South Korea’s financial regulator is taking steps to encourage long-term investors to participate in IPOs, but is putting much of the onus on underwriters to achieve results.
The Financial Services Commission on Tuesday amended IPO rules, effective from July, to require that 30% of the institutional offering should be allocated to "committed" investors who agree to a lock-up period in return for preferential allocations. That proportion will rise to 40% from 2026 onwards.
If the institutional lock-up portion falls short of the minimum, the FSC will require IPO underwriters to subscribe to 1% of the public offering, up to W3bn (US$2.1m), and hold it for six months.
The change is part of the country’s ongoing efforts to improve shareholder value. South Korea’s "corporate value-up programme," announced last February, was launched in a bid to address the "Korea discount" that sees many locally listed companies trade at lower valuations than international peers.
According to the FSC, the Korean IPO market is dominated by short-term arbitrage investors, leading to market distortions. Institutional investors, who are expected to take a longer-term view, often book profits by selling their IPO shares immediately after listing, it said.
Institutional investors turned net sellers on the day of listing for 74 of the 77 IPOs that took place in Korea in 2024, the FSC said.
The mandatory holding commitment and priority allocation system will discourage selling on the first day of trading and encourage investors to take a longer-term approach.
“The likely impact will be that there is likely to be reduced opportunities to capitalise on the first day of trading strategies on Korean IPOs and investors may need to take a longer time horizon to realise their profits,” Douglas Kim, an analyst at research portal SmartKarma, wrote in a note.
Lock-ups in Korean IPOs can last for 15 days to six months, and bankers say obtaining large lock-up commitments is not easy.
For a hot deal, investors often agree to make lock-up commitments to secure larger allocations, leading to reduced trading volatility for listing debuts, but it is not common for this to reach more than 40% of the institutional tranche, a South Korean ECM banker said.
Earlier this month, information technology service provider LG CNS’s W1.2trn IPO, the country's largest in three years, saw only 15% of institutional investors make voluntary lock-up commitments.
ECM bankers are worried the IPO lock-up priority allocation system could potentially add extra cost for underwriters.
Effectively, “most underwriters will need to hard underwrite the 1% offering volume or W3bn cost quite often, especially those who may underwrite many IPOs in a year,” the banker said.
Bankers are still digesting the regulations, which are only available in Korean so far. They said it is not clear what happens when the lock-up portion falls short in deals with more than one underwriter – whether each underwriter buys an amount equivalent to 1% of the shares or all underwriters involved share the burden.
"The regulation requiring underwriters to purchase a portion of the issue in the absence of sufficient institutional investors might prompt leading securities companies to be more selective in their deal pipelines, especially when capital market sentiment is weak," said Rowena Chang, a director in Fitch's Asia Pacific non-bank financial institutions ratings team, adding that "if underwriters are required to hold a specific percentage of the issuance, it could increase their market and liquidity risks, particularly if there are accompanying selling or holding period restrictions, and if the underlying equities have limited liquidity or if market trends are unfavourable."
Demand forecasting
The FSC also aims to improve IPO demand forecasting, a process in which institutional investors indicate at what price level and amount they would participate in an IPO, by strengthening qualifications for participation. According to the regulator, each IPO in 2024 on average had about 1,900 institutional investors participating in demand forecasting, showing signs of overheating.
To restrict the participation of small-scale institutional investors who lack the capacity to assess corporate value, participation qualifications for private equity firms and investment companies will be strengthened. Such investors will not be allowed to participate in demand forecasting if their operating assets fall short of a certain threshold, unless they agree to a lock-up of least three months.
The FSC said it will continue to promote the introduction of cornerstone investors in Korea, which will help expand a mid-to-long-term investor base in IPOs.
Additionally, as part of efforts to boost the overall value of the stock market, the regulator is overhauling the delisting system. The FSC will raise listing maintenance requirements, stipulating that companies with a market capitalisation of less than W50bn and sales under W30bn will be delisted from the Kospi main board, and those with a market capitalisation of less than W30bn and sales under W10bn will be delisted from the Kosdaq secondary board.