"Sales of 61.7 billion won and profitable for four straight years" ... Yet facing delisting risk as a 'penny stock' — the paradox of tougher delisting rules [Delisting storm, Part 2]

[Financial News]  "How can even a solid stock like this be designated as a monitored stock? What on earth are the criteria? I came in because it was profitable, but I still don't feel safe.""The financial authorities are working to make exceptions for profitable companies. Don't worry. It is the loss-making, distressed firms that will be pushed out, not profitable ones."These are posts written by individual investors who put money into Fashion Platform, a KOSDAQ-listed company, on an online community. Fashion Platform is neither a so-called penny stock nor a loss-making company or one with capital impairment.
Still, on the 13th, Fashion Platform was designated as a monitored stock on KOSDAQ because its market capitalization fell short of the requirement. Contrary to the government's explanation that tougher delisting standards were meant to remove distressed firms, the inclusion of companies like Fashion Platform, which the Korea Exchange had classified as blue-chip firms, is deepening market confusion.
Corporate backlash is also growing. A court recently held the first hearing on injunction requests filed by companies that objected to the exchange's decision to raise the market-cap threshold for delisting six months earlier than originally planned.


The government tightened the delisting system to prevent so-called zombie companies from lingering on the stock market for years and repeatedly harming investors. The goal is to stop marginal firms that cannot cover interest expenses with operating profit for more than three years from using listed-company status to raise capital repeatedly or to exploit the market for stock manipulation, and instead direct funds toward more competitive companies.
Attorney Kim Gwang-joong of the law firm HANGYEOL said, "There are cases where marginal companies that have not been delisted are used for stock manipulation or attract new investors through capital increases, only to create fresh damage again." He added, "From a policy standpoint, tougher delisting standards are necessary because such companies cannot simply be left alone forever."
According to Segye Ilbo on the 13th, 88 KOSDAQ-listed companies were at risk of being designated as monitored stocks under the new rules because their market capitalization fell below 20 billion won or their share price dropped below 1,000 won. On the 12th alone, 27 KOSDAQ stocks triggered reasons for monitored-stock designation under the revised rules, and more cases have followed since then.
What stands out is that 11 of those companies were classified by the exchange, after separate screening and review, as blue-chip firms or venture firms. Fashion Platform, which posted sales of 57.3 billion won and operating profit of 7.3 billion won in the first half of this year, is a profitable company included in the blue-chip category.
In other words, even companies that the exchange has classified as blue-chip firms, or companies that post annual profits, can still be designated as monitored stocks if they fail to meet the share-price or market-capitalization thresholds.
JMI, while not in the blue-chip category, also posted sales of 61.7 billion won in the first half of this year. That was up 49.8% from a year earlier, and the company also remained profitable, marking four consecutive years of earnings.
One problem raised in this process is that a company's operating performance and its share price do not necessarily move in the same direction. In Korea's stock market, capital is concentrated in a handful of large-cap stocks such as semiconductors, while KOSDAQ and small and mid-sized stocks are relatively neglected. As a result, many stocks fail to see their share prices rise even when their earnings improve.
Attorney Kim said, "If the KOSDAQ market itself does not rise significantly, share prices may fail to climb and the risk of falling into penny-stock territory increases." He added, "There are unavoidable aspects to the policy direction, but the issue is how to take each company's circumstances into account when applying uniform standards."
He also said, "There may be cases where individual companies are treated unfairly." He added, "It is important to balance the public interest of removing distressed firms with the protection of existing investors."

There are also concerns that tougher delisting standards could be abused in unexpected ways.
An official from the Korea Corporate Governance Forum said, "We agree with the purpose of clearing out listed companies that are merely occupying space in a distressed state and bringing in innovative companies and startups to revitalize the market." However, the official added, "For some companies, controlling shareholders may actually be able to take advantage of the delisting requirements," noting that the system is not necessarily unfavorable to controlling shareholders.
For controlling shareholders who allow share prices to remain low or deliberately fail to raise corporate value, the tougher delisting standards could instead provide an exit.
The official explained, "If some controlling shareholders do not want share prices to rise and try to engineer an intentional delisting by exploiting the requirements, it could become a case of 'like rubbing salt in the wound.'" The official also warned that if share prices plunge during the liquidation trading process, controlling shareholders may be able to buy up minority shareholders' stakes at bargain prices.
The official added, "We need to think about whether delisting is really a penalty for controlling shareholders." He said, "In fact, innocent minority shareholders may suffer the greatest damage."


The controversy has escalated into a legal dispute.
On the 21st, the Seoul Southern District Court held the first hearing on injunction requests filed by two KOSPI-listed companies and one KOSDAQ-listed company against the Korea Exchange. The companies argued that the revised rule, which moved up the timing of the tougher market-capitalization threshold for delisting ahead of the original schedule, was invalid and asked the court to block their designation as monitored stocks.
Attorney Choi Cho-rong of CHAMBERS, who represents the companies, said, "The bench indicated that it needs time for deliberation and sufficient grounds for judgment, since it must decide whether to grant the injunction on the premise that the listing rules themselves are invalid." She added, "From a company's perspective, being designated as a monitored stock alone already causes many practical disadvantages."
The core issue raised by the applicants is the reasonableness of the market-capitalization threshold.
Attorney Choi said, "The applicants argue that there is not enough rational explanation for why companies with a market capitalization below 50 billion won should be removed, or why companies with a low market cap should be regarded as distressed firms." She added, "In particular, they believe there is no clear basis for why the threshold should be 50 billion won."
They also challenged the investor-protection logic cited by the exchange.
Attorney Choi said, "The argument is that low market capitalization means lower liquidity and higher volatility, which could make such stocks more vulnerable to price manipulation. But separate delisting rules already exist for companies with low liquidity."
They also raised concerns about the unfairness of bringing the rules into force earlier than planned.
[email protected] Seo Yoon-kyung Kim Hee-sun Reporter