The Korea Exchange plans to significantly toughen sanctions for false disclosures, but cases ultimately determined to be false disclosures turned out to be only a tiny fraction. Although the exchange raised the level of sanctions on listed companies that issued false disclosures to protect investors, concerns are emerging that it may not be properly utilized.
According to the Korea Exchange on Oct. 19, three listed companies in the KOSPI and KOSDAQ markets were designated as unfaithful disclosure entities for false disclosures this year.
In the KOSPI market, KOAS was designated, and in the KOSDAQ market, Daesan F&B and CreoSG were designated as unfaithful disclosure entities for issuing false disclosures. Among listed companies designated as unfaithful disclosure entities, cases marked with the reason "false or incorrect disclosure" are classified as false disclosures.
The Korea Exchange found issues in the process by which KOAS acquired shares related to the three Ehwa Technologies Information affiliates that were under liquidation trading. KOAS received 42 demerit points and a 620 million won penalty. Daesan F&B issued a false disclosure about how the acquisition funds would be raised during a change of largest shareholder, and CreoSG was sanctioned after a false disclosure occurred in the process of announcing a third-party paid-in capital increase.
The reason there are few cases of false disclosures compared with the number of listed companies is that the exchange has no choice but to evaluate conservatively when determining false disclosures. The exchange regards a disclosure as false only when it determines that a listed company clearly and intentionally made a false disclosure.
In addition, because the exchange judges disclosures based on materials submitted by listed companies, it is structurally difficult to determine in the review process that they are false. An exchange official said, "For unfair transactions, if there is suspicion in advance, we check them, but in the case of unfaithful disclosures, they are found after the listed company makes the disclosure and a problem arises afterward."
As part of the "Action plan to eradicate unfair transactions in the capital market," jointly announced with the Financial Services Commission and the Financial Supervisory Service in Jul., the exchange plans to strengthen sanctions for false disclosures. To that end, it has given notice of revisions to the detailed enforcement rules of the disclosure regulations.
The core of the amendment is that if a listed company makes a false disclosure, the highest level of penalty will be imposed regardless of demerit points. In the KOSPI market, a penalty of 20 million won per demerit point will be imposed, and in the KOSDAQ market, 10 million won per demerit point. Also, whereas demerit points could previously be reduced depending on circumstances, going forward, no grounds for reduction will apply if a false disclosure is made.
An exchange official said, "Because the exchange determines false disclosures according to established rules, the determinations themselves will continue to follow principles," adding, "However, under the new rules, the level of sanctions for false disclosures will become stricter." The exchange said that as penalties for corporations that make false disclosures become tougher, it intends to use this as a warning to guide listed companies to make faithful disclosures as a preventive measure.