After the financial authorities signaled an intent to weed out penny stocks (shares priced under 1,000 won), many of them rushed to announce reverse stock splits. Attention is also turning to cases where stocks priced above 1,000 won are pursuing face-value consolidations, saying they aim to reduce the number of shares in circulation. HLB Innovation is a prime example.

HLB Innovation recently decided on a reverse stock split to manage what it said was an excessively high number of shares in circulation at an appropriate level. At a shareholders meeting on the 20th, the proposal to change the par value due to the reverse split passed as originally drafted. As a result, the number of issued shares is set to decrease from about 148.04 million to about 29.6 million. A reverse split does not affect corporate value, but the consolidation of shares raises the price.

The financial authorities announce their intent to delist so-called penny stocks to invigorate the stock market. Kwon Dae-young, vice chair of the Financial Services Commission, gives a briefing at Government Complex Seoul on reform measures to swiftly and strictly delist insolvent companies./Courtesy of News1

Investors are casting a wary eye as companies with shares priced above 1,000 won also move to conduct reverse splits. That is because there have been repeated cases in the past where companies raised their share price through a reverse split and then proceeded with a paid-in capital increase for shareholders shortly afterward.

Taihan Cable & Solution and TELCON RF PHARMACEUTICAL are representative examples. After deciding on reverse splits, they decided on shareholder-allotted paid-in capital increases a few months later. In May 2023, Taihan Cable & Solution decided on a 10-for-1 reverse split, saying it would reduce the number of shares in circulation to stabilize the stock price. But just seven months later, it decided on a paid-in capital increase issuing new shares to shareholders, saying it would raise 500 billion won.

KBI Dong Yang Steel Pipe also faced a wave of shareholder complaints after deciding on a shareholder-allotted paid-in capital increase following a reverse split last year. KBI Dong Yang Steel Pipe decided on a 2-for-1 reverse split at a shareholders meeting in July last year and then, in just two months, decided on a shareholder-allotted paid-in capital increase.

When a shareholder-allotted paid-in capital increase is decided after a reverse split, shareholders can suffer significant losses. That is because the number of issued shares decreases through the reverse split, pushing up the share price, and then new shares are issued again to raise funds based on the now higher price.

However, HLB Innovation and Jaeyoung Solutec said they have no immediate plans for a paid-in capital increase.

An HLB Innovation official said, "We have secured about 20 billion won in cash, and revenue is being generated, so we are not in a situation where we must raise funds immediately through a paid-in capital increase," but added, "However, there is a possibility that funds will be needed for the Berisomo clinical trial. It has not been decided whether the company will raise the funds on its own right away or whether the funding will take place at the group level."

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