'Zombie Companies' Eating Away at Capital Markets... FSC Accelerates Expulsion

Fundraising through Paid-in Capital Increase and Accounting Fraud
Illicit Gains from Embezzlement and Nominee Stock Sales

High-rise buildings in Yeouido's financial district. Photo by Younghan Heo younghan@

#. Capital-free merger and acquisition (M&A) group Company A avoided delisting risk caused by large-scale losses of the acquisition target company by conducting a large paid-in capital increase at the end of the year. After the stock price rose, they embezzled the capital increase funds and sold nominee stocks held under the name of a paper company at a high price to obtain unfair profits.

#. Company B, which was experiencing large-scale losses, escaped delisting requirements by overstating assets. During this period, Company B used fraudulent financial statements to raise funds worth hundreds of billions of won and used them to repay existing borrowings.

So-called "zombie companies" that engaged in unfair trading such as paid-in capital increases or accounting fraud to avoid delisting have been detected by the Financial Supervisory Service (FSS). There are cases where they immediately avoided delisting requirements and then raised funds in the market or obtained unfair profits through embezzlement and high-priced sales of nominee stocks.

The FSS announced on the 25th that it detected three illegal cases aimed at avoiding delisting and plans to continue investigating additional cases. The FSS emphasized, "These illegal acts delay the exit of 'zombie companies,' acting as an obstacle to the virtuous cycle of funds in the stock market flowing into productive sectors. They also cause investor damage and undermine the trust and value of the stock market, constituting serious criminal acts."

Distressed companies surviving through unfair trading often end up being delisted, increasing investor damage. According to the FSS, among 44 companies delisted in the past three years due to performance deterioration, various forms of unfair trading occurred in 37 companies, and investigative agencies were notified for 15 of these companies. The total amount of unfair profits embezzled by these 15 companies was estimated at 169.4 billion won. By charge, there were 7 cases of fraudulent trading, 1 case of market manipulation, and 7 cases of violations of undisclosed or reporting obligations.

The FSS is focusing its investigative capabilities on unfair trading aimed at avoiding delisting. If charges are found, investigations will begin immediately, and financial and disclosure data will be closely analyzed to identify additional similar cases. The results of similar case analyses will be actively shared with the Financial Services Commission and Korea Exchange. Unfair trading related to market entry will also be thoroughly analyzed. If a company deemed inappropriate for listing is found to have used fraudulent means such as accounting fraud or side agreements to newly list, thorough investigations or audits will be conducted. If there is a significant discrepancy between the estimated sales and other performance forecasts at the time of listing and the actual figures, the appropriateness of the forecast calculations will also be examined.

The FSS stated, "Zombie companies, whose exit has been delayed, are parasitizing the stock market and blocking funding for normal companies. Since this ultimately leads to delisting, spreading investor damage and undermining the trust and value of the stock market, which is one of the factors of the Korea discount, we will promptly remove zombie companies."