FSS Warns "Be Cautious of Investing in Free Capital Increase Theme Stocks... No Impact on Corporate Value"

[Asia Economy Reporter Lee Jung-yoon] The Financial Supervisory Service (FSS) has warned investors to exercise caution as indiscriminate investments related to free capital increases are spreading on social networking services (SNS) and other platforms.

On the 25th, the FSS stated, "Recently, as the number of KOSDAQ companies deciding on free capital increases has increased, some companies have announced free capital increases allocating more than 5 new shares per existing share," adding, "Unlike paid capital increases, free capital increases do not bring external capital into the company and therefore do not affect corporate value."

According to the FSS, as of July 20 this year, there have been 48 decisions on free capital increases by listed companies, of which 44 are related to KOSDAQ companies. Free capital increases by KOSDAQ companies rose significantly from 49 cases in 2020 to 101 cases last year. Until 2021, it was common to allocate free new shares at a ratio of one share or less per existing share, but this year, cases allocating more than one share have increased. Some KOSDAQ companies have allocated more than 5 new shares per existing share.

The FSS explained that a higher free capital increase ratio is not necessarily better. The FSS emphasized, "Since free capital increases do not bring in external capital, a high free capital increase ratio does not mean an increase in corporate value," and added, "There may be a temporary stock price rise due to an optical illusion such as the stock price appearing lower after the ex-rights date, but if there is no substantial change in corporate value, the stock price may eventually return to the level before the free capital increase."

It further stated, "A higher reserve ratio does not necessarily mean a higher possibility of free capital increases; it depends on the company's choice." Free capital increases utilize surplus funds, and as of the end of last year, half of the listed companies had surplus funds more than 10 times their capital, indicating a high reserve ratio. Therefore, free capital increases are conducted within the range of surplus funds available according to the company's choice, and it is not only a few companies that can carry out free capital increases.

It also explained, "If you purchase shares up to two business days before the new share allocation date, you can receive new shares, and the ex-rights date occurs one business day before the new share allocation date," adding, "Since free new shares are allocated to shareholders as of the new share allocation date, even if you purchase additional shares from one business day before, you cannot receive free new shares, so the ex-rights date occurs."

The FSS warned, "Recently, content encouraging indiscriminate investments in stocks related to free capital increases, such as 'How to make money with free capital increases' and 'Recommended promising stocks for free capital increases,' is spreading on SNS and other platforms," emphasizing, "It is risky to decide investments solely based on the possibility or announcement of free capital increases without actual changes in the company's intrinsic value." It added, "Before investing, it is essential to check the free capital increase schedule and other details through the company's disclosures."