[Inside Chodong] KOSDAQ Delisting Put to the Test... The First Step Toward Restoring Trust

While the KOSPI index surged significantly last year, the presence of the KOSDAQ remained relatively weak. Although optimism surrounding KOSDAQ revitalization policies toward the end of the year has brought the index closer to reclaiming the "Cheonsdaq" (KOSDAQ 1,000) milestone, questions persist both inside and outside the market. The key issue remains: Will the era of KOSDAQ truly arrive?

The reasons investors are shunning the KOSDAQ cannot be explained simply by industry conditions or supply-demand issues. Instead, a single figure provides a more intuitive snapshot of the current state of the KOSDAQ. According to FnGuide, as of the third quarter of last year, more than 400 listed companies in Korea had an interest coverage ratio below 1 for three consecutive years. Of these, about 80% are listed on the KOSDAQ. This means that for several years, a large number of so-called "zombie companies"-unable to cover their interest expenses with their earnings-have been prevalent across the KOSDAQ market.

This is closely tied to the chronic structural problems of the KOSDAQ market. The KOSDAQ has long focused on lowering listing requirements to help growth companies raise capital. The expansion of technology-based special listings is part of the same approach. However, there have been relatively loose standards for how to manage companies after listing and when to delist them from the market. As a result, the perception that "survival is all that matters" has become entrenched in the KOSDAQ. Even companies with no improvement in performance have remained in the market through various grace periods and improvement phases, leading to an accumulation of such firms. Ultimately, all of this has eroded investor confidence.

Among KOSDAQ investors, there is a persistent anxiety about not knowing when or how their investments might be exposed to risks. The continued existence of insolvent companies has become chronic, and even those facing delisting have found ways to prolong their survival. Speculative trading for short-term gains, as well as misconduct by major shareholders or management, have also been recurring issues. Additionally, even the performance-based delisting system that existed a few years ago has disappeared, further weakening the market's self-correcting mechanisms.

Repeated collective backlash from retail investors during the delisting process has also delayed the removal of insolvent companies. With inadequate investor protection measures in place, discussions about delisting have often failed to be implemented consistently. In such circumstances, it is difficult to see how any institutional or foreign investor could choose the KOSDAQ as an investment destination.

The direction to take is clear. Coinciding with the announcement of "KOSDAQ revitalization" measures at the end of last year, the criteria for delisting have been strengthened starting early this year. For KOSDAQ-listed companies, the market capitalization requirement has been raised from 4 billion won to 15 billion won. The delisting process has also been streamlined with a two-stage review system. However, the key issue is the "application" of these rules. Policy announcements alone are not enough to restore market trust. Only when actual delistings occur and the process is carried out consistently will perceptions of the market begin to change.

With the current momentum for capital market activation fueled by policy expectations, if the fundamentals of the KOSDAQ do not improve, the polarization between the KOSPI and KOSDAQ, as well as between large-cap and small- to mid-cap stocks, will only intensify. Therefore, the starting point for revitalizing the KOSDAQ should not be the inflow of new capital, but rather the clear distinction between companies that deserve to remain in the market and those that do not. The strengthened delisting system introduced this year will serve as the first real test of that principle.