Debt capital markets in Japan: regulatory overview
A Q&A guide to debt capital markets law in Japan.
The Q&A gives an overview of legislative restrictions on selling debt securities, market activity and deals, structuring a debt securities issue, main debt capital markets/exchanges, listing debt securities, continuing obligations, advisers and documents, debt prospectus/main offering document, timetables, tax, clearing and settlement, and reform.
To compare answers across multiple jurisdictions visit the Debt Capital Markets Country Q&A tool.
This Q&A is part of the global guide to debt capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/debtcapitalmarkets-guide.
Legislative restrictions on selling debt securities
Main restrictions on offering and selling debt securities
To make a public offering of debt securities, companies must in general file a securities registration statement before they start soliciting investors to purchase of debt securities. Prospectus must be delivered to investors prior to their purchase of debt securities.
Restrictions for offers to the public or professional investors
See Question 3.
Market activity and deals
Structuring a debt securities issue
The main types of debt securities issued and offered in Japan are:
Straight bonds (including those issued under bond programmes setting the maximum amount of outstanding bonds in a shelf registration under the FIEA) and convertible bonds issued by Japanese and foreign companies.
When securities are issued to retail investors the issuance is through a public offering. When securities are issued to professional investors, a public offering is possible but a private placement can also be used, subject to certain requirements. Shelf registrations are commonly used for public offerings of corporate bonds. If so, the issuer files a shelf registration statement in advance with the local finance bureau and provides ongoing disclosure of information concerning the issuer and its corporate group. At the time of issue, the issuer then files a supplement to the shelf registration statement. In the case of private placements, by contrast, debt securities are offered to a limited number of investors (fewer than 50) or only to qualified institutional investors (see Question 14). In this case, a securities registration statement or shelf registration is not required (subject to certain conditions under the FIEA).
Issuance of straight bonds is the most prevalent mode of issuance, and trust structures are rarely used. Collateralised bond obligations (CBOs) constitute an example of such a rare case, in which the CBOs are trust beneficiary rights, which are backed by a pool of several types of bonds, which may include junk bonds.
Main debt markets/exchanges
Japanese debt transactions are mainly conducted in the over-the-counter market, rather than in markets regulated by securities exchanges. This reflects, historically, the high reliance on bank loan financing in Japan, which has resulted in relatively little development of public debt capital markets compared to public equity capital markets.
Outside of the over-the-counter market, the Tokyo Stock Exchange (TSE) (www.jpx.or.jp) is the principal debt securities exchange in Japan.
The number of debt securities listed on the TSE is small compared to that of equity securities. Only the Japanese government has bonds listed on the TSE. As at 31 December 2015, the total listed face amount was JPY811,021 billion and Japanese government bonds comprised the entirety of this amount. Some convertible bonds are also currently listed (as of 31 December 2015, the number of issuers was 22, the number of listed series was 22 and the total listed face amount was JPY258 billion).
In 2011 a new bond market for professional investors known as the TOKYO PRO-BOND Market (TPBM) commenced operation. The TPBM was established to enable issuers to benefit from speed and flexibility of issuance equivalent to that of euro medium term note programmes, through greatly simplified disclosure documents and issuance procedures. Among the features of the TPBM are the following:
It allows for flexibility and timely issuance of bonds by streamlining disclosure documents required at the time of issuance.
Issuers may choose to list a bond programme (Programme Listing). Under this system, if an issuer files programme information (that is, issuer financial data and basic information regarding bonds to be issued under the programme, such as maximum aggregate amount to be issued) with the TSE, the issuer will then be able to swiftly issue bonds under the programme, rather than preparing extensive documentation for each issuance.
It allows for preparation of English language disclosure documents, use of international accounting standards and issuance of bonds denominated in currencies other than JPY.
As of 29 February 2016, 22 issuers have listed bond programmes on the TPBM and 12 issuers have bonds listed on the TPBM.
Listing requirements are as follows:
The bonds or the programme to be listed must have been rated by a widely recognised ratings agency (typically, Moody's, Standard & Poor's and Fitch).
