Delisting of Loss-Making Companies from KOSDAQ to Accelerate... Promotion and Relegation System Gains Speed

Financial Services Commission and Korea Exchange Developing Detailed Criteria
Long-term Losses and Insufficient Revenue to Be Applied
Many Technology Exception-Listed Firms, Including Biotech, Likely to Be Included

The government and Korea Exchange are preparing to introduce the "KOSDAQ Promotion and Relegation System" in the second half of the year, and are reportedly considering designating a large number of so-called "zombie companies," which have been running deficits for years, to the management segment. The aim is to quickly delist underperforming companies from KOSDAQ through the management segment designation, thereby enhancing the market's competitiveness and dynamism.

Financial Services Commission and Korea Exchange Accelerate Work on Detailed Criteria for KOSDAQ Promotion and Relegation System

According to the financial sector on April 23, the Financial Services Commission and Korea Exchange are preparing to introduce the "KOSDAQ Promotion and Relegation System" as early as this summer. Once implemented, the KOSDAQ market is expected to be reorganized into three segments: Premium (tentative), Standard (tentative), and Management. The goal is to clearly classify KOSDAQ-listed companies by grade, offering benefits to high-quality companies and delisting underperformers in order to revitalize KOSDAQ, whose index has been stagnant for a long time.

The Premium segment will strictly apply requirements for market capitalization, financial performance, and corporate governance, and is expected to include 80 to 170 large, mature companies. This represents a plan to separately manage the top 10% of KOSDAQ-listed blue-chip stocks. Premium companies will be granted more autonomy, such as a reduction in ad hoc disclosure items, while English disclosures and governance reports will be made mandatory to demand global standards of transparency.

The Standard segment will be operated based on current KOSDAQ requirements and will include general scaling-up companies and those listed through technology exceptions. These companies will be required to expand disclosures on performance outlooks and growth plans, and to hold regular investor relations (IR) events, thereby tightening their obligations.

The core of this reform is the management segment, which is the lowest tier. The management segment is expected to include a large number of companies facing delisting risks or high trading risks. In particular, many companies that entered the market through technology exception listings but have failed to escape long-term deficits or have revenue below standards, and thus face insolvency risks, are expected to be included in the management segment. Even some bio companies or theme stocks with high market capitalization but longer-than-expected losses may also be included in large numbers.

An official from the financial authorities stated, "We are working on specific criteria to screen out deficit companies for the introduction of the KOSDAQ Promotion and Relegation System," and emphasized, "The introduction of the promotion and relegation system will strengthen KOSDAQ's competitiveness." A Korea Exchange official also highlighted, "We plan to establish the promotion and relegation system with various criteria," adding, "We will improve the disclosure system and expand the investment base through index diversification, such as introducing a top-tier representative company index."

Companies included in the management segment through the KOSDAQ Promotion and Relegation System are expected to face a higher possibility of delisting. The government will operate a "concentrated delisting management period" until June next year and has strengthened the four major delisting requirements: market capitalization, penny stocks, capital impairment, and disclosure violations. As a result, the number of KOSDAQ companies subject to delisting is estimated to surge from the current 50 to around 150 (ranging from 100 to 220). This is why there is a growing possibility that many companies with persistent deficits or poor performance after technology exception listings will be designated to the management segment.

Japan's Early Adoption of Promotion and Relegation Led to Qualitative Improvement

The KOSDAQ Promotion and Relegation System is similar to the market restructuring undertaken by Japan Exchange Group (JPX). Previously, Japan operated five markets: the First Section, Second Section, JASDAQ (Standard and Growth), and Mothers. These were reorganized into three tiers: Prime, Standard, and Growth. As a result, new listings decreased, delistings increased, and the proportion of companies with low price-to-book ratios (PBR) declined, leading to qualitative improvement.

It is pointed out that for this system reform to take root successfully, detailed institutional design is essential. In particular, there is a need to strengthen qualitative evaluation centered on governance. If a corporate governance issue arises at a company classified in the Premium segment, not only that company but also the credibility of the entire promotion and relegation system could be shaken in the market.

There are also calls to prevent "future earnings overstatements" in securities registration statements submitted by technology exception listing companies during IPOs, which continue to pose problems in KOSDAQ. The argument is that companies whose actual sales and operating profits over several years significantly diverge from the figures forecasted in their registration statements should be placed in the management segment.

Kang Jin-hyuk, a researcher at Shinhan Securities, said, "The KOSDAQ Promotion and Relegation System is positive in that it encourages competition among companies," and predicted, "The more companies are incentivized to move up to the Premium segment, the more strongly the system will function."

There are calls for a system in the management segment to swiftly expel underperforming companies. Researcher Kang pointed out, "In Korea, a combination of declining corporate competitiveness and accommodative support policies has led to a structurally low closure rate but an increasing number of marginal companies," adding, "Even in the stock market, the number of delistings is negligible compared to new listings, and more than 20% of listed companies are marginal companies." He stressed, "In the management segment market, it is essential to ensure the effectiveness of the delisting system that supports the prompt expulsion of underperforming companies."

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