Korean regulator mulls flat-rate underwriting fees to cool IPO hype

South Korean financial regulators are considering introducing flat-rate underwriting fees for initial public offerings, in a move seen aimed at cooling the overheating IPO market.

The Financial Supervisory Service recently held a closed-door meeting with brokerage officials in charge of IPOs and tipped them off about the possible regulatory move, according to investment banking sources on Sept. 25.

Currently, IPO underwriting fees are charged in proportion to the volume and value of the shares offered.

Usually, such charges are set at around 1% of the total value of the shares. For biotechnology startups and foreign companies, which require a complicated IPO process, the underwriting fees rise to as high as 5-6%. If the IPO is priced at the top end of the proposed price band, the underwriters can receive an additional 1-5% as an incentive.

Brokerages, however, came under fire for inflating enterprise values and increasing IPO prices to receive higher underwriting fees. The IPO market has also been overheating with steady money inflows from retail investors who favored new stocks amid record-low interest rates.

Kakao Games, which made a splash on its Kosdaq market debut this month, paid a total of 10 billion won ($8.5 million) or 2.2% in underwriting fees to three IPO managers. Among them, Korea Investment & Securities Co. and Samsung Securities Co. received 5.2 billion won and 3 billion won, respectively, in underwriting fees from the game developer.

The expected regulatory move comes as Big Hit Entertainment Co., the label behind K-pop sensation BTS, kicked off its bookbuilding for the Oct. 15 stock market listing. A number of startups, including mobile banking app KakaoBank Corp. and game developer Krafton Inc., as well as LG Chem Ltd.'s soon-to-be-launched battery business arm, have also announced IPO plans

Industry sources said the new rules, if introduced, would dampen the country’s IPO market and prevent underwriters from handling complex IPOs of some technology startups.

Brokerage firms could also be driven into fierce competition to win as many IPO mandates as possible to make up for reduced fee income, they added.

This week, two Korean companies -- shipping components maker Panasia and medical device manufacturer QuantaMatrix Inc. -- abandoned their IPO plans due to weak investor demand. Analysts said valuations for their Kosdaq market debuts were set too high.

Write to Ye-jin Jun at ace@hankyung.com


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