The Financial Services Commission and the Korea Exchange (KRX) will comprehensively tighten delisting requirements to swiftly remove insolvent companies. It comes a year after they released the "Plan to improve the delisting system" in Jan. last year.
On the 12th, Vice Chair Kwon Dae-young of the Financial Services Commission held a briefing at Government Complex Seoul on the "delisting reform plan for the swift and strict exit of insolvent companies," and said, "To grow the KOSDAQ market into an engine of productive finance and a growth platform for innovative companies for the growth of the Korean economy is the Lee Jae-myung administration's firm policy direction."
He added, "We will push for a full shift to a 'high birth and high mortality (多産多死)' market structure in which innovative companies list smoothly and insolvent companies are exited swiftly and strictly."
Kwon noted that although a plan to improve the delisting system was released last year, the problems of insolvent companies had accumulated over a long period.
He said, "In the KOSDAQ market, 1,353 companies entered over the past 20 years, but only 415 exited," adding, "In this process, market cap increased 8.6 times, but the index rose only 1.6 times." He stressed that to make a great leap forward into a market trusted by investors, a faster and stricter exit of insolvent companies is needed.
The Financial Services Commission (FSC) will run a focused management period through Jun. next year, strengthen the four main delisting requirements, and move to streamline delisting procedures.
In particular, the four main delisting requirements will center on: ▲ creating a new delisting standard for "penny stocks" with share prices under 1,000 won ▲ moving up the implementation of the plan to raise the market capitalization requirement ▲ strengthening the complete capital impairment requirement ▲ adjusting the accumulation of disclosure violation penalty points from 15 to 10. The delisting review procedure will be shortened further from 1 year and 6 months to 1 year.
Reflecting the reform plan, as of now, the number of KOSDAQ companies subject to delisting this year is estimated to be around 150 (100–220), about 100 more than the originally expected 50. The following is a Q&A with Vice Chair Kwon.
– If you push to delist penny stocks, won't it increase the burden on undervalued corporations with strong fundamentals?
"These requirements are built on two pillars: market capitalization and share price level (penny stocks). For corporations with low share prices but large market caps, we plan to be flexible in operating the system. Penny stocks often see no trading and then suddenly face surging demand, causing high price volatility. Cleaning up insolvent listed companies is necessary for market soundness and investor protection, and we actually see the timing (of introducing the improvements) as late. It should have been done earlier."
– Why wasn't revenue included among the delisting requirements? The criteria for removing penny stocks seem stricter than those of the U.S. Nasdaq.
"The revenue criterion is difficult to improve through short-term self-rescue efforts, so we kept the existing schedule. Since market assessment ultimately comes down to market capitalization and share price, we strengthened those parts. Some regulations are tougher than Nasdaq's, and some are looser. We require 45 consecutive trading days within a 90-day grace period, and Nasdaq's period is shorter. To sort out insolvent companies swiftly and early, we referred to foreign cases to set the standards. We are adopting global standards, and the specifics differ by country."
– Why did you move up the cycle for raising the market cap threshold from annually to semiannually? Did you gather opinions from industries such as KOSDAQ corporations?
"It is a policy judgment that we need to raise the pace of reform because it is necessary to enhance trust and transparency in our capital market. After giving advance notice of the rule change, we plan to communicate with corporations so that the system can be designed to be acceptable yet sophisticated."
– How will you prevent avoiding delisting through temporary price pumping? What measures are there to prevent investor harm?
"Unlike in the past, this time we created a criterion requiring the share price to be maintained for 45 consecutive trading days, blocking majority shareholders or stakeholders from engaging in illegal acts. However, for stocks where organized illegal activities are possible, we will strengthen market surveillance.
It is already late to talk about remedies for investor damage. For a long time, the public has known about penny stocks and "theme" or "operator" stocks. Due to problems such as a surge in trading volume of a particular corporation's shares or the involvement of stock manipulation groups, investors have been continually harmed. It is like arteriosclerosis. Clearing this out firmly now will likely help the capital market. The KOSDAQ market has a high share of individual investors and a small share of institutions. Even securities firm analyst reports are not issued. There is a need to evaluate corporations, and corporations themselves must communicate with shareholders and be assessed by the market."
– Is there a way for delisted companies to restore corporate value and relist in the future?
"They can use the over-the-counter market (K-OTC) for unlisted stocks operated by the Korea Financial Investment Association. In Jan. this year, we created a delisted-companies segment on K-OTC, and allowed trading of delisted companies' shares on K-OTC for six months. This provided liquidity to investors and gave corporations a chance to be re-evaluated. If they then meet the conditions, they can move from the delisted-companies segment to a regular K-OTC listing, and, if they produce results, they can then move back to the Exchange and KOSDAQ—essentially a ladder."
– You said you would consult with the courts to streamline delisting procedures. What is the specific direction?
"We are not asking the court for a specific judgment; we mean we will communicate so that lawsuits proceed swiftly. Once this plan is introduced, injunction suits could increase and the court's burden could grow. That is because there is a possibility that the number of (delisted companies) will rise more than threefold from around 50 this year. Accordingly, the intent is to enable the courts to proceed quickly so the system can be complete."
– Are there specific operating guidelines during the focused management period?
"During opinion gathering on exits and the substantive review process, many companies are granted improvement periods. The focused management team's goal is to check whether those listed companies are actually carrying out measures during the improvement period. Issues that may arise from corporations will also be discussed frankly within the focused management team."
– What do you mean by fundamental innovation measures at the level of a full redesign of the Exchange?
"You can see it as a reflection on whether Korea's capital market has properly fulfilled its role as a platform to nurture and grow innovative companies. As good companies come in and insolvent companies are pushed out, we need serious consideration of whether the current system is right when we think of the Exchange 10 or 20 years from now."
– How much do you expect the KOSDAQ index to rise after introducing this plan?
"That is a very difficult question. It is not appropriate for the government to talk numbers, but if our market earns trust and becomes sounder, I believe that will be reflected well in the index."