[Risk Cox] Penny Stock Delisting Countdown Begins: 7.3% of Listed Firm…

The countdown has begun for the delisting of Korean penny stocks trading below 1,000 won per share. An illustration generated by CoxNews using Gemini highlights the mounting pressure on low-priced stocks.

South Korea’s Financial Services Commission approved revisions to the Korea Exchange’s listing regulations on May 13. The move finalizes the “Reform Measures for the Swift and Strict Delisting of Insolvent Companies,” first unveiled in February. The new rules will take effect on July 1.

The numbers show the scale of the impact. Based on closing prices on May 13, 141 KOSDAQ-listed companies were trading below 1,000 won. Including KOSPI and KONEX markets, the total rises to 210 companies. That means 7.3% of South Korea’s 2,879 listed firms now fall directly within the scope of the tougher regulations. On KOSDAQ alone, nearly one out of every ten listed firms is classified as a penny stock.

At the heart of the reform is a tougher listing maintenance requirement. If a stock trades below 1,000 won for 30 consecutive trading days, it will be designated as a watchlist issue. The company must then recover its share price and maintain it for at least 45 trading days within the following 90-trading-day period. Failure to do so will result in delisting.

The regulations also target attempts to artificially inflate stock prices through reverse stock splits or capital reductions. Companies that carried out such measures within the previous year will no longer be able to rely on temporary price-support mechanisms after being designated as watchlist issues. In addition, reverse stock splits or capital reductions exceeding a 10-to-1 ratio are now explicitly defined as immediate grounds for delisting.

The market had already sensed the direction of the policy. Among 174 companies that announced reverse stock splits during the three months following the February announcement, 68.4% had share prices below 1,000 won at the time. Many firms moved before the regulations were even finalized.

Market capitalization requirements are also being raised. For KOSDAQ-listed companies, the threshold will increase to 20 billion won in July and to 30 billion won in January next year. KOSPI thresholds will rise to 30 billion won and later to 50 billion won. Review cycles, previously conducted annually, will now take place every six months to prevent temporary stock-price boosting ahead of evaluations.

Survival conditions for companies designated as watchlist issues have also become stricter. The previous requirement — maintaining standards for either 10 consecutive days or 30 cumulative days — has been replaced with a tougher condition requiring compliance for 45 consecutive trading days. Regulators have effectively shut down loopholes companies once used to avoid delisting.

Semiannual full capital impairment has also been added as a criterion for substantive listing review. Meanwhile, the threshold for cumulative disclosure penalty points has been lowered from 15 to 10. Serious or intentional disclosure violations can now trigger an immediate review regardless of accumulated penalty points.

The Korea Exchange estimates that between 100 and 220 companies could eventually face delisting under the new framework. For comparison, only 415 companies have been delisted from KOSDAQ over the past 20 years combined. In effect, the new rules alone could shake nearly half that number at once.

An official at one company currently trading below 1,000 won said, “Stock prices do not always move in line with corporate performance, but since the government has established the rules, we are reviewing possible response measures.”

Lee Geon-jae, head of the KOSDAQ Research Center at IBK Investment & Securities, said, “Stronger listing maintenance requirements and the removal of insolvent firms will be the first step toward improving the quality of the KOSDAQ market and restoring investor confidence.”

The KOSDAQ index has climbed above 1,000 points. Yet one out of every ten listed companies still trades below 1,000 won per share. The disconnect between the index and the underlying companies exposes a structural distortion that has been left unresolved for two decades. On July 1, the reckoning begins.