[Reporter’s Notebook] KOSDAQ Without the 'Loss-Making Company Filter'

The KOSDAQ market once had a "mechanism for filtering out loss-making companies." According to the KOSDAQ Market Listing Rules, companies that recorded losses for four consecutive years were designated as under management, and those with losses for five consecutive years became subject to delisting review. This provision was abolished in 2022. The system was removed to encourage the growth potential of venture and bio companies. However, three years later, there is widespread skepticism about the effectiveness of its abolition.

The advantages of this system, when it existed, were simple yet powerful. First, it served to purify the capital market. By filtering out unproductive companies, it improved the qualitative standard of the market. It also acted as a warning signal for investors: "This company has not generated profits for a long time, so be cautious." For management, the pressure to return to profitability was significant. Companies were compelled to pursue restructuring, business diversification, and new business initiatives to improve their fundamentals.

However, the landscape of the market changed after the system was abolished. So-called zombie companies, which survive in the capital market without real business viability, have increased. There have been repeated cases where companies survive by raising new funds or inflate their stock prices through various thematic issues. For investors, it has become more difficult to identify clear risk signals such as "consecutive losses," as was possible in the past. As the requirements for being designated as under management have become more relaxed, it is now harder for novice investors to detect risks. The overall credibility of the KOSDAQ has also declined. If the market cannot be trusted, the supply of capital will inevitably shrink in the long run.

Of course, the previous system was not perfect. It was problematic in that it applied a uniform standard without considering industry-specific characteristics. Excluding bio or new technology companies that are still in the research and development stage solely due to "losses" ignored their growth potential. There was also criticism that the system infringed upon the rights of investors who wanted to support companies over the long term.

What is needed now is a balance between "indiscriminate filtering" and "indiscriminate retention." For example, differentiated criteria that reflect the characteristics of each industry could be established. For bio or IT venture companies, supplementary indicators such as operating cash flow, clinical stage, and R&D achievements could be considered instead of just operating losses. In contrast, for manufacturing and service companies, strict management of consecutive operating losses should continue as before.

Transparent information disclosure is also necessary. Since a company's soundness cannot be judged solely by its listing status, periodically disclosing a "potential zombie company list" would allow market participants to assess risks independently. This is more rational than having the government or the exchange unilaterally decide on delisting.

If the revision of the system, originally intended to protect innovative companies, has ultimately resulted in the proliferation of zombie companies, then it is time to restore balance. The sprouts of innovation must be protected, but companies that continuously cause harm to investors should be decisively filtered out. Bold decisions by financial authorities and the exchange are needed to achieve both regulation and growth.

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