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FSC looks to increase retail investors’ chance for IPO allotment

A bull statue in front of Busan International Finance Cetner (KRX)
A bull statue in front of Busan International Finance Cetner (KRX)
South Korea’s financial regulator, the Financial Services Commission, is looking to invite a wider range of retail investors to get access to shares offered when a company goes public on the Korean stock market.

The key to the new measure is encouraging Korean underwriters of the initial public offering -- eligible for securities brokerage firms -- to allocate at least 10 percent of stocks potentially to any retail participant, regardless of how many bids retail investors place when subscriptions are taking place.

The news comes amid backlash that retail investors are meeting frustration in their IPO subscriptions while the attention to the somewhat risky bets are heightening on high market liquidity.

In Korea, retail investors placing more bids in IPO subscriptions were given higher chances to be allotted stocks in retail tranches on a proportionate basis for 20 percent of the total shares offered to public. This had led to what could be seen as frenzy among retail investors, while virtually closing doors to those who could not afford to put in a large amount of bids enough to be accessible to stocks just ahead of the listing.

The trend has been seen throughout the year in blockbuster stock flotations here, in the investors’ pursuits of a bonanza from IPO stocks immediately upon their debuts on the public market. The Kakao Games IPO collected a record-high 58.6 trillion won ($52.5 billion) of bids in retail tranche. Big Hit Entertainment gathered 58.4 trillion won of bids and SK Biopharmaceuticals attracted 31 trillion won in bids. Such bets, however, are often deemed risky, as shares new to the stock market are subject to volatility immediately after the listing, meaning their trading price skyrockets from the offered price and shrinks to normal.

Also, IPOs in general have become increasingly overheated. According to FSC data, IPO stocks in March were 422 times oversubscribed for retail investors on average, while the IPOs in August were 1,559 times oversubscribed.

To give retail investors with less bids a fair access and at the same time normalize the IPO market, the regulator aims to set at least half of the shares allotted to retail investors -- including high-net-worth individuals -- who will get their shares regardless of the volume of bids placed, by revising the guideline of the Korea Financial Investment Association in late November.

According to regulators, underwriters may choose to either allot stocks evenly to all retail investors that had placed a minimum amount of bids or to selected subscribers on the basis of a draw of lots. The other 10 percent of shares may be offered to retail investors on a proportionate basis.

As a result, at least 20 percent of floating shares will go to a larger number of Korean retail investors.

The measures will first come into effect in December. This will become full-fledged by the first half of 2021, raising the retail investors’ share to 30 percent if combined -- only half of which will be allotted on a proportionate basis.

By Son Ji-hyoung (consnow@heraldcorp.com)
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