The underwriters(s) for the bonds or the programme must be listed on a Lead Underwriters List maintained by the TSE. (Securities companies seeking listing must file an application with the TSE, which will be assessed taking into account that company's experience as a lead manager.)
Issuers listed on the TPBM must file financial statements with the TSE at least once a year, although this requirement does not apply to any issuer already subject to continuous disclosure obligations under the Financial Instruments and Exchange Act of Japan (Act No 25 of 1948, as amended) (FIEA). In addition, issuers may file financial statements which are disclosed outside Japan, if the TSE deems this appropriate.
Issuers listed on the TPBM are also subject to timely disclosure obligations under the TSE rules. The matters that must be disclosed, however, are quite limited (including, for example, dissolution, bankruptcy and dishonour of any notes by those issuers).
Approximate total issuance on each market
See above, Main debt markets/exchanges.
The Financial Services Agency of Japan (FSA) is the regulator responsible for Japan's debt securities markets. The main role is taken by the FSA's relevant local finance bureau. The TSE regulates the debt securities markets in relation to listed securities.
The legislation principally governing the debt securities markets is the FIEA.
The TSE has adopted rules governing listed securities.
Listing debt securities
A Japanese company must be listed on the TSE before it can list bonds and notes on the TSE. In addition:
The principal amount of bonds and notes must be at least JPY1 billion.
The number of initial purchasers must generally be at least 1,000.
The denomination of the securities must be:
JPY1 million; or
The securities must be handled within the book-entry system of the Japan Securities Depository Center Inc (JASDEC).
A foreign company must be either listed on the TSE or have a status, including financial condition, equivalent to that of listed companies on the TSE.
Minimum size requirements
See above, Main requirements.
Trading record and accounts
See above, Main requirements.
TSE rules provide different listing criteria for different types of debt securities. Any issuer wishing to list new convertible bonds on the TSE, for example, must already be listed on the TSE with respect to other securities or a programme before that listing will be permitted. In addition, convertible bonds must satisfy criteria that include:
Total face value to be listed must be JPY2 billion or more.
Bonds are, or are expected to be, handled by JASDEC.
Conditions for exercise of conversion rights must be deemed appropriate by the TSE.
Continuing obligations: debt securities
Under the FIEA, the same requirements that apply to equity securities also generally apply to debt securities listed on the TSE.
Disclosure requirements under the FIEA
A company with listed debt securities on the TSE must file with the local finance bureau (through EDINET):
Annual securities reports. The company must file annual securities reports within three months (six months for foreign companies) after the end of each financial year disclosing the business and financial results of the company and its corporate group.
Quarterly securities reports. A company that is required to file annual securities reports and that has a financial year of more than three months in length will also be required to file quarterly securities reports within 45 days after the end of each quarter disclosing business and financial results of the company and its corporate group.
Extraordinary reports. A company that is required to file annual securities reports will also be required to file extraordinary reports without delay to disclose important decisions and events that may significantly affect business and financial results.
These documents must be prepared in Japanese in compliance with the forms prescribed under the FIEA. Foreign issuers may file foreign issuer reports prepared in English rather than preparing these documents in compliance with the forms prescribed under the FIEA. Summary and other explanatory materials prepared in Japanese must accompany foreign issuer reports and in addition, the filing deadline is shortened to four months for annual foreign issuer reports.
Companies that are not listed on any stock exchange in Japan are exempted from continuous disclosure requirements in either of the following cases, subject to the approval of the FSA:
The number of investors in Japan who own securities issued by the company was less than 25 as of the end of its most recent fiscal year.
The number of shareholders of the company in Japan was less than 300 as of the end of each of its five most recent fiscal years. If a company has publicly offered any type of securities (such as bonds) in Japan in addition to shares, that company is subject to disclosure obligations for both shares and other securities. In this case, it will need to qualify for exemption under both this point (for shares) and the first point (for other securities) and is subject to FSA approval.
The exemption set out in the second bullet point above applied only to Japanese companies until an amendment to the relevant regulation under the FIEA was adopted in August 2013, which expanded the exemption to include foreign companies.
The same continuing obligations apply to foreign companies with listed debt securities (see Question 9).
