Introducing Characteristics of Marginal Companies Likely to Be Designated as Issues Under Management or Delisted
Beware Abnormal Surges in Share Price and Trading Volume, and Frequent Fund-Raising
# Company A experienced a deterioration in its profit structure, including a decline in sales and a widening operating loss. Before the disclosure of a 30% or more change in sales or profit structure, insiders executed large-scale sales, causing the share price to plunge, and trading was suspended after the auditor issued a qualified opinion.
# At Company B, the largest shareholder resigned and sold off its stake after becoming involved in illegal activities. Before the disclosure of the filing for commencement of rehabilitation proceedings due to worsening financial structure, an insider who became aware of this information avoided losses by selling shares. Subsequently, grounds for delisting arose, including the auditor issuing a disclaimer of opinion.
On February 26, the Market Surveillance Committee of the Korea Exchange issued an advisory on investment precautions, outlining the characteristics of marginal companies that are highly likely to be designated as issues under management or to be delisted, as well as examples of unfair trading.
The Korea Exchange cited abnormal, sharp fluctuations in share prices and trading volumes as major characteristics of marginal companies vulnerable to unfair trading related to year-end settlements. Investors should be cautious when the share price and trading volume of relatively weak companies, whose business performance and financial structure are poor, swing sharply without reason right before the deadline for submitting their audit reports. The exchange also warned about abnormal price movements such as share prices rising even in the face of negative disclosures, including deteriorating settlement results or the occurrence of reasons for designation as issues under management.
Investors should also be wary when companies seek to raise external funds by issuing convertible bonds (CBs), bonds with warrants (BWs), or paid-in capital increases through third-party allotments, while reducing direct financing generated from operating activities, thereby engaging in fund-raising unrelated to their core business. Another characteristic is inconsistent conduct, such as pursuing mergers and acquisitions (M&A) in business areas unrelated to their existing line of business with such funds and then selling them off again.
Delayed submission of audit reports is another red flag. The Korea Exchange pointed out that companies that fail to submit their audit reports within the prescribed deadline often have significant differences of opinion between the auditor and the company, and that this frequently leads to delisting triggers due to non-unqualified audit opinions from external auditors, making it particularly necessary to exercise caution.
The exchange also stated that companies with weak governance structures, such as those with a low ownership stake held by the largest shareholder or with frequent changes in the largest shareholder, should be treated with caution. An official at the Korea Exchange stressed, "Investing without considering a company's financial condition can result not only in losses from a sharp drop in the share price but also in unforeseen damage such as delisting," adding, "Before investing, please check accurate information on listed companies and exercise prudence in making investment decisions."
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