The Financial Supervisory Service (FSS) announced on March 25 that it would initiate a concentrated investigation into what are colloquially referred to as “zombie companies.” These are businesses considered financially distressed, resorting to tactics such as capital increases through disguised payments, where third-party funds are recognized as assets, or manipulating accounting practices to artificially avoid delisting. The aim is to identify such companies and remove them from the market.
According to the FSS investigation, the majority of companies that have undergone delisting procedures in the past three years were found to have engaged in unfair trading practices. In the past three years, out of the 44 companies delisted from the stock market, 37 were found to have engaged in unfair trading practices. The amount of unfair gains identified from the 15 cases where investigations were completed alone stood at 169.4 billion won (US$126.14 million). Various shady methods were employed, including illegal transactions in 7 cases, market manipulation in 1 case, and failure to disclose or report obligations in 7 cases.
The FSS views these financially distressed companies as obstacles to the flow of funds within the stock market, contributing to what it calls a “Korea Discount,” which refers to the undervaluation of Korean stocks compared to their true worth.
To address the issue comprehensively, the FSS is establishing a joint response system by deploying investigation teams, disclosure review offices, and accounting audit teams. They plan to closely scrutinize cases where projected figures, such as revenue estimates at the time of listing, significantly differ from actual results.