Audit report review likely by the end of March... Low possibility of delisting
[Asia Economy Reporter Lee Seon-ae] Shareholders of Osstem Implant are spending a restless Lunar New Year holiday ahead of the decision on whether the company will be subject to a substantive review of listing eligibility in February. If it is judged not to be subject to the substantive review by the 17th, trading will resume immediately. However, the financial investment industry forecasts that this possibility is extremely low. It is expected that the trading suspension will be prolonged as Osstem Implant is likely to be designated as a subject of the substantive review of listing eligibility.
According to the Korea Exchange on the 1st, Osstem Implant is awaiting the decision on whether it will be subject to the substantive review of listing eligibility on the 17th. Due to a large-scale embezzlement incident, trading of Osstem Implant was suspended on the first trading day of the new year in the KOSDAQ market. The decision on whether it would be subject to the substantive review was originally scheduled for the 24th of last month. However, the Korea Exchange postponed the decision once (extended by 15 days), which has heightened investors' anxiety to the extreme.
The Korea Exchange determines whether to subject a company to review by comprehensively examining how internal controls operate, the amount of embezzlement, and the possibility of recovery. If Osstem Implant is decided not to be subject to the review, trading will resume the next day. However, at present, due to Osstem Implant’s lax control system that failed to detect the embezzlement of 221.5 billion KRW in advance, it is highly likely to be subject to the substantive review.
If Osstem Implant is designated as a subject of the substantive review of listing eligibility, the company must submit an improvement plan within 15 days. The Korea Exchange will conduct the review within 20 days from the day it receives the plan. After about a month of substantive review, the Corporate Review Committee, composed of nine members, will deliberate and decide. The committee must choose one of three options: maintain listing (resume trading), delist, or grant an improvement period (within one year). If additional investigation time is needed, the committee can extend the period by 20 days.
The committee will review and deliberate on △business continuity △financial stability △management transparency, and it is expected to align the schedule to reflect the business and audit reports at the end of March in the review. The Exchange reviews the company’s submitted documents, and the audit report is objectively evaluated externally (by auditors). It is expected that the results of the evaluation regarding losses from the incident and the company’s equity will be taken into account. In other words, to protect investors, it is highly likely that the audit report verification process, which could again pose a risk of trading suspension, will be conducted.
Ultimately, the improvement plan for internal control systems (management transparency), the business and audit reports at the end of March, and cash flow will be the key variables determining Osstem Implant’s fate.
Financial stability will be examined to see whether the company can maintain a stable financial structure or debt ratio through future cash flow forecasts if the embezzled amount is not recovered. Management transparency is also expected to be a critical point in the review. The content of internal control strengthening included in the improvement plan will be crucial. Osstem Implant has reiterated its commitment to strengthening the internal control system and establishing and implementing a perfect recurrence prevention plan and a firm management improvement plan.
However, under such scenario forecasts, shareholders’ funds are inevitably frozen. The damage caused by the trading suspension falls entirely on the shareholders. According to the Financial Supervisory Service’s electronic disclosure system, as of the end of September last year, Osstem Implant had 19,856 minority shareholders, who hold 55.6% (7,939,816 shares) of the shares. During the review and deliberation process, the suspension of stock trading will be prolonged, and relief for damages will inevitably be delayed. The longer the trading suspension lasts, the more individual investors’ funds will be indefinitely locked up.
The securities industry expects the trading suspension period of Osstem Implant to be longer than initially anticipated. Accordingly, cases are emerging where securities analysts who were in charge of Osstem Implant are temporarily suspending their corporate analysis of the company.
A securities industry official said, "The trading suspension of Osstem Implant is expected to be prolonged, and analysts in charge have dropped coverage of the company," adding, "Because the scale of embezzlement is so large, it seems the Korea Exchange is seriously reviewing the matter."
However, the Korea Exchange stated, "Some parts of the materials submitted by Osstem Implant are incomplete, so we are receiving additional documents and conducting the review," and added, "Since we are still reviewing the documents, it is premature to provide results or forecasts."
The possibility of delisting is extremely low. Seogeunhee, a researcher at Samsung Securities, said, "Since the embezzlement amount is large compared to equity, whether the substantive review is conducted will depend on the possibility of fund recovery," and added, "Considering the company’s continuity and investor protection, the possibility of delisting is judged to be low."
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