Amid Operating Losses, Excessive Issuance of CB and BW... Characteristics of Delisted Companies Turning 'My Stocks into Trash'

Financial Supervisory Service Analyzes 75 Delisted Companies Over the Past 5 Years

[Asia Economy Reporter Ji Yeon-jin] It has been revealed that the number of companies delisted from the domestic stock market is steadily increasing. These companies have continuously recorded operating losses or experienced financial deterioration due to embezzlement, among other reasons, and were frequently issuing stock-related bonds such as paid-in capital increases, bonds with warrants (BW), or convertible bonds (CB).

According to an analysis by the Financial Supervisory Service of 75 companies listed on the KOSPI and KOSDAQ markets from January 2017 to June this year, the number of delisted companies slightly increased from 12 in 2017 to 15 in 2020, then surged to 20 last year. This year, 9 companies were expelled from the domestic stock market by June.

Delisting due to formal requirements such as adverse audit opinions accounted for 59 cases, or 78.7%, which is 3.7 times higher than delisting due to substantive review (16 cases, 21.3%). Among all cases, more than half (44 cases, 59%) were due to 'adverse audit opinions'.

In particular, cases of delisting related to accounting or management transparency issues, such as audit opinion refusals, embezzlement, breach of trust charges, and inadequate disclosure, have increased. The combined proportion of uncorrected audit opinions and substantive review rose from 50% in 2019 to 75% in 2021, and further to 88.9% in the first half of this year.

Delisted companies showed a tendency of continuously expanding large net losses relative to their equity capital, and due to the accumulation and expansion of such deficits, they faced capital erosion.

In addition to continuous losses caused by deteriorating operations, there was an increase in large impairment, bad debt, and valuation loss expenses related to assets such as stocks, bonds, and loans of other companies, which led them to undertake large-scale capital increases such as paid-in capital increases to avoid worsening capital erosion. However, as their management and financial conditions worsened, their ability to raise funds declined, and the scale of capital increases gradually shrank.

Cash raised through paid-in capital increases was used for investment activities such as stocks of other corporations or loans, as well as operating expenses, and along with repayment of borrowings, they continued to issue paid-in capital increases and stock-related bonds (CB, BW) exceeding that scale.

Moreover, while frequently issuing large amounts of stock-related bonds (CB, BW, etc.) and stocks (paid-in capital increases), the issuance of general bonds was minimal. In fact, among the total 772 bonds issued by delisted companies, 409 were stock-related bonds, 359 were paid-in capital increases, and only 4 were general bonds. A Financial Supervisory Service official stated, "The number of issuances of stock-related bonds and stocks increased from 114 five years before delisting to 193 two years before, and 114 one year before, indicating that companies faced funding limitations as they approached the delisting year."

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