Korea Exchange building in Seoul's financial district of Yeouido / Korea Times file

The Korea Exchange (KRX) is considering the immediate removal of listed companies from the stock market, if they receive an inadequate rating for trading for two straight years, according to sources familiar with the matter, Friday.

The KRX said no details have been confirmed and the case needs consultation with the financial authorities.

The sources, however, said, the country's sole bourse operator is already working on the plan, to grapple with the sluggish shares that increasingly prompt investors to leave for overseas stocks exchanges.

“Companies possibly will be targeted for delisting if they get an adverse opinion for two consecutive years from the auditors,” a source said. An adverse opinion is the worst evaluation in an audit, made when financial reports contain gross misstatements and have the potential for fraud.

The source said the listed companies can also be delisted if the auditors issue a ?disclaimer of opinion, which adversely affects the reputation of the firms as it suggests the company falls short of providing sufficient data for an audit to take place.

Currently, it takes up to 20 months to delist these companies even after they are rated inadequate, because they can remain on the market if they raise an objection.

“Under the circumstances, the KRX is geared toward streamlining steps to sort out unqualified companies and boost the market,” a second source said.

“Otherwise, underperforming companies will continue to undermine the Seoul market's competence against global peers.”

The sources speculated more than 50 firms may be removed from the stock market, if the KRX's plan is implemented. The noted 16 companies on the benchmark KOSPI and the 56 firms on the secondary bourse Kosdaq were given poor evaluations from auditors this year.

Kim Dae-jong, a professor of business administration at Sejong University, positively assessed the possible delisting of the incompetent firms, saying, “We have too many listed companies despite lower market valuation compared to the markets abroad.”

He pointed out that Nasdaq is 25 times bigger than the overall Korean stock market in terms of market capitalization but is only 2.5 times larger when it comes to the number of listed companies.

“The finding suggests the financial authorities should have adopted a measure earlier to kick out unqualified companies to improve credibility on the market,” the professor said.

Kim Kyu-shik, chairman of the Korean Corporate Governance Forum, which monitors transparency in business management, viewed that the KRX is “on course to expel ‘zombie companies' to bolster the Corporate Value-up Program.”

Zombie companies are insolvent firms that are unable to service their debts with profits but still remain in business. They are in a virtual state of bankruptcy and undermine investors' confidence in local bourses.

In May, KRX CEO Jeong Eun-bo deemed that these firms are under the government's efforts to speed up the Corporate Value-up Program aimed at bolstering Seoul's undervalued stock market.

The CEO proposed a shortened grace period — from four years to two years — for the zombie companies to improve their business conditions in order to avoid being removed.