Dealers are working in a dealing room at Hana Bank's headquarters in Seoul on Tuesday, with electronic displays showing stock market indices. (Yonhap)
Dealers are working in a dealing room at Hana Bank's headquarters in Seoul on Tuesday, with electronic displays showing stock market indices. (Yonhap)

South Korea’s financial authorities are streamlining delisting processes and expanding mandatory holding commitments for institutional investors to curb market distortion from short-term trading in initial public offerings.

A set of reforms was announced at a seminar on stock market listing and delisting held Tuesday in Seoul by the Financial Services Commission, Financial Supervisory Service, Korea Exchange, Korea Financial Investment Association and Capital Market Institute.

The reforms were introduced to facilitate the removal of underperforming companies to improve capital market efficiency.

Firstly, market capitalization thresholds will be gradually raised by 2028, from 5 billion won to 50 billion won ($3.47 million to $34.7) for the benchmark Kospi and from 4 billion won to 30 billion won for the secondary Kosdaq. Revenue requirements will also be strengthened, rising from 5 billion won to 30 billion won for the Kospi and from 7.5 billion won to 30 billion won for the Kosdaq.

Companies with two consecutive substandard audit opinions will be immediately delisted, with exemptions from stricter revenue requirements for high-growth companies meeting the minimum market capitalization.

The delisting process will also be streamlined. The period allowed for improvements will be cut from four years to two for the Kospi and from two years to 1 1/2 years for Kosdaq. The Kosdaq review process will also be reduced from a three-tier to a two-tier system.

The delisting reforms will take effect in July, with enhanced market capitalization and revenue requirements coming in phases starting next year.

The government is also reviewing IPO regulations to address market distortions.

According to the FSC, institutional investors engaged in net selling on the listing day for 74 out of 77 IPOs last year, contributing to inflated demand forecasts and market distortions driven by short-term profit-seeking investments and improper IPO pricing.

To address this, the government has mandated that over 40 percent of the institutional investor allocation must be designated for committed investors. If the commitment falls short, underwriters must purchase 1 percent of the offering, capped at 3 billion won, and hold it for six months. The system will be phased in, starting at 30 percent this year and rising to 40 percent in 2026.

To tackle market overheating, eligibility for demand forecasting participation will be tightened to require either 30 billion won in total entrusted assets or two years of registration with 5 billion won in assets. The use of indirect investment funds or offshore companies to bypass these rules will also be prohibited.

The government will also continue to enhance underwriters' responsibilities, reviewing the introduction of systems such as the "pre-demand forecasting system," which enables advanced assessment of investment demand, and the "cornerstone investor system," allowing pre-allocation to institutional investors before securities registration.

The IPO-related reforms will take effect in July, with a bill to revise the Capital Markets Act for the cornerstone investor and pre-demand forecasting systems expected by the second quarter.