Korea to adopt cornerstone investor system to vitalize IPOs

South Korea is set to introduce a system of cornerstone investors who agree in advance to subscribe to a forthcoming listing with conditions of lockups next year to revitalize the local initial public offering market by luring financial institutions.

Cornerstone investors usually commit to taking a fixed value of shares -- often of a sizeable amount -- in an IPO at an early stage in the listing process and before the main roadshow and bookbuilding commence.

“We plan to establish a cornerstone investor system suggested by the investment industry to improve the stability in the IPO market,” said Rhee Yun-su, director general of the capital market bureau at the Financial Services Commission (FSC), the country’s top financial regulator, on Monday.

“We will prepare for legislative discussions to start at the National Assembly as soon as possible,” Rhee added during a seminar on the global competitiveness of the local financial investment sector.

The FSC aims to begin the talks in the first half as the introduction of the system needs to revise the Capital Market Act, which prohibits an offering before official listings.

The cornerstone investor system was first introduced in the Hong Kong stock market in 2007 and other Asian countries such as Singapore followed suit. The Korea Exchange unveiled a plan to adapt the system in 2018.

TO REDUCE VOLATILITY IN STOCK PRICES

The FSC expects the system to invigorate the domestic IPO market, which has been under pressure from rising interest rates. Several companies such as gourmet food delivery platform Kurly Inc. gave up or postpones their listings as investor sentiment deteriorated.

The system is likely to allow institutional investors to secure shares for long-term investments at prices they offer, cutting volatilities in stock prices after listings. It is expected to help set fair values for companies seeking IPOs as institutional investors offer prices before the bookbuilding process.

The measure will also prevent investors who aim to raise their allotment chances in highly subscribed IPOs without enough money from bidding, attracting individual investors to participate in listings at proper prices.

“Large institutions such as NPS will take the lead in the IPO market rather than smaller players once the cornerstone investor rule is introduced,” said an executive for the listing business at a local brokerage house, referring to the state-run National Pension Service.

Late last year, the FSC unveiled measures that allow a bookbuilding session before submitting a securities registration statement to improve the IPO market system. The market has been hurt by practices of bidding with nonexistent money, which made it difficult to set fair value.

TO EASE RULES ON LOCAL INVESTMENT FIRMS’ OVERSEAS BIZ

The regulator separately plans to ease regulations on local brokerage houses’ lending to their overseas units to strengthen their business in other countries.

“The FSC will apply eased rules of the net capital ratio (NCR) on large securities firms’ corporate credit offering for their overseas subsidiaries," Rhee said.

The NCR is the net amount of all elements of working capital. It is intended to reveal whether a business has a sufficient amount of net funds available in the short term to remain in operation.

The ratio is currently calculated by applying differentiated risk values of up to 32% to total financial investment firms’ corporate credit offerings according to counterparties’ credit ratings. But the risk value has been applied at only 100% when overseas units of local securities firms borrow, which the brokerage industry said limited their overseas business.

The plan is predicted to help major brokerage houses expand their businesses in other countries, industry sources said.

“It will have a positive impact on the competitiveness in overseas business and market expansions,” said one of the sources.

Write to Dong-Hun Lee, Han-Gyeol Seon and Byeong-Hun Yang at leedh@hankyung.com
 
Jongwoo Cheon edited this article.