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
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
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. )