SOUTH KOREA: An Introduction to Capital Markets
Although South Korea’s export growth gained some momentum in 2024 thanks to falling global inflation and growing global trade activities, many are putting forward a rather sombre outlook for the South Korean economy owing to the prolonged slumps in domestic spending and the construction industry. Furthermore, South Korea’s export-oriented economy sees multiple challenges ahead with intensifying trade tensions between the US and China and acceleration of geopolitical risks brought about by conflicts that negatively affect the global economy.
South Korea’s initial public offering (IPO) activity up to the third quarter of 2024 held steady compared to that of last year. However, it is worth noting a sharp rise in the number of unsuccessful closings of IPO transactions. Some 47 IPO plans and applications (including the highly anticipated mega IPO of South Korea’s online lender, K-Bank) have either been voluntarily scrapped or rejected by the Korea Exchange, marking an increase of 57% compared to the previous year.
This number has already surpassed that of 2021 which saw the highest year-end total for the number of unsuccessful closings of IPO transactions in the last decade. This phenomenon can be understood to have been caused by the stricter review of, and scrutiny by, the Korea Exchange of both technical and financial requirements coupled with valuation-related issues, especially for the large-cap companies with institutional investors who have made pre-IPO investments during the ultra-low interest period.
South Korea’s equity capital market is currently enjoying vibrant market activities with increased equity issuance volume stemming from a rapid recovery phase that began last year. However, this may be said to be the product of the increased need for additional capital amidst lingering market volatility driving companies to turn to equity issuances with no interest burden (especially centred around manufacturers which tend to have higher debt liabilities).
South Korea’s debt capital market is also picking up steam with expanding investments propelled by the prospectus of increased money supply, favourable policy shifts and base rate cuts. The money supply in the first quarter of 2024 has seen record-high growth as measured on a monthly basis. High market liquidity can equally be seen as a factor driving stable interest rates. In addition, the Bank of Korea’s reform of its liquidity adjustment loans which broadened the scope of eligible collateral securities and opened doors for non-bank depository institutions such as mutual savings banks to benefit from its lending regime led to a steady growth in corporate lending.
Following the base rate cut in October 2024 by the Bank of Korea, the interest burden associated with corporate bonds has subsided and the interest rate for bonds (although unusual) still remains lower than the base rate set by the Bank of Korea. As such, many companies are predicting a slowdown in the base rate cuts, impelling them to engage in financing activities now rather than later.
With the appointment of Eun-bo Jeong, former head of the Financial Supervisory Service, as the CEO of the Korea Exchange in February 2024, the Korea Exchange has vowed to impose tighter standards with respect to its review of the listing applications and management of listed companies in an attempt to expand fair asset management opportunities to investors and enhance listing application review expertise and capacity. In furtherance thereto, Korea Exchange’s level of scrutiny (including stricter review of sales, evidence of sales forecast and current business activities) has sharply increased concerning the companies seeking to be listed under the listing regime for specialist technology companies since June 2024 following a steep decline in the sales of listed specialist technology companies.
The development and introduction of a corporate value enhancement plan (Corporate Value-Up Plan) by the Financial Services Commission and the Korea Exchange in September 2024 to tackle the so-called “Korea Discount” is also noteworthy. With the help of the guidelines to the Corporate Value-Up Plan, listed companies are encouraged to draw up an effective Corporate Value-Up Plan (which may include items such as company overview, current status analysis, goals, plans, implementation evaluation and communication) on a voluntary and self-initiated basis.
In a related development, the Korea Value-Up Index has also been introduced to support the launch of financial products such as exchange-traded funds and funds. The Korea Value-Up Index looks to include 100 listed companies selected based on key investment indicators such as the price-to-book ratio, price-to-earnings ratio, return on equity and cash flow.
Endeavours to improve investor rights have also been made throughout 2024. From the beginning of 2024, large Korea Composite Stock Price Index or KOSPI-listed companies with either:
- assets of KRW10 trillion or more; or
- 30% or more of overseas ownership are required to provide disclosures in English within three business days after their Korean disclosures to the Korea Exchange.
This effectively enables foreign investors to access information on the Korea Composite Stock Price Index or KOSPI-listed companies more freely. Furthermore, from 24 July 2024, insiders (such as major shareholders and executives) of a listed company have been obligated to disclose the purpose, price, quantity, and expected trading period of any large trading of shares in the company in advance. Namely, any transfer by an insider of securities (including equity securities, convertible bonds and bonds with warrants) issued by a listed company amounting to:
- 1% of the total issued and outstanding securities; or
- KRW5 billion or more is required to be disclosed no later than 30 days prior to the expected closing date.
A recent hostile takeover attempt made by MBK targeting Korea Zinc has highlighted a rather disadvantageous position of insiders in ongoing management disputes as they are required to disclose qualified securities transactions 30 days in advance whilst the opposing (hostile) parties are not obligated to do so.
Some are of the view that the easing of inflationary pressures and money supply policy will shed a positive light on South Korea’s capital markets. However, the popular sentiment is that South Korea's capital markets are in their most volatile stage. Trump’s victory in the recent US presidential election and North Korea’s involvement in the Russia-Ukraine conflict can be said to be the major factors driving this volatility.
Internally, South Korea is reeling from an astronomical rise in household debt and a steep downturn in the real estate project financing market and semiconductor exports. In these trying times, a collective effort is made to (hopefully) uplift South Korea’s capital markets by enhancing the investor protection regime (through a stricter IPO application review process and wider disclosure obligations); creating an investor-centred investment environment (through the introduction of the Corporate Value-Up Plan and the Korea Value-Up Index); and improving investment conditions (through increased money supply, a base rate cut and amended lending regimes of the Bank of Korea).
Given the increasingly complex regulatory landscape and the challenges facing South Korea’s capital markets, the role of legal professionals will become even more critical in navigating these turbulent times.
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