The same penalties for breach of continuing obligations that apply in relation to equity securities also generally apply to debt securities.
The following penalties can be imposed for breach of the continuing disclosure obligations under the FIEA:
Criminal penalties (imprisonment and fines).
Surcharges (surcharges are imposed by the Financial Services Agency Commissioner as an administrative sanction, as opposed to fines that are levied by a court as a punishment).
Civil liabilities (for example, a company that includes incorrect or misleading information in an annual securities report can be liable for damages to investors who incur losses arising from purchase of that company's debt securities).
Advisers and documents: debt securities issue
The following are key advisers for an issue and listing of debt securities:
Investment bank. The issuer appoints a lead investment bank, which provides advice to the issuer, manages the offering procedure and co-ordinates other advisers. Generally, the lead investment bank assumes the following roles:
financial adviser, providing advice as to timing of the offering, offering structure, valuation, pricing and marketing strategy;
underwriter, underwriting, alone or together with other syndicate members, the securities to be offered;
bookrunner, maintaining the book of demand for the offered securities.
Lawyers. The issuer and underwriters often appoint lawyers to advise them on legal matters arising in connection with the debt offering and listing, including preparation of prospectus and other offering documents. After issuing the debt securities, the issuer's lawyer often undertakes the issuer's post-listing activities, such as ongoing corporate disclosure.
Agents. The issuer appoints agents for administrative matters relating to the bonds, such as payment of principal and interest to bond holders.
Audit corporations. An audit corporation is appointed to:
analyse the issuer's financial statements and description in the securities registration statement (or other disclosure document required under the FIEA) and prospectus (see below, Main documents);
provide a report for the securities registration statement (or other disclosure document required under the FIEA) and prospectus.
Receiving bank. A receiving bank is generally necessary for settlement.
The following are the primary documents to be produced for issuance and listing of debt securities:
Terms and conditions of the debt securities.
Securities registration statement or other disclosure document required under the FIEA (such as a shelf registration statement and a supplement).
Various agreements, including an underwriting agreement, an agreement between managers and an agency agreement.
Listing application to be submitted to the TSE and other related documents, such as a recommendation letter from an investment bank which is a TSE participant, if applicable.
Debt prospectus/main offering document
The same requirements that apply to equity securities generally apply to debt securities. A securities registration statement must be filed with the local finance bureau for public inspection through the Electronic Disclosure for Investors' NETwork (EDINET) (an electronic disclosure system operated by the FSA) before the start of a public offering of securities in Japan. In addition, a prospectus (the content of which is almost identical to the securities registration statement) is generally required for any offering of securities to the public in Japan and must be delivered to investors on or before the sale of the securities.
Previously, under the FIEA and related regulations, securities registration statements were required to be prepared in Japanese. Since an amendment to the FIEA in May 2011 and an amendment to the related regulations in November 2011 (2011 Amendments) became effective, however, foreign companies in some cases may be permitted to file securities registration statements in English, although these must be accompanied by certain supplementary documents in Japanese. (For English continuous disclosure requirements, see Question 9.)
The same requirements that apply to equity securities generally apply to debt securities.
A prospectus is not required:
Where a securities registration statement is not required because the offering does not constitute a public offering of debt securities.
The offering is addressed to:
a qualified institutional investor;
a person who already owns the same securities or has or is likely to have a prospectus and who agrees that the prospectus need not be delivered.
For offerings of listed debt securities, even an offering to one person constitutes a public offering. However, in the case of unlisted debt securities (which is the most common offering in the current Japanese debt market), the issuer may be exempt from the requirement to file a securities registration statement and publish or deliver a prospectus if offering to a limited number of investors or offering to qualified institutional investors only (see Question 3).
For offerings where an issuer files a securities registration statement with the local finance bureau, the same requirements that apply to equity securities also generally apply to debt securities.
The content requirements for a prospectus vary according to the nature and circumstances of the issuer and securities. Generally, the requirements are almost identical to those imposed for the securities registration statement.
The form of the securities registration statement is prescribed by regulation passed under the FIEA. The primary information required in the form is as follows.
