South Korea's Crackdown on Zombie Firms: A New Era for the Stock Market

South Korea's financial regulator, the Financial Services Commission (FSC), has announced a series of enhanced regulations aimed at improving the quality of the stock market and removing zombie firms. These changes, set to take effect in the coming years, will have a significant impact on the overall composition of the South Korean stock market and its economic benefits.

The FSC's new delisting rules will tighten the requirements for companies to remain listed on the main Kospi exchange. The market capitalization requirement will be raised from 5 billion won ($3.45 million) to 20 billion won starting 2026, and to 50 billion won from 2028. This means that smaller companies with lower market capitalization will be delisted if they fail to meet these new requirements. As a result, the Kospi will become more concentrated with larger, more established companies, potentially leading to a more stable and less volatile market.



The improvement period granted to Kospi firms after a delisting warning will also be halved from four years to two years. This change will accelerate the delisting process for companies that fail to meet the required standards, ensuring that the market is composed of more viable and productive firms. This could lead to a reduction in the number of zombie companies and improve the overall productivity of the market.

Starting from 2029, a company whose market capitalization hovers below 50 billion won ($3.47 million) and with revenues that stay below 30 billion will be exited from the main bourse. This stricter delisting criterion will help to remove underperforming companies from the market, allowing more competitive and productive firms to take their place.

The FSC's measures also include stricter regulations for institutional investors' investment in newcomers on the stock market. Starting next year, over 40 percent of the initial public offering (IPO) shares will be first allotted to institutional investors who guarantee the holdings of IPO shares for a certain period, usually three or six months. This could lead to increased demand for IPO shares, potentially driving up their valuation. Additionally, the requirement for institutional investors to hold these shares for a certain period could lead to more stable valuations for these companies, as there will be less immediate selling pressure.



The removal of zombie firms from the market can have several potential economic benefits. Zombie firms are companies that are unable to repay their borrowing costs with their operating profit, and their presence can distort the corporate ecosystem and put a serious burden on the national economy in the long run. By removing zombie firms, resources can be reallocated to more viable and productive enterprises, fostering economic growth and innovation. Additionally, the removal of zombie firms can help reduce risk to investors, enhance financial system stability, and increase economic vitality.

In conclusion, South Korea's crackdown on zombie firms is a significant step towards improving the quality of the stock market and fostering economic growth. The new delisting rules and stricter regulations for institutional investors will lead to a more concentrated, stable, and productive Kospi market, with a reduced presence of zombie companies. This should ultimately contribute to the overall health and vitality of the South Korean stock market and its economy.