[Reporter’s Notebook] Lax Disclosure Rules Hamper the Goal of "KOSPI 5000"

Minority shareholders fear the "convertible bonds (CB)" of listed companies. CBs grant bondholders the right to convert bonds into shares after a certain period. When a conversion request is made, it becomes a factor that dilutes the value of existing shares.

For this reason, the Korea Exchange requires listed companies to disclose the "exercise of conversion rights" if the number of shares requested for conversion exceeds 1% of the total outstanding shares. This serves as a minimum safeguard for investor protection. Typically, new shares are listed two weeks to one month after the disclosure of the exercise of conversion rights, giving existing investors time to prepare in advance.

The problem is that this disclosure falls under the category of "market notification" rather than "timely disclosure." If a company fails to make a timely disclosure, it may face legal sanctions or be designated as a company with inadequate disclosure. However, market notification carries no such penalties. This is because the regulation was created by the exchange solely for management purposes.

Since there are no disadvantages, some listed companies exploit this loophole. For example, Jinyang Pharmaceutical issued CBs worth 16 billion won in 2021. Since then, by July of this year, bonds worth 6.6 billion won-exceeding 10% of the total shares-were converted into shares over 11 occasions. However, Jinyang Pharmaceutical never once disclosed the exercise of conversion rights. From the investor's perspective, they could only learn of the potential dilution of existing share value through the "additional listing" disclosure issued by the exchange just before the new shares were listed.

For companies, faithfully disclosing the exercise of conversion rights is not just about complying with regulations; it is also a social responsibility to maintain investor trust. Ignoring this responsibility simply because there are no legal consequences is an act of "moral hazard" that exploits loopholes in the law, and this will eventually return as a reputational risk for the company. While companies may temporarily avoid the burden of disclosure, the cost of capital will ultimately rise in a market where trust has been lost.

Financial authorities are not free from responsibility either. The core of market trust lies in the timeliness of information. Classifying the "exercise of conversion rights" as merely a reporting matter for management purposes is a clear institutional flaw. Disclosure should be made immediately upon receipt of a conversion request so that the market has enough time to absorb the supply shock of new share listings in advance. If investors cannot learn of this fact until the new shares are listed, the disclosure system is effectively allowing information asymmetry to persist.

Financial authorities and the exchange must upgrade the disclosure of the exercise of conversion rights from a simple reporting item to an official timely disclosure item. In addition, practical sanctions such as penalties for delayed disclosure should be introduced. As information asymmetry decreases, market transparency will increase, which will in turn enhance the credibility and competitiveness of the Korean capital market. This is a prerequisite that must be addressed to achieve the goal of "KOSPI 5000."