Information concerning securities
Information required for public offering of debt securities includes:
Name of bonds.
Aggregate face value of bonds.
Face value of each bond.
Interest payment date.
Name of the underwriter(s).
Use of proceeds.
Other terms and conditions of bonds.
Information concerning the issuer and its corporate group
The following information is provided:
An overview of the issuer and its corporate group, including:
trends in major business indices concerning the issuer and its corporate group;
the nature of their business;
their affiliated companies;
The issuer and its corporate group's business, including:
an outline of the results of their operations;
the state of their production, orders accepted and sales;
problems to be resolved;
research and development activities;
an analysis of their financial condition, operating results and cash flows.
The facilities of the issuer and its corporate group, including:
an outline of capital investment;
a description of the state of major facilities;
any plans for installation and retirement of facilities.
Information concerning the applicant's:
state of shares, including the number of authorised and issued shares, and the list of the large shareholders.
trends in stock prices;
directors and officers;
The issuer and its corporate group's financial condition, including:
events subsequent to the financial statements;
differences in accounting principles and practices between the issuer's home country and Japan (if the issuer is a foreign company).
A summary of the filing company's share-handling services in Japan.
Other reference information.
In connection with financial statements, issuers that are already subject to continuous disclosure requirements in Japan at the time of filing of a securities registration statement must include in that securities registration statement only audited financial statements for the two most recently completed fiscal years. For issuers not already subject to continuous disclosure requirements in Japan at the time of filing (that is, issuers filing a securities registration statement in Japan for the first time), audited financial statements for one additional fiscal year (only for foreign companies), or unaudited financial statements for three additional fiscal years, must also be included (the choice between these alternatives is at the issuer's discretion). In addition, if a securities registration statement is filed after a certain period has passed since the beginning of the current fiscal year, financial statements for the fiscal quarter or half must also be included in the securities registration statement.
As to accounting standards, Japanese issuers are required to prepare their financial statements in accordance with either:
Relevant rules under the FIEA and Japanese generally accepted accounting principles.
The International Financial Reporting Standards.
For foreign issuers filing securities registration statements, filing of financial statements prepared in accordance with generally accepted accounting principles in other jurisdictions may be permitted, although this requires the prior approval of the FSA.
An issuer that has complied with continuous disclosure requirements under the FIEA for one year can use a simplified form of securities registration statement and prospectus. Under this form the issuer only needs to physically include the following documents:
Its latest annual securities report.
A quarterly securities report or semi-annual securities report and extraordinary reports filed after the filing of the latest annual securities report.
Any amendments to the reports.
In addition, issuers that satisfy certain additional requirements can also use a simplified form in which they can incorporate the above reports by reference. Examples of such issuers are listed companies that, in addition to having complied with continuous disclosure requirements under the FIEA for one year, have:
A trading volume and market capitalisation that are both JPY10 billion or more.
Market capitalisation that is JPY25 billion or more.
For offerings where an issuer files a shelf registration statement and related supplement, the issuer can use a simplified form of prospectus. Into that simplified form the issuer can incorporate by reference its latest annual securities report and any quarterly securities reports or semi-annual securities reports and extraordinary reports filed after the filing of the latest annual securities report (and any amendments to the report).
The lead manager, the issuer itself, or sometimes the issuer's legal counsel generally prepares the prospectus and other disclosure documents. In relation to liability, the same regulations that apply to equity securities also generally apply to debt securities.
The securities registration statement and prospectus are prepared by the issuer with input from other advisers (see Question 12). In particular, the business section (especially the description as to the issuer's business strategy) is often prepared in consultation with the issuer's legal counsel and participating investment bank(s). Typically, a draft securities registration statement and prospectus are subject to review and comment by the advisers, and documentation meetings are held for discussion.
The local finance bureau also reviews the content of the securities registration statement in the course of preparation for filing, and its comments (if any) must be reflected in the statement and the prospectus.
The following persons have statutory liability for the securities registration statement:
Senior management of the issuer (for example, directors and executive officers).
In addition, the issuer and persons using the prospectus for offering have statutory liability for the prospectus in a debt security offering. Auditors and underwriters may also be liable for the contents of the prospectus.
