by: Kana Inagaki in Tokyo

Analysts say regulators could force crisis-hit conglomerate off the stock exchange

Toshiba’s shares fell just 1 per cent on Wednesday, and its bond prices barely moved, after it had warned of significant doubt over its future as a going concern.

But experts caution against apparent market complacency, saying that while the chances of Toshiba going bust might be limited, there is a real and increasing risk that the Japanese industrial conglomerate could lose its status as a public company.

Toshiba is contending with its worst financial crisis because of big problems at Westinghouse, its US nuclear subsidiary, and the conglomerate expects to record a net loss of up to ¥1tn ($9.1bn) for the 12 months to March 31 — which would rank as the worst performance by a Japanese manufacturer.

Much attention now focuses on the Tokyo Stock Exchange which, in its regulatory role, is scrutinising whether Toshiba’s internal controls comply with the bourse’s listing criteria.

The controls were found to be inadequate during a $1.3bn accounting scandal at Toshiba in 2015 and, if proposed improvements are deemed insufficient by the exchange, its shares could be delisted in a move that would render it a private group, unable to tap investors focused on public companies.

Newly added to the exchange’s list of things to check are Toshiba’s much-delayed accounts for the third quarter of its 2016 fiscal year, which were released on Tuesday and featured a warning by the group of “substantial doubt” over its ability to continue as a going concern.

The accounts were also notable because Toshiba failed to persuade its auditor, PwC Aarata, to certify their accuracy.

“It is extremely rare for an independent auditor to not sign off on a client’s accounts, let alone a public industrial giant like Toshiba,” said Robert Rostan, a former Deloitte auditor and chief financial officer at Training The Street, a firm that provides financial training to banks. “This is a sign that the situation is extremely dire.”

Kota Ezawa, analyst at Citigroup, said Toshiba’s disagreement with its auditor was likely to “heighten concern” about its shares being delisted.

One reason for the limited movement in Toshiba’s shares on Wednesday may be the fact the stock has already fallen about 50 per cent since December, when the group first warned of a large writedown on Westinghouse.

But another reason for the muted reaction could be that for government officials in Japan it is more or less inconceivable that Toshiba — responsible for several technology innovations, including the world’s first mass market laptop computer — can collapse.

With Westinghouse having filed for Chapter 11 bankruptcy protection in the US last month, Toshiba executives insist the financial risk posed by large cost overruns on two flagship nuclear projects in the US is under control. In the rosiest of the group’s scenarios, its balance sheet weakness will be fixed if Toshiba completes plans to sell its key tech business, the Nand memory chip unit, for $18bn or more.

However, Toshiba’s survival strategy does not solve the impasse with its auditor.

The disagreement focuses on investigations by outside lawyers that were commissioned by Toshiba in relation to Westinghouse’s acquisition in 2015 of US nuclear construction company Stone & Webster, which is involved in the two troubled reactor projects in Georgia and South Carolina.

Toshiba says it was only after the purchase of Stone & Webster that the full scale of the cost overruns on the two US projects were discovered — findings that led the group to record a $6.3bn writedown on Westinghouse in its latest accounts.

But Toshiba said on Tuesday that PwC was questioning whether there was a need to recognise losses linked to Stone & Webster in its accounts before the third quarter — something the group’s executives maintain is not necessary. PwC declined to comment.

Tatsuo Uemura, professor at Waseda University, said Toshiba’s failure to secure the auditor’s sign-off on its third quarter accounts should, in theory, lead to the group’s shares being delisted.

However, he cautioned this move was not a certainty because of Toshiba’s strategic importance to Japan, including how it maintains and decommissions the country’s nuclear power stations.

Prof Uemura also warned that turning Toshiba into a private company could enable overseas funds to acquire the group at a fire sale price, and thereby gain access to sensitive nuclear and other technologies.

In previous cases, the Tokyo Stock Exchange has taken as long as four months to examine a company’s internal controls.

But bourse officials say it will probably take longer to reach a conclusion on Toshiba — the exchange’s evaluation began in the middle of last month — because of its long checklist.

Toshiba’s shares could also be delisted under the exchange’s rules if the group records negative shareholder equity — where assets are exceeded by liabilities — for two consecutive years.

Toshiba expects to have negative equity of ¥620bn at March 31, and avoiding a repetition in its 2017 fiscal year is likely to be heavily influenced by the proposed sale of the Nand chip business.

Kazunori Ito, analyst at research firm Ibbotson Association Japan, said Toshiba’s future ultimately hinged on the support of its creditors, an 80-strong group of banks and regional lenders that are not always aligned.

“The key to the company’s survival is whether the banks will continue to show solidarity in their support,” he said. “In addition to the delisting risk, that’s the real uncertainty factor.”