TOKYO, June 26 (IFR) - Japan is to stiffen penalties on insider trading and shorten the subscription period for follow-on stock offerings, a senior director of the committee on financial affairs in Japan's upper house of parliament told IFR.
The aim is to introduce legislation that "will act as a deterrent" not only for those acting on insider information but also those providing it. "Those who pass on insider information will also be guilty," Tsutomu Okubo said in an interview.
Under current law, those working for underwriters who leak information about deals into the market are not subject to regulatory sanctions. This leads to a situation where the authorities sanction and fine fund managers acting on inside information, while bankers who passed on the information often escape with only minor censures.
The most recent insider trading case saw SMBC Nikko given a so-called "business improvement order" for passing on information about parent Sumitomo Mitsui Financial Group's 953 billion yen ($12 billion) capital increase.
Nomura is still under investigation for three other cases, with rumours suggesting it could suffer a suspension of wholesale activities - a back-door way of fining the firm under current laws.
Sanctions against trading on insider information by fund managers will also be toughed up and should be similar to fines in Western markets, said Okubo. Under the current legislation, funds are only fined a portion of the fees earned from trading on insider information, which has meant small fines.
For example, Chuo Mitsui Asset Trust and Banking was fined just 50,000 yen ($600) for trading on insider information ahead of Inpex Corp's 507 billion yen ($6.4 billion) global share offering in July 2010 when it was reported to have earned 10 million yen by shorting the stock.
The Company Act will also be changed to force issuers and underwriters to protect existing shareholders when raising fresh equity, said Okubo, a former banker with Morgan Stanley.
"Hugely dilutive follow-ons are a corporate governance issue," he said.
To that end, publicly-listed companies will be expected to hire independent outside directors, Okubo said.
The reforms on insider trading will be achieved through amendments to the Financial Instruments & Exchange Act.
Amendments to the FI&E Act will legalise soft-sounding investors who have signed confidentiality agreements. This change should help rights issues, which protect existing shareholders, become a more common method of raising funds by addressing Japanese houses' concerns about the risk of underwriting transactions without first being able to talk to key shareholders.
The trickier and more time-consuming effort to reform the Company Act should happen in the next fiscal year starting April 2012. This will see the subscription period for follow-ons cut from the current two weeks between launch and settlement.
"We are currently in talks with the Ministry of Justice to see what length of time is realistic," said Okubo.
This article is from the International Financing Review, a Thomson Reuters publication. www.ifre.com.