B, listed on the KOSDAQ market, recently became the largest shareholder of A, a company that develops application software. Despite ongoing annual operating losses totaling hundreds of millions of won, the company has acquired a KOSDAQ-listed company to embark on a new business venture. Following the news that B was acquiring A's equity, B's stock price soared, attracting attention due to the mention of the robot and artificial intelligence (AI) sectors, which are currently trending in the stock market.
As the stock price rose, creditors who invested in the convertible bonds (CB) issued by the company exercised their conversion rights one after another. The stock price experienced significant volatility. Coupled with news of promising business expansion, this rollercoaster effect in stock prices has piqued the interest of individual investors.
However, soon after, cries of despair emerged among investors. The stock price, which had exceeded 3,000 won by the end of last year, has now halved to around 1,800 won. Suspicions arose among investors that a scheme might have been executed.
◇ KOSDAQ 'scheme' turning the stock market into a speculative arena
As policy authorities promote stock market value-up policies, there have been calls for a thorough 'purification effort' to prevent the market from becoming a speculative arena. This means that without identifying 'zombie corporations' being mobilized for schemes and devising measures to prevent this, the KOSDAQ market will inevitably remain a secondary market. Schemes commonly taking place in the KOSDAQ hinder the healthy development of listed corporations and attract speculative investments.
The reason companies open the market for investors to easily trade the stocks issued is to help finance the corporations and provide investment opportunities for good-faith investors. However, schemes disrupt this virtuous cycle.
Unfair transactions, often referred to as schemes, are punishable under the Capital Markets Act. The Korea Exchange has stated that when a listed company is mobilized for a scheme, significant fluctuations in stock prices occur, trading becomes concentrated in a few accounts, or numerous rumors arise. If such behaviors are detected, the company will be designated as an investment caution item and notified to investors. If there are suspicions of unfair trading, it is reported to the Financial Supervisory Service for investigation.
However, the existing market surveillance system is not capable of monitoring all unfair transactions. There are instances where illicit activities deftly evade scrutiny. B's recent activities exemplify a typical scheme. Conversely, this suggests that enhancing monitoring of such corporations could raise the KOSDAQ market's value-up level.
① Changing businesses and engaging in M&A every year
Signs indicating that individual listed companies are being mobilized for schemes are relatively easy to discern, including frequent changes of company name or business and mergers and acquisitions (M&A). The forces leading the schemes exploit the fact that many investors are easily swayed by promising business prospects.
B’s primary business has changed almost every year. Until 2020, the company's main business was game content creation. However, in 2021, it transformed into a construction company by acquiring a small building material firm. And in 2023, it expanded into robotics by acquiring equity in a Canadian company that makes service robots.
While it claims to have entered the promising field of robotics, many points remain unclear. B spent nearly 8 billion won to acquire 45% equity in the Canadian company, which has assets totaling only 3.2 billion won.
Last year, B became the largest shareholder of A, a KOSDAQ-listed company, claiming it would enhance synergy by integrating robotics and AI technologies. Coincidentally, the new business segment B entered was among the most noteworthy themes in the stock market at that time.
While considerable technological expertise is indeed required in this field, which typically takes a long time to establish a stable business, B has skillfully donned the most attention-grabbing attire for investors as needed. The company's business reports merely note that there are 'no applicable items' under the production facilities and research and development sections.
It didn't matter whether the company could actually undertake the new business or whether the acquired firm was competitive. Stock prices fluctuated dramatically every time a significant announcement was made.
② Issuing bonds to investment groups…consecutive fundraising
Meanwhile, the company issued convertible bonds and raised funds through a capital increase. In 2021 alone, three rounds of convertible bonds were issued, with additional bonds issued in 2023. These funds are used for operational expenses, such as purchasing materials and paying wages.
As the company expanded into areas unrelated to its current business, it appears increasingly difficult to generate profit. A securities industry representative who reviewed the company's financial statements noted, 'Since it cannot generate profit from normal business operations, it barely manages to operate with funds raised from issuing bonds or stocks.'
Convertible bonds that can be converted into stocks act as a burden on stock prices once they circulate in the market. Creditors can exercise their claims to gain profits when the price rises, and when this stock volume floods the market, existing stock investors are bound to incur losses.
③ The large shareholder as a predatory corporate raider
By checking the list of large shareholders and executives, one can ascertain whether the company is a legitimate corporation. Most of B's major shareholders and executives are well-known 'operators' in the KOSDAQ market.
They claim to be M&A experts, but in reality, they are notorious 'corporate raiders' in the market. Their names can also be found among shareholders or executives of companies related to or previously suspected of schemes involving B.
The problem is that large shareholders and creditors are forming interest groups. Creditors of the convertible bonds issued by B have concealed their identities by forming investment groups and have financed the company. A few years later, they profited significantly by exercising their conversion rights.
An industry source stated, 'To prevent the schemes of corporate raiders who exploit loopholes for unfair gains, monitoring of the 'zombie corporations' mobilized in these schemes must be strengthened,' adding, 'We also need to consider qualitative evaluation measures to filter out shell companies that are abused in schemes.'
In this regard, authorities hope that some market cleansing will occur as they tighten the delisting criteria for listed companies. The current delisting criteria for the KOSDAQ market are a market capitalization of 4 billion won and 3 billion won in sales. On the 21st, the Financial Supervisory Service and the Korea Exchange announced plans to gradually strengthen these criteria starting next year. From 2028, companies with a market capitalization of less than 30 billion won and, from 2029, those with sales below 10 billion won will be delisted.
A representative from the exchange stated, 'If the quantitative criteria for delisting are strengthened, it will help prevent unfair transactions using small listed companies to some extent.'