[Inside Chodong] Missed the Golden Time for IPO Revitalization Measures

[Asia Economy Reporter Hyungsoo Park] Following the second half of last year, the domestic initial public offering (IPO) market continues to face a chilling downturn in the first half of this year. TMC, a special gas company for semiconductors that had raised expectations, lowered its public offering price by more than 10% below the lower end of the desired range. Despite confident demand forecasting based on rapid growth driven by domestic technology, the results fell short of expectations.

Curly, once considered a "big fish," also postponed its listing. It appears that the Curly management and financial investors (FI) judged that the company value they expected would not be recognized given the market sentiment.

As the IPO market shrinks rapidly, financial authorities have announced plans to improve regulations to enhance market soundness. They plan to extend the demand forecasting period and revise related regulations to prevent fictitious subscriptions, but the industry voices complaints.

Going forward, underwriters will be required to verify the payment capability of institutional investors participating in demand forecasting. The authorities have set a policy to impose penalties, including up to suspension of operations, if underwriters are found to be negligent in management. With an already prevailing atmosphere of withdrawal or postponement of listings, if participation rates in demand forecasting decline further, the IPO market downturn could be prolonged.

It is also necessary to reconsider the causes of fictitious subscriptions. Not only institutional investors but also individual investors participating in general subscriptions engage in a competitive struggle to secure even one more share if they believe the stock price will exceed the public offering price after listing. They decide the order size based on past competition rates. For example, if the demand forecasting or subscription competition rate exceeds 100 to 1, even if one subscribes with 100 million won, they will receive only about 1 million won worth of shares. Consequently, the competition rate for anticipated high-demand public offerings inevitably becomes even higher. Conversely, for public offerings expected to have low competition rates, investors tend to be passive in subscriptions, fearing they might receive all the shares they ordered.

The impact of fictitious subscriptions on the inflation of public offering prices is also a matter to consider. Among 70 companies that underwent demand forecasting last year, 12 companies, including Saevitchem, Sungil Hightech, Nextchip, and Laser Cell, set their public offering prices above the upper limit of the desired range. They entered the stock market with prices about 10-20% higher than the upper limit. Excluding fictitious subscriptions, it is expected that the public offering price of 2 out of every 10 newly listed companies annually could be lowered by about 20%. Compared to this, the side effects caused by rigid demand forecasting processes could be greater. Moreover, it remains uncertain how effectively private underwriters can verify payment capabilities.

Regulatory improvements to calculate appropriate public offering prices in the IPO market are made frequently. It is a process of finding a proper consensus between companies pursuing listings and investors investing in public offerings. Various attempts should be encouraged. The problem lies in timing. It took a year after the LG Energy Solution incident for alternatives to emerge. Meanwhile, the market sentiment has changed. Last year, the average demand forecasting competition rate was 836 to 1, about 30% lower than the 2021 average of 1173 to 1. This year, the concern is not fictitious subscriptions but insufficient participation in demand forecasting.

The contraction of the IPO market also negatively affects startups and venture companies in raising investment funds. If it becomes difficult to recover investments through IPOs, investment sentiment toward early-stage companies inevitably freezes. Although financial authorities say they will "repair reservoirs when water recedes due to drought," they must not forget that farmers have to watch their crops wither during the drought.

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