Naysayers portend doom for tertiary Konex

The main building of the Korea Exchange in Yeouido, western Seoul. Provided by the company

A plan to create a new bourse exclusively for promising SMEs is continuing to stoke controversy as critics, pointing to weaknesses in the secondary Kosdaq, fear it will fail to lure investors.

Later this month, the Financial Services Commission (FSC) will start revising the Capital Market Law to allow for a third market dubbed the Korea New Exchange (Konex). At present, the law only provides for the Kospi and Kosdaq as the two major bourses in Seoul.

The aim is to create a fair and transparent capital market for companies of this size, but doubting Thomases in the local financial industry do not see how the regulator will be able to make it work.

“Even the Kosdaq isn’t operating that well in comparison with the main Kospi,” said an official at a securities firm, who spoke on condition of anonymity.

A perception runs deep in the business community that Kospi-listed firms are better off in terms of profit and fiscal soundness than those on the secondary market, he added.

The Kosdaq was set up in 1996 to help small businesses that failed to meet the Kospi’s stringent capital and profit qualifications find financing.

According to the Korea Exchange, 82 Kosdaq-listed companies reported a 16 percent decline in total operating profit on average in the first quarter of this year and a 9 percent fall in net profit on a consolidated basis.

Moreover, 19 companies on the Kosdaq were suspended from trading as of May 31 due to cases of accounting fraud, embezzlement or unstable fiscal conditions. Two have been frozen for more than a year and three for over six months.

“Investors already consider Kosdaq-listed companies to be less healthy than Kospi firms, so regulatory officials aim to change this misconception,” said Yoo Jae-hoon, standing commissioner of the Securities & Futures Commission.

The agency hopes to ease the burden on small ventures by helping them become independently financed as they go public. Many are suffering from mounting debts as their only source of liquidity comes in the form of high-interest bank loans.

“The watchdog’s plan doesn’t stop there. We hope to foster a market where small ventures can grow into bigger companies and move onto the bigger capital markets, the Kosdaq or Kospi, in the future,” Yoo said.

The Konex will welcome small ventures at an early stage of development with at least 1 billion won ($847,000) of their own capital. Similar businesses that have been operating for more than 10 years with at least 3 billion won in assets qualify for the Kosdaq.

The financial regulator plans to attract start-ups with high growth potential by loosening its monitoring standards. It plans to scrap the preliminary evaluation rule for initial public offerings (IPOs) that is currently required by the Kospi and Kosdaq.

Yoo cited as a pressing concern the need to eliminate all the negative press about the new market. “Who would want to invest in Konex companies if the market has a bad reputation before it even gets off the ground?” he said.

The FSC wants large securities firms with secure capital bases to serve as designated advisors for SMEs. Under this proposed new system, sound securities firms will discover blue-chip ventures and examine whether they deserve to be listed on the Konex. After listing, the advisors will continue to monitor the companies’ movements on the market.

Critics say large securities firms will not be willing to join the program because of the low commission fees involved, not to mention the higher risks and expanded responsibility.

“They won’t be able to make a big profit because their commission fees are only two or three percent of listed companies’ sales. But they will be saddled with greater risk as they have to take care of those small ventures,” an industry insider said.

Small ventures are also expecting little of the new bourse.

According to a recent survey conducted by one local securities firm, 11 of 20 small ventures said they will probably not seek to be listed on the Konex because they do not have faith in its potential to develop as an active market. Others said they were put off by the burdensome cost of carrying out an IPO and maintaining their status as a listed company.

“In my opinion, the Konex will be a failure as was the case for the over-the-counter Freeboard market, which is now not functioning properly as a financing channel for small companies,” said one official from the surveyed companies. He was referring to a market established in 1999 for small ventures that fail to qualify for the Kosdaq.

By Song Su-hyun [ssh@joongang.co.kr]