Daesan F&B, the operator of South Korean pizza chain Mr. Pizza, has been suspended from trading longer than it has been active over the past seven years. The company first underwent a substantive review of its listing eligibility in 2017 due to allegations of embezzlement by former executives. Although trading resumed in April 2020, it was suspended again on April 7 this year when an accounting firm refused to give an opinion on last year’s audit report. An appeal to the Korea Exchange has extended the deadline until April 10 next year, but even if trading resumes then, the total suspension period will exceed four years and four months.
South Korea’s financial authorities and the Korea Exchange are stepping up to address the issue of so-called “zombie companies” - companies that are listed but unable to trade. Often involved in unfair practices such as market manipulation, these companies have been criticized for tying up investors’ funds and avoiding delisting through lengthy appeal processes. Financial authorities are concerned that this has been exacerbating the “Korea discount,” the trend of Korean stocks constantly underperforming compared to global peers. The Korea Exchange aims to speed up the delisting process to tackle this problem.
A total of 97 stocks were suspended from trading on Korea’s stock market due to reasons related to delisting, including 21 on the benchmark KOSPI and 76 on the technology-focused KOSDAQ as of last month, according to the Korea Exchange on June 3.
This figure excludes short-term trading suspensions caused by SPACs - an investment vehicle formed to raise money through a stock exchange listing to acquire a company that will eventually go public - or stock splits. Of these, ten companies have been suspended for more than 1,000 days.
Under the current system, zombie companies can indefinitely prolong the delisting process by appealing the decision. The problem is these companies hold on to investor funds indefinitely, and even when they do resume trading, it is rare for them to make a dramatic recovery, and most eventually face delisting again.
“Once a delisting decision is made, investors file complaints with the Financial Services Commission, the Financial Supervisory Service, the exchange, the National Assembly, and even the Blue House, which creates a significant burden on those involved in the delisting process,” said an official from a securities firm. “The political pressure to delay delisting has led to a surge in zombie companies.”
“The market capitalization of the U.S. stock market is about 27 times larger than that of Korea, but the number of listed companies is only about twice as many, meaning Korea has more listed companies relative to its market size,” said an exchange official.
“In the U.S., the ratio of newly listed companies to delisted companies was 146.2% last year, while in Korea, it was only 20%, indicating that it is easy to go public but hard to delist, contributing to the Korea discount.”
