[Inside Chodong] The Long and Arduous Path to Enhancing IPO Soundness

Considering Expansion of Mandatory Holding Commitments for Institutional Investors
A "Last Resort" to Curb Excessive Short-Term Trading
Cautious Approach Needed Amid Concerns of Market Contraction

Regulatory authorities are considering measures to encourage institutional investors to hold their allotted shares for a mandatory period in order to enhance the soundness of initial public offerings (IPOs). As internet-only bank K-Bank has once again withdrawn its IPO plans and signs of regulatory tightening emerge, the investment banking (IB) industry is voicing complaints. They worry that setting a mandatory holding period will inevitably make institutional investors more cautious when participating in demand forecasting, and that prospective listed companies pushing for IPOs may refuse to accept an offering price lower than expected. While it could remove bubbles from the offering price, it may also lead to a contraction of the IPO market.

According to the '2025 Major Business Promotion Plan' announced by the Financial Services Commission on the 8th, efforts will be made to improve the structure of the stock market to advance the capital market. To raise the qualitative level of the IPO market, the rationality of the offering price will be enhanced. A concrete plan is scheduled to be prepared by March this year. Expanding the mandatory holding commitment system, which requires institutional investors to hold their allotted shares for a certain period, is a likely option.

Last year, the simple average return on the listing day for newly listed companies entering the domestic stock market reached 41.1%. Institutions could earn more than 40% capital gains by selling their allotted shares on the listing day. Because the risk was low and expected returns were high, institutional investors increasingly offered prices exceeding the upper limit of the desired offering price range to receive even one more share. Competition in demand forecasting became fierce, and 8 to 9 out of 10 newly listed companies set their offering prices above the upper limit of the desired range.

There was a bubble in the offering price, and many newly listed companies saw their stock prices surge briefly after listing but then continuously decline. The simple average return of newly listed companies as of the end of last year was -16.9%. Although they attracted investment by being recognized for future growth potential, shareholders who bought stocks in the secondary market were anxious and lost sleep. This is why there are criticisms that the IPO market has become a playground for speculative short-term funds.

The regulatory authorities’ consideration of expanding mandatory holding commitments for institutional investors reflects their agreement with these criticisms. The IB industry expects that expanding mandatory holding commitments will reduce the number of institutional investors participating in demand forecasting or lead them to offer conservative underwriting prices. As cases of setting offering prices below the lower limit of the desired range increase, more prospective listed companies postpone their listing plans. The number of unicorns (unlisted startups valued at over 1 trillion won) heading to the New York Stock Exchange, which recognizes higher corporate values than the domestic stock market, may also increase.

In the past, many prospective listed companies withdrew their listing plans because they refused to accept offering prices lower than the desired range. However, leaving things as they are would increase investor losses after listing. Not only institutional investors but also individual investors approach the market with a 'hit-and-run' style, causing significant side effects. Leaving it solely to market logic results in excessive bubbles, while tightening regulations leads to market contraction.

Thus, the path to enhancing IPO soundness is long and arduous. Previously, regulatory authorities announced the 'Measures to Enhance IPO Soundness' in December 2022. Since then, various attempts have been made over two years. As part of the soundness enhancement measures, from June 2023, the price limit on the listing day for newly listed companies was expanded to 60?400% of the offering price. While this affected the activation of the IPO market, it was also criticized as a major cause of offering price bubbles. This time, it is hoped that diverse opinions will be evenly heard and improvements that minimize side effects will be found.