Reform Plans for IPO and Delisting Rules

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Reform Plans for IPO and Delisting Rules
Jan 21, 2025

On January 21, the Financial Services Commission and related organizations including the Financial Supervisory Service (FSS), Korea Exchange (KRX), Korea Financial Investment Association (KOFIA) and Korea Capital Market Institute (KCMI) held a joint seminar on improving initial public offering (IPO) and delisting rules, as part of the government’s ongoing efforts for capital market reforms. At the seminar, the FSC unveiled reform plans for IPO and delisting rules and gathered feedback from various market participants.

FSC Chairman Kim Byoung Hwan delivered his congratulatory remarks outlining the background and directions of the reform plans. The Chairman said that the market structural improvement is needed to boost the overall valuation of our capital market as the government has been pushing forward capital market reform initiatives since last year. Regulatory reforms on IPO and delisting rules will be pushed forward as another major task for the value-up initiatives, he emphasized.

In regard with the IPO market, Chairman Kim said that reform plans will incentivize institutional investors to hold shares for a longer period under a lock-up commitment, which will help shift the IPO market more towards investments based on corporate value. Reforms will also strengthen the roles and responsibilities of underwriters for determining appropriate IPO prices and securing mid-to-long-term investors, he added.

Regarding the delisting rules, Chairman Kim explained, the authorities will strengthen the requirements for companies to remain listed and streamline delisting procedures so that companies undermining market trust can be timely removed without delay.

Along with this, Chairman Kim suggested that the government will consider overhauling the stock market structure to make it more efficient and provide stronger investor protection. “We will seek differentiation and linkage between market segments so that companies can raise funds in the market tailored to their growth stage and characteristics,” he said. To this end, the FSC will study the characteristics of our stock markets and overseas cases and initiate the public discussion process, he added.

Background

While the Korean stock market has continued to expand in quantitative scale, such as the number of listed companies and market capitalization, it has been evaluated insufficient in terms of qualitative progress such as corporate value and growth potential of individual listed companies. In recent five years, stock market index of major overseas markets has grown at higher or similar levels against the growth of market capitalization. However, in Korea, market capitalization has grown faster than its stock market index.

As part of the efforts to induce the qualitative growth of our capital market, the government and related organizations have been implementing the Corporate Value-up Program since February 2024, which aimed at encouraging and supporting listed companies to establish and implement plans to boost their corporate value.

However, it has been pointed out that regulatory reforms of IPO and delisting rules are needed in addition to voluntary efforts of listed companies in order to boost the overall valuation of our capital market. Critics say that the current IPO market is driven by short-term profit-seeking investments, which distort IPO price and cause excessive post-IPO price swings. They also point out that relaxed requirements for companies to stay listed and prolonged process tend to delay the removal of underperforming companies from the exchange. Proposals to reform IPO and delisting rules, announced today, are mainly focused on addressing these problems.

Reform Plans for IPO Rules

Despite previous regulatory reforms on IPO rules, the current IPO market is still dominated by short-term profit-seeking investors, causing market distortions. In particular, institutional investors, who are expected to serve as mid-to-long-term investors, often sell their allotted IPO shares shortly after listing to realize profits. Such short-term profit-seeking investments tend to overheat the book building process, undermining the appropriate pricing of IPO shares, and negatively affect stock market index as stock prices continue to fall after a sharp rise on the day of listing.

To encourage a fundamental shift in the IPO market from investments for short-term profits to investments based on corporate value, the government and related organizations proposed reform plans for IPO rules in three aspects.

(1) Expanding Institutional Investors’ Lock-up Commitments

A prioritized allocation scheme for institutional investors who signed a lock-up agreement will be newly introduced and bonus points will be increased for mandatory holdings depending on the lock-up period.

Out of IPO shares allocated to institutional investors, more than 40% will be allotted to institutional investors who signed a lock-up agreement, under which they are prohibited from selling their shares for a certain period of time after an IPO. If the share volume subject to the lock-up commitment is less than 40%, IPO underwriters are required to purchase 1% of public offering shares with the upper limit of KRW3 billion and hold it for six months. The maximum lock-up period, which is granted bonus points, will be extended from three months to six months.

Policy funds will be also subject to a lock-up period of at least 15 days if they want to receive a separate allocation of IPO shares. So far, 5 to 25% of IPO shares have been set aside separately for policy funds such as high-yield funds and KOSDAQ venture funds. Going forward, policy funds will receive separate allocation only for the portion committed to the lock-up period.

The KOFIA will strengthen its sanctions against rule-breaking cases such as violation of lock-up agreements, unsubscribed shares or unpaid subscriptions. In principle, violators are restricted from participating in the book-building process. In practice, however, the sanction has been often replaced with fines or exempted for a wide range of reasons. In the future, restriction on participation in the book-building process will be used as the principal means of sanctions, and the mitigation standards will be clearly quantified and applied strictly.

