITA/MAC/OJ/NMELCHER
STATE PASS USTR FOR BEEMAN, MEYERS AND DWEINER
JUSTICE FOR ANTITRUST DIVISION - CHEMTOB
TREASURY FOR IA/CARNES AND POGGI
GENEVA ALSO FOR USTR
PARIS FOR OECD

E.O. 12958: N/A
TAGS: EINV ECON EFIN JA
SUBJECT: TOKYO STOCK EXCHANGE TO INTRODUCE DEPOSITARY RECEIPTS BUT
IMPACT UNCLEAR

SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY

1. (SBU) The Tokyo Stock Exchange plans to introduce a system of
Japanese Depositary Receipts (JDRs) starting in September 2007. The
system will provide a new option for foreign companies that want to
access the Japanese capital markets, but that cannot or do not wish
to list their shares directly. JDRs will be domestic securities,
priced in yen, with transactions settled by means of the regular
Japanese clearing system. For Japanese investors seeking to
internationalize their portfolios, this makes JDRs more convenient
than purchasing foreign stocks directly. Both TSE and METI
officials view the introduction of this new type of financial
instrument in the Japanese markets as contributing to making Tokyo a
more globalized financial center. Whether significant numbers of
foreign companies will be interested in a JDR listing remains
unclear. End Summary.

2. (U) Like the almost 80-year-old system of American Depositary
Receipts under which shares of over 280 foreign firms trade on the
New York Stock Exchange, the JDR would be a security issued by a
domestic depositary bank that represents shares of a foreign
corporation held by that institution, which in most cases would be
an investment bank. The TSE would quote prices for and trade JDRs
alongside domestic shares. Prices for the securities would be in
yen and dividends paid in yen. Investors would be able to hold the
securities in their domestic investment accounts and to avoid
opening the special accounts and paying the additional fees required
to trade and own foreign securities in Japan. In this way, the JDR
represents a convenient way for Japanese investors to
internationally diversify their portfolios.
3. (SBU) According to the Head of Product Development at the TSE
Listing Department, foreign companies issuing JDRs will need to
comply with the same disclosure rules as any other TSE-listed firm.
They will also need to submit financial statements, in Japanese, to
the Ministry of Finance and to offer potential investors a
prospectus that includes the number of depository receipts on offer
and their total value. The firms must also publicly disclose any
material changes, such as corrections of earnings results, via press
releases or other public media in Japanese.
4. (SBU) Until recently, Japanese law provided no legal basis for a
secondary security such as the JDR or for the Exchange Traded Fund
(ETF) Beneficiary Certificates - a depositary receipt based on a
foreign traded listed fund rather than an individual listed stock -
that TSE plans to introduce at the same time. The crux of the
problem, according to METI's Director of Industrial Finance, was
that under Japan's civil code there was no way to transfer the
underlying rights inherent in the foreign share to the purchaser of
the depositary receipt. With the revision of Japan's Trust Law and
the implementation of the new Financial Instruments and Exchange Law
in September 2007, a legal basis for transfer of rights and payments
between the issuer of the underlying stock the depositary
institution and the ultimate beneficiary will exist. TSE has
already begun discussions with a number of foreign and domestic
investment banks about participating as trustees in the scheme.

5. (SBU) A JDR program has particular appeal to the TSE, which is
looking for ways to expand its product portfolio and boost its
overall profitability in advance of its expected 2009 initial public
share offering. Although TSE tells us it does not need explicit
approval from the Financial Services Agency (FSA) to introduce these
new products, the exchange has been in consultation with the agency,
which had no objection. TSE officials tell us they have found FSA
officials far more receptive to the idea of new product offerings
since public discussion of promoting Tokyo as a global financial
center arose in recent months.

TOKYO 00002946 002 OF 002

6. (SBU) Neither TSE nor METI officials could provide clear
projections of how many foreign firms they expected to take
advantage of a JDR listing. Nor could they say whether or how a JDR
program would be better for a foreign firm than listing its shares
directly. Although outgoing TSE President Nishimuro had told EMIN
in 2006 that increasing the number of foreign companies listed on
the exchange was one of his priorities, the number of TSE's foreign
company listings is less than 30 today, down from a high of over 120
in the early 1990s.

7. (SBU) The Director of METI's Industrial Finance Division told us
the most likely potential issuers of JDRs would be firms based in
jurisdictions, such as India and Taiwan, which have laws explicitly
prohibiting domestic companies from listing shares overseas.
Medium-sized foreign companies may also find it cheaper to issue
depository receipts rather than stock if the depositary bank
prepares the necessary listing documentation and takes care of
investor relations. Finally, some foreign firms considering the
triangular merger mechanism -- a stock-swap acquisition via a
subsidiary firm incorporated in Japan -- under Japan's new Company
Law may chose to use JDRs instead of foreign-listed stock as
consideration in the merger to make the deal more appealing to the
target company's shareholders.

8. (SBU) Comment: In our discussions with TSE officials, there was
no indication they had a clear calculation of the potential size of
the JDR market. Rather they viewed an expanded menu of investment
products by itself as a benefit for the exchange and for Japanese
investors in general. It is unclear whether this new scheme will
attract a significant number of foreign companies to list in Tokyo
at a time when global capital markets are already awash in
liquidity.

SCHIEFFER

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