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[Asia Economy Reporter Lee Seon-ae] Ostem Implant, embroiled in a large-scale embezzlement scandal, received an 'unqualified' audit opinion, avoiding the worst-case scenario of delisting. As a result, about 20,000 small shareholders are relieved to escape the risk of losing their entire investment. However, if the fate day (the 30th) results in no continuation of listing, trading will remain suspended during the improvement period, keeping their investments locked. Consequently, so-called 'debt-investing retail investors' who borrowed money to invest will continue to face the burden of interest and the fear of forced liquidation through margin calls.

According to the financial investment industry on the 27th, Ostem Implant is scheduled to receive one of three decisions?continuation of listing, granting of an improvement period, or delisting?at the Korea Exchange’s Corporate Delisting Committee on the 30th. If delisting is decided, the case will move to the KOSDAQ Market Committee for a final judgment. However, this crisis was averted as the external auditor, Induk Accounting Corporation, submitted an 'unqualified' audit opinion. For KOSDAQ-listed companies, if an auditor issues an adverse opinion, the substantive review of listing eligibility is suspended, and formal delisting follows immediately. Induk Accounting Corporation, Ostem Implant’s external auditor, requested the appointment of external experts for the company’s internal audit to examine whether the largest shareholder or executives were involved in the embezzlement incident last year and to check for similar fraudulent activities. Accordingly, as of December 31 last year, Ostem Implant’s financial performance and cash flows were thoroughly audited through forensic accounting under international accounting standards, resulting in an unqualified opinion.

If the decision is to continue listing, trading will resume immediately. This is the outcome most desired by small shareholders.

If an improvement period is granted, the Corporate Delisting Committee will decide again on continuation or delisting after the period, during which trading remains suspended. Small shareholders fear even the granting of an improvement period. Ostem Implant has 19,856 small shareholders. They hold 7,939,816 shares, accounting for 55.6% of the approximately 14.29 million total issued shares. Calculated simply at the closing price on the day before trading suspension (December 30, 2021), this amounts to about 1.133 trillion KRW.

In particular, debt-investing individual investors are extremely anxious. As of the last trading day before suspension, 1,212 investors borrowed money from securities firms to invest on margin, with outstanding balances totaling 23 billion KRW. Including short-term loans such as unsettled trades and loans secured by held shares, the total credit extended is estimated to exceed 113 billion KRW. If trading remains suspended during the improvement period, the interest burden will be significant. Subsequently, securities firms classified Ostem Implant as a restricted stock for new margin loans and maturity extensions, notifying investors, which led to many loan repayments. Investors unable to repay in cash faced forced liquidation of other stocks through margin calls. As of the first week of March, outstanding margin loan balances remain around 12 billion KRW due to remaining loan maturities. Thus, many debt-investing retail investors are still under the threat of an effective interest bomb, with average interest rates around 5% plus delayed interest.

The internal accounting control system received an 'adverse' audit opinion. Given the large-scale embezzlement of 221.5 billion KRW, receiving an unqualified opinion was practically impossible. Additionally, 'impairment losses on receivables other than trade receivables' were separately added. On the 21st, Ostem Implant disclosed impairment losses of 108.8 billion KRW last year, equivalent to 53.1% of its equity capital at the end of 2020. This disclosure added grounds for substantive review of listing eligibility, which will be included as an agenda item for the Corporate Delisting Committee’s comprehensive review.

Accordingly, the key issue at the Corporate Delisting Committee is how faithfully the company’s management transparency improvement plan strengthens the collapsed internal control system. The committee comprehensively evaluates business continuity, financial soundness, and management transparency. Ostem Implant emphasized, "For the purpose of improving the adverse opinion, we commissioned Samil Accounting Corporation to design and apply an advanced internal accounting control system, appointed a majority of outside directors, introduced an audit committee, and established an ethics management committee to enhance management transparency."

An industry insider said, "Despite impairment losses exceeding 50% of equity capital, Ostem Implant recorded an annual net profit of about 30 billion KRW, so the possibility of resuming trading is high," expressing a positive view. Another insider noted, "If the audit opinion was unqualified and the impact of deficit on profits was limited with no accounting issues, resumption of trading would have been likely. However, since the internal accounting control received an adverse opinion, if the improvement plan is not substantial, the conclusion will likely be to grant an improvement period."

This content was produced with the assistance of AI translation services.