Tightening the Listing Requirement in Korea Exchange
2010/05/04 1 Comment
When the listing evaluation committee had been launched in early 2009, significant number of listed companies had lost its listing from Korea exchange(KRX). Because listed companies not only performed badly enough to lead themselves out of listing, but also financial authorities tightened their monitoring and evaluation on listed companies. At present, more than 20 listed companies are supposed to be delisted this year. Pursuant to KOSPI market listing regulation, it is clearly stated that every company either listed on KOSPI or KOSDAQ must be audited for each fiscal year as well as each quarter. Based on official opinion by auditor, any companies failed to meet their listing requirements are subject to be delisted.
Obviously losing the listing causes an enormous amount of cost for the company as well as investors who own its shares. As for the company, it might have to consider bankruptcy or court receivership unless it will be able to recover from ailing financial status in the event of delisting. Also due to being delisted, no credit line will be available from anywhere as the company loses its financial credibility from the market. As for investors, they may lose their investment on the company since the company stock would be worthless when the price of company plummets.
Even though the company is obliged to post public notice on significant business changes and financial performances, it is impossible for investors to understand the in-depth details of the company. For example, investors are unable to access the insider information of the company which can be a major key factor affecting the company as whole. Since every detail of the company cannot be disclosed to investors, investors should be able to keep monitoring the financial performance and significant change of the company up to date as much as they can in order to avoid any possible losses on delisting of the company. With respect to that, it is beneficial to be aware of the listing requirements and related issues.
In order to sustain its listing status, each listed company should be able to meet the category of requirement instructed by KRX. The details are as follows;
Violating any requirement above, the company is destined to be delisted. In case that the company claims its bankruptcy or cease the transaction with banks or any company is considered to be delisted in terms of the continuance of company, the transparency of management, and investor’s protection reviewed by the listing evaluation committee, it shall be out of market immediately.
To avoid the event of delisting, companies seek any possible way to meet the requirements before the end of fiscal year. Since most cases of delisting can be caused by poor business performance, the companies try to either meet the revenue requirement or repair capital impairment on the condition that all other requirements are met. Sometimes some desperate companies commit wrongdoings to meet the requirements. For instance, a company, running below the revenue requirement near the end of year, creates fictitious revenue to meet the revenue requirement. Also a company exceeding capital impairment requirement may try to replenish its capital by temporary loan. Once they successfully get away with it, the loan shall be reimbursed with high interest payment, which increases financial burden and deteriorates financial status. In order to prevent any wrongdoing and improvised method, financial authorities have launched the listing evaluation committee to review companies notified to be delisted in terms of reviewing qualitative method rather than quantitative method.
That is to say, any company which met its revenue requirement at the end of its fiscal year based on audited financial statements shall be qualified to stay listed. However, if the review found out that the company created significant amount of fictitious revenue at the end of year, the company shall be kicked out of market immediately. But, of course, the company has a right to appeal the judgement and prove its innocence.
The more listing evaluation gets tougher, the more unqualified listed companies expect to lose their listing. In terms of protecting general investors from potential losses on delisting due to the possible wrongdoing or fraud initiated by the company itself and also maintaining the soundness of equity market in Korea, tougher measures of evaluation shall be necessary. Most of all, investors also should be responsible for their investment since the decision on investment shall be made solely on their own risk. Simply their money is at stake.