KOSPI-listed company A, facing designation as an issue under management for failing to meet the 5 billion won revenue threshold, inflated revenue by fabricating sales to a related party without any actual transaction. The Financial Supervisory Service (FSS) detected this as unfair trading and accounting fraud aimed at avoiding delisting.
Financial authorities will significantly step up their response to unfair trading and accounting fraud in line with tougher delisting requirements. They believe the risk of illegal acts by marginal corporations trying to avoid delisting has grown.
The Financial Supervisory Service said on the 19th that it has activated a joint response system across its investigation, disclosure, and accounting divisions and will begin intensive monitoring of related violations.
Since January this year, financial authorities have sharply tightened delisting standards by raising the KOSPI market capitalization threshold from 5 billion won to 20 billion won and KOSDAQ from 4 billion won to 15 billion won. Starting in July, KOSPI will be raised further to 30 billion won and KOSDAQ to 20 billion won. In addition, new criteria will be introduced for "penny stocks" priced below 1,000 won and for complete capital impairment on a semiannual basis.
With thresholds rising, some corporations are increasingly likely to try to meet the requirements artificially. The Financial Supervisory Service (FSS) sees the potential for more illegal acts such as executives pumping up share prices, inflating capital through paid-in capital increases using sham deposits, and booking fabricated sales.
In fact, there were cases uncovered in which a company head carried out a paid-in capital increase using embezzled funds, or inflated sales and equity to avoid delisting. There were also instances where shares were sold before the disclosure of accounting standard violations to avoid losses, and where short-term price manipulation was used to prevent falling short of trading volume thresholds.
Going forward, the Financial Supervisory Service (FSS) plans to focus on checking: ▲ artificial share-price support by corporations that fall short of market capitalization or penny stock criteria ▲ unfair trading such as avoiding issue-under-management designation through sham paid-in capital increases and accounting fraud ▲ use of undisclosed information by insiders selling before the release of negative news. If suspicions are detected, investigations will begin immediately.
It will also toughen disclosure reviews related to paid-in capital increases and the use of funds for corporations at high risk of delisting. It will closely examine the rationale for capital raising and risk factors for investors, and if the raised funds are misused for purposes such as acquiring equity in affiliates, it will actively employ major item report reviews and correction orders.
In addition, it will strengthen monitoring of corporations showing signs of distress and expand the review pool by more than 30% from last year.
An official at the Financial Supervisory Service (FSS) said, "Upon finding suspected violations of accounting standards, we will conduct stringent audits and share suspected violations with the unfair trading investigation division to facilitate early exit from the capital market."