South Korea's third stock market for small companies has remained bearish since its launch nearly a year ago due in large part to thin trading and low investor confidence, said listed companies and market watchers on Tuesday, calling for eased entry rules to the market and greater incentive for trading to boost expansion.
Korea New Exchange debuted on July 1 last year to provide a bourse where business start-ups and venture firms can raise funds easier via stock sales instead of having to borrow from banks.
Over the past year, KONEX's market capitalization grew to 1.14 trillion won ($1.12 billion) with 53 firms listed, and two companies on a waiting list, according to its website. About 30,000 shares were traded as of Monday, with an average turnover of around 2.4 million won.
The figures fall far short of market expectation as Korea Exchange, the operator of benchmark KOSPI and tech-heavy KOSDAQ, started KONEX with 21 firms with the goal of having over 50 by the end of 2013 to eventually reach 1,000.
Listed companies say the lukewarm growth is attributable to low liquidity, a key element of a well-functioning market.
"One of the biggest problems is that an investor's stocks could be 'a pie in the sky,'" said Kim Chang-ho, CEO of mobile equipment manufacturer Ajinextek Co. based in the southeastern city of Daegu.
"Investors may not find it easy to sell their stocks for profit-taking because of the low volume of trading."
Weak investor confidence is another challenge facing the venture-firm driven market.
"I still have to explain what KONEX is as many investors still don't know about it," said Lee Seong-woo, CEO of Yelopay Corporation, an electronic payment system operator. Lee demanded the government put more effort into promoting the junior market's brand image.
Although KONEX still remains sluggish, it has benefited start-up companies that are seeking ways to diversify their funding sources.
"I couldn't think of any other option but to borrow money from banks for financing. After joining (KONEX), we have drawn 12.5 billion won in funds by issuing convertible bonds," said Kim Sang-baek, chief of Standard Group, an aluminum producer based south of Seoul.
Over the past 12 months, 48.4 billion won have flowed into KONEX through issuing either new shares or convertible bonds. The amount has steadily grown from 6.9 billion won in the fourth quarter of last year to 22.3 billion won in the April-June period of this year.
But given the performance falling short of expectations, market experts recommend easier entry rules for individual investors who want to bet on KONEX-listed firms.
Currently, only institutional investors or an individual with a deposit of above 300 million won are allowed to participate in the KONEX market. The minimum amount for a transaction is set at 100 shares.
"Rather than opening the market to all private investors, easing the market entry requirements may resolve the liquidity issue for KONEX," said Hwang Se-woon, a senior researcher at market think tank Korea Capital Market Institute.
Analysts say that relatively scarce information available on the KONEX-listed companies is another setback as it raises risk factors for investors.
"Because start-up companies have high volatility, financial authorities should encourage the listed companies to give more information, offer tax breaks on trading and dividend interests,"
Jang Young-soo, an analyst at Kiwoom Securities Co., said.
While financial authorities have taken a careful approach to lowering the entry bar for the new market, the Financial Services Commission recently said it will soften the qualifications for KONEX-listed companies wanting to switch over to KOSDAQ.
Under the so-called fast track system, companies on KONEX that post a quarterly net profit of over 4 billion won, with more than
20 percent of return on equity, are eligible for review for KOSDAQ listing starting on June 30.
The bourse operator earlier said its eventual goal is to have firms listed on the new market to attract investments and be relisted on the secondary market within three to four years. While it takes 14.3 years on average for a firm to be listed in KOSDAQ, KONEX targets companies that are 10 years or younger.
The FSC also said it will encourage local asset managers to design more mutual funds that include KONEX-listed firms to provide more indirect opportunities for retail investors to participate in the new bourse. (Yonhap)