Preventing IPO Stock Price Volatility... Financial Authorities Assign Price Management Responsibility to Lead Securities Firms

Announcement of Improvement Measures for IPO System and Practices Expected as Early as This Month

[Asia Economy Reporter Minji Lee] Financial authorities will assign responsibility for stock price management to underwriting securities firms to prevent excessive fluctuations in the stock prices of newly listed companies. This aims to promote investment sentiment and management stability for listed companies amid a surge of interest in the public offering market.

According to financial authorities on the 11th, the Financial Services Commission is reportedly planning to announce improvement measures for the initial public offering (IPO) system and practices as early as this month. An IPO refers to the stage where a company receives its first market evaluation, a process that discovers the appropriate price for unlisted companies and raises investor funds through listing.

Individual investors are receiving subscription consultations at the Korea Investment & Securities headquarters sales department in Yeongdeungpo-gu, Seoul, on the 6th, the last day of the general public subscription for Big Hit Entertainment, the agency of the group BTS. After the general public subscription ends on this day, Big Hit is scheduled to be listed on the KOSPI market on the 15th. Photo by Moon Honam munonam@

Recently, IPO "big names" such as SK Biopharm, Kakao Games, and Big Hit Entertainment have consecutively entered the stock market, increasing interest in the public offering market. However, as the stock prices of newly listed companies fluctuate wildly, there have been ongoing calls for stock price management measures.

Accordingly, financial authorities are reviewing ways to strengthen the underwriting firms' "overallotment option system" to prevent excessive stock price volatility of listed companies. The overallotment option is a system where the underwriter borrows shares held by existing shareholders of the issuing company to allocate additional shares to subscribers, then repays the shares by purchasing them from the market (if the stock price falls below the offering price) or by issuing new shares (if the stock price rises) after trading begins.

While this system has the effect of stabilizing stock prices for a certain period after listing, concerns over dilution of major shareholders' stakes and the practice of underwriters neglecting stock price management have rendered it virtually ineffective since its introduction in 2002. To address this, the Financial Services Commission plans to incorporate contracts for market-making roles, where underwriters manage stock prices for one month after listing, into IPO agreements?drawing on examples from the United States?to encourage underwriters to actively control stock price volatility.

The "5% rule" will also be relaxed to enable securities firms to actively discover and nurture innovative companies. Currently, securities firms are prohibited from underwriting IPOs for unlisted companies in which they hold more than 5% (or more than 10% combined with related parties) of shares, but this threshold is planned to be raised. To enhance the reliability of the offering price, regulations on information exchange between underwriters and major institutional investors (cornerstone investors) will also be partially eased.

While the autonomy of securities firms will significantly increase, the responsibility and penalties for due diligence failures regarding corporate insolvency will be greatly strengthened. The Financial Services Commission is reportedly planning to hold securities firms accountable for detecting false or omitted financial statements of issuing companies and to substantially raise the current maximum fine of 2 billion KRW.

This content was produced with the assistance of AI translation services.