Kim Byoung-hwan, chairman of the Financial Services Commission, delivers his address during a joint seminar on improvements of initial public offering (IPO) and delisting systems at the conference hall of the Korea Exchange in Seoul, Tuesday. Yonhap

Financial authorities in Korea have decided to overhaul systems related to the listing and delisting of companies to enhance the qualitative standards of the domestic stock market.

The initiative aims to address market distortions, caused by the overheating of initial public offering (IPO) subscriptions or so-called "zombie" companies — insolvent firms that cannot service their debts but continue to operate and maintain their listing status.

The goal is to improve the efficiency of capital allocation in the stock market and foster an investment environment based on corporate value.

The Financial Services Commission (FSC), together with the Financial Supervisory Service, the Korea Exchange, the Korea Financial Investment Association and the Korea Capital Market Institute, held a joint seminar on Tuesday and announced measures to improve IPO and delisting systems. They said the improvement plans will be implemented starting July.

"A key task for enhancing the value of the capital market is to pursue improvements in the IPO and delisting systems," FSC Chairman Kim Byoung-hwan said during his address.

"The IPO market is excessively driven by short-term profit-oriented operations, and delisting does not occur as smoothly as listing. This has led to criticism that it undermines the efficient functioning and trustworthiness of the capital market."

According to the FSC, institutional investors recorded a net sell position on the listing day for 74 out of 77 IPO stocks last year. This means that even institutional investors, who are expected to play the role of medium- to long-term investors, sold their allocated IPO shares immediately after listing.

The government noted that this short-term profit-driven investment behavior led to overheating in demand forecasts and the failure to determine appropriate offering prices.

To address this issue, the government plans to introduce a new system where at least 40 percent of the shares allocated to institutional investors must be preferentially allocated to those who commit to a mandatory holding period.

Considering that the proportion of shares allocated to institutional investors with a mandatory holding commitment was around 20 percent on average last year, this new measure will double that proportion.

To ensure the smooth implementation of the system, the preferential allocation will be set at 30 percent this year, and it will be increased to 40 percent next year.

If the mandatory holding commitment does not reach 40 percent, the lead underwriter will be required to purchase 1 percent of the offering volume — up to a maximum of 3 billion won ($2 million) — and hold on to it for six months.

Participants listen to a speech by Korea Exchange CEO Jeong Eun-bo during a joint seminar on improvements of IPO and delisting systems at the conference hall of the Korea Exchange in Seoul, Tuesday. Yonhap

The country's top financial regulator also explained that the delisting system in the domestic stock market has been more focused on the impact on individual companies and investors, rather than on overall market efficiency, and that the requirements and procedures have been overly lenient.

The regulator said the number of companies being delisted annually is typically only about one-quarter of the number of companies entering the market, and the growth rate of listed companies is relatively high compared to major global stock markets.

It highlighted that the delayed delisting of underperforming companies leads to inefficiencies in capital allocation, a decline in overall market confidence and negatively impacts stock indices.

To address these concerns, the government will take steps to accelerate the delisting of the zombie companies from the stock market by tightening requirements, which a company must meet in order to maintain its listing, by 2029.

Firms that have a market capitalization of less than 50 billion won and sales under 30 billion won will be delisted from the country's main bourse, the KOSPI, while those with a market capitalization of less than 30 billion won and sales under 10 billion won will be delisted from the secondary Kosdaq. This means the listing maintenance requirements will be increased by up to 10 times.

Starting in April, the delisting process for KOSPI-listed companies will be shortened from a maximum of four years to two years, and the process for Kosdaq-listed ones will be reduced from a three-step procedure to a two-step procedure.

Additionally, from the second half of the year, if a company listed on the KOSPI or Kosdaq receives an audit opinion that is either limited, disqualified or rejected for two consecutive years, the company will be immediately delisted.

"We will strengthen the listing maintenance requirements and streamline the delisting procedures to ensure that companies undermining market trust are smoothly delisted," Kim said.