Japan antitrust watchdog warns brokerages against IPO underpricing

FILE PHOTO: Monitors displaying the stock index prices and Japanese yen exchange rate against the U.S. dollar are seen after the New Year ceremony marking the opening of trading in 2022 at the Tokyo Stock Exchange (TSE), amid the coronavirus disease (COVID-19) pandemic, in Tokyo, Japan January 4, 2022. REUTERS/Issei Kato

By Makiko Yamazaki

TOKYO (Reuters) - Japan’s antitrust regulator on Friday said brokerages could be acting illegally if they knowingly underprice initial public offerings (IPO), a practice detrimental to startups upon whom the government is relying to help stoke economic revival.

The Fair Trade Commission (FTC) targeted price-setting procedures to address concern that IPOs can be underpriced to increase the chance of share prices jumping on trading debuts to the benefit of brokerage clients but at the cost of startups.

The warning comes as the government works to promote startups as it searches for ways of revitalising the world’s third-largest economy, where there are less than a dozen unicorns, or new firms with valuations in excess of $1 billion.

The FTC in a report said lead underwriters could cause antitrust concern if they use their superior bargaining position to unilaterally set IPO prices low.

But the report, based on findings from FTC surveys and interviews with startups and brokerages, showed the regulator had not found any specific cases of such practice.

The Japan Securities Dealers Association, a brokerage industry group, is reviewing the price-setting process in response to the issue which was initially raised by startups.

The group will probably make recommendations in February, Toshio Morita, chief executive of the industry group and the former head of Nomura Holdings Inc’s main securities arm, said last week.

Recommendations could include shortening the listing process and allowing more flexibility in the price-setting mechanism, Morita said.

On the Tokyo Stock Exchange’s Mothers market for startups, it is not uncommon to see shares debut at prices far higher than IPO prices, leaving some startups questioning whether IPO prices are set excessively low.

Brokerages attribute the wide gaps to high volatility in the Mothers market, where prices of shares in unproven firms with very small market capitalisations tend to swing wildly.

(Reporting by Makiko Yamazaki; Additional reporting by Mayu Sakoda; Editing by Christopher Cushing)

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