(2) Strengthening Qualifications and Methods for Participation in Book-building Process

Qualifications for institutional investors to participate in the book-building process will be strengthened to prevent irrationally overheated interest in IPO shares. To restrict the participation of small institutional investors with insufficient capabilities in evaluating corporate value, private equity funds and discretionary investment funds will face tougher eligibility requirements for participation. Currently, they are required to meet qualifications such as the operational period after business registration and the size of entrusted total assets only when they intend to invest their proprietary assets. Going forward, the requirements will equally apply to assets under their management as well. However, institutional investors who pledged a lock-up period of more than three months will be exempted from the strengthened requirements. For existing funds and discretionary investment contracts, the application of new requirements will be delayed until the end of 2025. After assessing whether overheated participation in demand forecasting is mitigated with the implementation of this reform, the authorities will consider additional reform measures such as raising the threshold of total entrusted assets, if needed.

Indirect participation via fund of funds or overseas paper companies will be also restricted. Under the structure of indirect investments, investment by an underlying fund will be basically excluded from the payment capability for stocks unless the underlying fund makes it clear that they would not participate in the book-building process. When allocating IPO shares, underwriters should exclude foreign institutional investors with no transaction records and whose substance is difficult to identify when allocating IPO shares unless they submit specific documents to verify their business operations.

To prevent the phenomenon in which demands are concentrated on the first day of the book-building process, the bonus point system, which currently gives higher points on the first day, will be revised to evenly allocate bonus points over the period of three days.

(3) Strengthening Roles and Responsibilities of IPO Underwriters

The FSC will resume the amendment to the Financial Investment Service and Capital Markets Act (FSCMA) to introduce cornerstone investors and “test-the-waters” schemes as the bill proposed in the last session of the National Assembly was scrapped with the expiration of the session.

The cornerstone investor scheme is expected to act positively in expanding mid-to-long-term investors by allowing shares of an IPO to be allocated to institutional investors in advance before filing a securities report on the condition of a lock-up period. The “test-the-waters” rule will help underwriters determine appropriate IPO prices as it enables them to take into account market evaluations from the stage of setting the offering price band. While the FSC continues to work on amendments to the FSCMA, details such as how to prevent unfair trading and conflict of interest will be stipulated in the subordinate decree.

Underwriters will specify their internal criteria for allocation of public offering shares, which will include essential elements such as the method of prioritized allocation for institutional investors who pledged a lock-up period, criteria for setting tiers and allocation for each tier, and criteria for assigning weights, etc. To ensure underwriters can allocate shares at their discretion, allocation of IPO shares in accordance with their internal criteria that comply with the industry association’s regulations will not be deemed as a violation of the prohibition of discrimination under the FSCMA.

Obligations for mandatory holding by underwriters will be strengthened. Under the current regulation requires, in the KOSDAQ market, given its relaxed listing requirements, underwriters are required to hold shares acquired within six months of applying for the preliminary listing review for a certain period of time according to price gap ratios between IPO prices and pre-acquisition prices. In order to strengthen underwriters’ responsibilities, the criteria of price gap ratio will be reduced from the current 50% to 30%, while a minimum lock-up period will be extended from one to three months.

Reform Plans for Delisting Rules

The delisting rules in our stock market has been criticized for being more focused on the damages to individual companies and investors rather than the overall efficiency of the market, with overly lenient implementation of delisting requirements and procedures. In fact, the number of delisted companies annually is just one fourth of that of newly listed companies on average, and the number of listed companies has been growing at a faster pace, compared to other major stock markets.

The current rules delay the delisting of underperforming companies, causing inefficiencies in capital allocation, a decline in overall market confidence, and negative impact on stock indices. A higher proportion of underperforming companies in a stock index acts as a constraint on the rise of the index, as the stocks of underperforming companies are still counted as market capitalization even during a delisting review (suspension of trading) period.

Against this backdrop, the government and relevant organizations have come up with measures to strengthen delisting requirements and streamline procedures, aiming to boost the overall value of our stock market by facilitating delisting of underperforming companies. To address investor protection concerns with the increase in delisting, the plan includes measures to ensure the continuity of trading and enhance investors’ access to information.

(1) Strengthening Delisting Rules

The requirements of market capitalization and revenue for companies to stay listed will be gradually raised. The current criteria are set too low so that no company has been delisted over the past decade due to the failure to meet the market cap and revenue requirements. The thresholds for market cap and revenue will be gradually raised to an effective level, considering various factors including proportionality compared with delisting requirements, comparisons with overseas major markets, and differences across markets.

