After the financial authorities signaled their intent to delist "penny stocks (share price under 1,000 won)," more KOSDAQ-listed companies have decided on capital reductions without consideration. Through a reverse stock split, a form of such reduction, the number of outstanding shares is cut, and the share price rises in proportion to the reduction ratio, allowing the stock to escape penny status.
A capital reduction without consideration is a method of reducing capital without compensating shareholders. Capital is the product of par value and the number of shares issued, and it can be reduced by a "reverse stock split," which decreases the number of shares issued, or by a "par value reduction," which lowers the par value.
However, while a capital reduction without consideration can improve the balance-sheet financial condition, it does not change a corporation's fundamental value.
According to the Financial Supervisory Service's electronic disclosure system on the 30th, there were 82 decisions on capital reductions without consideration disclosed this year (Jan. 1–Mar. 26) on the Korea Exchange's main board and KOSDAQ, more than quadruple the same period last year (19). In particular, such reductions on KOSDAQ jumped fivefold to 45 from 9 a year earlier.
Among KOSDAQ-listed companies that moved to reduce capital without consideration, 26 pursued the move to offset accumulated deficits. When corporations continue to post losses, deficit carryforwards pile up; by cutting capital, they offset these and wipe out accumulated losses. By deficit size, NKGen Biotech Korea (NKGen Biotech) was the largest at 346.8 billion won.
In particular, of the corporations that pursued capital reductions without consideration to offset deficits, 20 were currently penny stocks with share prices under 1,000 won. As the financial authorities decided to include penny stocks as a delisting criterion starting in July, this is seen as a move in response. Most of these corporations are pursuing reverse stock splits as their method. Because the number of shares issued decreases, the share price rises accordingly, helping the stock escape penny status.
The remaining four—NKGen Biotech Korea, Korea Cable T.V Chung-Buk System, DA Technology, and The Technology—are already undergoing delisting procedures.
Of course, not all capital reductions without consideration are the same. Sensorview, one of the corporations that pursued a reduction to offset deficits, chose a par value reduction. Sensorview's decision also appears aimed at alleviating the risk of capital impairment, but because a par value reduction does not change the number of shares issued and therefore has no share-price boost, it differs in nature from a reduction intended to escape penny status.
Sensorview disclosed on the 20th of last month that it decided on a par value reduction without consideration, lowering the par value per share from 500 won to 100 won to offset deficits. With this reduction, capital will fall from 25.82465 billion won to 5.16493 billion won after the reduction, but the number of shares issued will not change. Because the number of shares remains the same, when trading resumes after additional listing, the reference price will be the same as the closing price before the trading halt.
Kim Yong-jin, a professor of business administration at Sogang University, said, "There are many attempts on KOSDAQ, where capital is relatively smaller than on the main board, to escape capital impairment through reductions without consideration," adding, "Even if a reduction resolves capital impairment, the delisting risk remains unless the fundamental business structure improves and profitability recovers."