Timetable: debt securities issue
Tax: debt securities issue
Set out below is the main tax issue when issuing and listing debt securities.
Interest of debt securities of foreign companies paid to Japanese investors are subject to Japanese income tax, including corporate income tax.
Interest received by residents of Japan and Japanese corporations is generally subject to withholding tax, if such payments are made by and through a paying agent in Japan. For residents of Japan, the tax rate is 20.315% and for Japanese corporations, the tax rate is 15.315%. Further, residents of Japan can elect either:
Conclusive taxation exempt from tax reporting.
Separate self-assessment taxation.
If separate self-assessment taxation is elected, the tax rate will be 20.315%.
Interest of debt securities of foreign companies, received by non-residents of Japan and non-Japanese corporations which have no permanent establishment in Japan, is generally not subject to Japanese taxation.
Interest of debt securities of Japanese companies, received by non-residents of Japan and non-Japanese corporations which have no permanent establishment in Japan, is generally subject to Japanese taxation.
It should be noted that the descriptions are not exhaustive, and an issuer should ask for specialist tax advice to discuss any tax issues specific to its offering.
Clearing and settlement of debt securities
The Japanese yen is by far the most common currency for issuances of debt securities in the Japanese market, but foreign currency debt securities (including the US dollar and euro, among others) are also issued in Japan. Generally, when debt securities are issued in Japan, the securities are cleared and settled through the Japan Securities Depositary Center, which is the clearance and settlement management institution in Japan. To participate in this system, the issuer must apply for participation beforehand. There are no special considerations for holding, clearing and settling debt securities issued in foreign currencies.
As of 29 February 2016, there were no important proposals for reform of debt capital markets/exchanges. In 2014, however, there were amendments to the FIEA and related regulations, intended to further facilitate financing by listed companies through Japanese capital markets. Among these amendments, is the following.
Measures to further facilitate financing by listed companies. Under the FIEA, solicitation directed to potential investors prior to the filing of a securities registration statement is prohibited. However, the term "solicitation" is not expressly defined under the FIEA and relevant regulations, with the result that the permitted scope of communications between an issuer and its potential investors is unclear. Any contact between issuers and potential investors prior to the filing of a securities registration statement must be conducted with appropriate care and in accordance with qualified legal advice. In August 2014, the relevant guidelines under the FIEA were amended to provide that issuers are permitted in certain circumstances to engage in limited, necessary communications with investors (including publication of certain corporate information) prior to the filing of securities registration statements. By way of example, the amended guidelines list several types of communications that are permitted prior to the filing of securities registration statements. Among these, the amended guidelines provide that surveys of demand among large shareholders or professional investors conducted in order to make go or no-go decisions are permitted, provided that companies take certain measures, such as preventing leakage of information regarding the contemplated offering to other persons.
Japanese Law Translation (Hourei data teikyo system)
W (Japanese original) http://law.e-gov.go.jp/cgi-bin/idxsearch.cgi
W (English translation) www.japaneselawtranslation.go.jp/?re=02
Description. The website on which the Japanese original of the FIEA is available is maintained by the Ministry of Internal Affairs and Communications (MIC), although the data contained there is not official. The data has been updated from time to time by MIC. The website on which an English translation of the FIEA is available is maintained by the Ministry of Justice. This English translation is prepared for reference purposes only and is unofficial and without binding force. The English translation was prepared on 26 June 2010 but has not since been updated.
Kazuhiro Yoshii, Partner
Anderson Mōri & Tomotsune
Professional qualifications. Japan, 1999; New York, US, 2006
Areas of practice. International financial and securities transactions; mergers and acquisitions; general corporate matters.
Hiroto Ando, Partner
Anderson Mōri & Tomotsune
Professional qualifications. Japan, 2002; New York, US, 2009
Areas of practice. Capital markets; mergers and acquisitions; corporate restructuring; general corporate matters.
Nobutake Nemoto, Associate
Anderson Mōri & Tomotsune
Professional qualifications. Japan, 2012
Areas of practice. Capital markets; mergers and acquisitions.