To ensure a smooth transition, the adjustment will be implemented in three stages over three years. The adjustment of revenue requirement will be implemented with a one-year delay as it takes longer to adjust than the adjustment of market cap requirements.

To mitigate the impact of raising the revenue threshold, companies with high growth potential but low revenue will be granted exemption from the revenue requirement if they meet the minimum market capitalization threshold (KRW 100 billion for KOSPI-listed companies and KRW 60 billion for KOSDAQ-listed companies).

According to a simulation test, once the upward adjustments are fully implemented, 62 KOSPI-listed companies (8% of a total number of 788 KOSPI-listed companies) and 137 KOSDAQ-listed companies (9% of a total number of 1,530 KOSDAQ-listed companies) would fail to meet the strengthened requirements to stay listed. However, given that the simulation test was based on data from 2024 and several assumptions, the actual impact may vary depending on companies’ value-up efforts and market conditions.

The audit opinion requirements will be more strictly applied. Under the current delisting rules, the audit opinion requirements have been enforced relatively leniently, giving companies that fail to meet the audit opinion standards an improvement period until audit reports of next two business years are released. However, such improvement periods have been exploited by some underperforming companies as an excuse to avoid delisting or intentionally delay the delisting process.

To address this issue, companies that fall behind the audit opinion standards for two consecutive years will get delisted immediately. However, given the impact on the economy, companies undergoing rehabilitation or workout process will be exceptionally granted an additional improvement period.

The delisting review regime for a surviving entity in the case of relisting of a spun-off entity, currently available only in the KOSDAQ market, will be introduced to the KOSPI market as well.

(2) Streamlining Delisting Procedures

The procedures of delisting reviews and improvement periods will be shortened to make the overall process of delisting more efficient. Currently, the delisting process takes up to a two-tier review and a four-year improvement period for KOSPI-listed companies and a three-tier review and a two-year improvement period for KOSAQ-listed companies. To enhance the efficiency of the delisting review process, the time span of improvement periods for KOSPI-listed companies will be reduced to two-years. The delisting procedure for KOSDAQ-listed companies will be also shortened to a two-tier review and a one-and-half year improvement period.

To eliminate operational inefficiencies, in principle, it will not be allowed to resume a review procedure after a certain period of time, which in effect grants companies under review an additional improvement period. If the results of the first round of review are clear, no additional improvement period will be granted in the second round of review.

When technical and substantive reasons for delisting occur simultaneously, under the current rule, a substantive review procedure is suspended and then resumed after a review procedure for technical reasons is completed. However, in the future, it will be made that reviews for technical and substantive reasons proceed in parallel, and whichever reaches a delisting decision first becomes a final decision.

(3) Strengthening Investor Protection

Systems will be made available for investors to trade delisted stocks. Currently, once a company is delisted, there is virtually no way for investors to trade the delisted stocks other than a post-delisting liquidation trading period of seven trading days. To address this issue, K-OTC, the trading platform for unlisted stocks operated by KOFIA, will be utilized. Under the K-OTC, a new division, tentatively named ‘Delisted Company Division,’ will be established to support trading of delisted stocks for six months. After the six months of trading, those stocks may be transferred to the K-OTC platform to continue to be traded if KOFIA deems it appropriate.

Disclosures of information during a delisting review will be expanded. Currently, investors have little access to information on companies during the delisting review period except for disclosures related to the KRX’s delisting procedures. To enhance investors’ right to information, companies under a delisting review will be required to disclose main contents of their improvement plans that they submit to KRX.

Implementation Schedule

For the implementation of reform plans for IPO rules, revisions will be made to the KOFIA regulation in the first quarter and the KRX regulation in the second quarter of 2025. Measures that can be enforced immediately will be implemented from April 1, and measures requiring internal system adjustments or investors guidance will be implemented from July 1. To introduce the cornerstone investor scheme and the “test-the-waters” rule, a revision bill on the FSCMA will be proposed in the second quarter of 2025.

For the implementation of reform plans of delisting rules, revisions will be made to the KRX rules in the first quarter and the KRX regulation in the second quarter of 2025. Measures that can be enforced immediately, such as shortening improvement periods and a parallel review of technical and substantive delisting reasons, will be implemented in the first quarter of 2025 with the revision of the KRX rules. Measures requiring preparation and guidance for companies, such as strict application of the audit opinion requirement, strengthened review on relisting of a spun-off entity and disclosure of improvement plans by companies under a delisting review, will be implemented July 1. Strengthened financial requirements such as market cap and revenue for companies to stay listed will be implemented in three phases starting January 2026. The K-OTC support system for trading delisted stocks will be also newly established in January 2026.

• Please refer to the attached PDF for details.

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