[Policy Pulse] The 'Hormuz Blockade' in the Stock Market... Who Is Delisting Really For?

Sudden Tightening of Market Cap Criteria by the Korea Exchange
Shock-Absorbing Measures Neutralized in Just 42 Days
Exit Routes Closed for KOSPI and KOSDAQ-listed Firms
Forward-Looking Decisions Needed to Restore Market Trust

Sooman Park, Attorney at Law

At the end of February, the Iranian blockade of the Strait of Hormuz in response to attacks by Israel and the United States led to global concern for the over 1,200 ships and their crews trapped there. The Korean government also joined in issuing a statement condemning the blockade. For the ships, sailors, and related personnel who entered the Persian Gulf through the strait, the blockade must have come as a completely unexpected and devastating development.

A similar situation has occurred in the stock market. Investors and listed companies, who had believed they could sell their stocks at any time, are now experiencing the same sense of being trapped as the vessels in Hormuz, due to recent changes in exchange regulations. With unexpected changes—namely, the strengthening of market cap requirements—the exit from the market has been blocked, forcing companies to look for an escape as unlisted entities.

Last year, the Korea Exchange raised the market capitalization requirements needed to maintain a listing on the KOSPI and KOSDAQ stock markets, increasing the thresholds tenfold from 5 billion won to 50 billion won, and from 4 billion won to 30 billion won, respectively. To mitigate market shock, a three-year phased implementation until 2028 was announced. However, only 42 days after the first phase began, the Korea Exchange announced accelerated implementation in February this year. Through another revision, the 30 billion won threshold was moved up to July, and the 50 billion won threshold was advanced to January of the following year. As a result, some companies and investors filed for injunctions.

The key point during the hearing on August 21 was the extent of discretionary power the Korea Exchange, as a government-approved monopoly, has to unilaterally change the conditions for maintaining listing status. The main arguments from companies were twofold. First, a drop in market capitalization does not automatically indicate corporate deterioration; even healthy companies with positive earnings could fall short of the standard due to stock price declines. Second, the shortening of the grace period. Measures intended to cushion the shock were rendered ineffective in just 42 days, and requirements for recovery have become even more stringent than before, narrowing the path to avoid delisting.

By contrast, the stock exchange argues that the purpose of the revision is to enhance market soundness by promptly exiting underperforming or troubled companies. They maintain that the revision structure remains phased but the implementation timeline has simply been brought forward, and, as a public institution, the exchange has broad discretion to frequently amend related regulations in line with policy objectives.

While awaiting the court's decision, I wish to point out a policy contradiction. If the Korea Exchange had truly recognized the hundreds of companies with market caps below 50 billion won, along with 5 million investors, as its genuine 'customers,' such a ruthless lockdown of exits would have been avoided. The tightened criteria should instead have been applied to newly listed firms first, granting a long grace period to existing companies for business restructuring, or at the very least, a secondary market should have been established to provide a minimal safety net for delisting.

Even more critically, the current regulation itself triggers a self-fulfilling crisis that accelerates stock price declines. Stock prices are determined at the intersection of buying and selling, but with the threat of delisting imminent, a powerful "melting" effect has hit the market. For instance, even a solid company with a current market cap of 55 billion won could easily drop below 50 billion won, simply because buyers disappear due to delisting fears. Regardless of fundamentals, the exchange’s regulatory yardstick is turning into a black hole that drags down market caps. The exchange must explain how it intends to correct this foreseeable market distortion.

The stock exchange claims "investor protection" as its justification. Yet, those at risk of sinking while trapped in the Hormuz strait are none other than today’s investors. Claiming to protect hypothetical future investors, while ignoring the massive harm to 5 million existing ones, is logically inconsistent. Regardless of the case’s outcome, both the exchange and financial authorities must break free from administrative expediency. I strongly urge decisive action to minimize unintentional harm and restore market trust.

Sooman Park, Attorney at Law

This content was produced with the assistance of AI translation services.