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South Korea planned to incubate and nurture small companies through a new capital market called "KONEX " that would enhance access of growth venture companies to the equity capital market, a senior official of the main bourse operator said Friday.
"KONEX will be an incubating market. Small growth companies can transfer their listing to the main board KOSPI or KOSDAQ markets after growing as a bigger company via listing on the KONEX that can help enhance their access to the equity capital market," Choi Hong-sik, vice chairman of Korea Exchange (KRX), told foreign reporters at a press conference.
The KONEX, which stands for Korea New Exchange, will officially open on July 1 after mock operation of the system from June. The KRX expected around 20 to 30 companies to be listed at the official opening, predicting the number to increase to about 50 by the end of this year.
"We are targeting venture companies, which have yet to develop into a company to be able to be listed on the KOSDAQ but have huge growth potential and innovative technology. In the mature stage of the market, the number of listed firms on the KONEX will rise to around 1,000," said Choi.
The new capital market was aimed to assist small, startup companies in raising funds through the equity capital market, while helping venture capitals recover their invested capital via the KONEX listing and re-invest the money collected into other companies.
Small firms in South Korea depended heavily on bank loans for financing, which increases burden for interest payment. Nearly 99 percent of capital raised by small firms came from bank loans, with the remaining one percent raised through such methods as public offering of stocks.
The tech-laden KOSDAQ market was launched in 1996 as an independent stock market to meet the needs of small venture companies, but the entry barrier to the market was heightened in a bid to protect investors.
The South Korean government under President Park Geun-hye, which took office in February, sought to create an ecosystem for the so-called "creative economy", or a concept to converge science and information technology to the entire industrial sectors that can be believed to generate profits from newly created industries.
Choi noted that the KONEX market will make a significant contribution to creative economy by supporting the funding of startup venture companies and creating a virtuous cycle of risk capital through the capital market.
To introduce the market system appropriate for startup companies, regulations will be eased to a great extent. The number of matters subject to timely disclosure will be reduced to 29 for KONEX-listed firms, lower than 64 for KOSDAQ-listed companies.
Listing requirements will be reduced to the minimum. Companies can list their stocks on the KONEX through various methods such as the public offering, private offering and direct listing unlike the KOSDAQ market that requires the public offering for the listing.
To facilitate M&A between the KOENX-listed companies, the rules and regulations applied to the companies listed on the KOSPI and the KOSDAQ that merges with an unlisted company will not be applied to the KONEX-listed firms.
Nominated advisors will assess the listing eligibility of companies to be listed on the KONEX, while preparing and submitting the business reports and taking care of disclosure requirements on behalf of companies.
Given the high risk of investment into the KONEX-listed firms, market participation will be restricted to professional investors such as venture capital and angel investors that have the expertise in investment and the ability to take risks.
As for retail investors, those who make a deposit of more than 300 million won (2,700 U.S. dollars) as basic deposit will be allowed to invest into the KONEX-listed companies.
However, concerns remained over investment demand given the restricted participation of retail investors.
"At the initial stage, many of professional investors may take a 'wait and see' attitude. The active participation by the public sector financial institutions such as the policy finance corporation and pension funds is necessary to supplement the investment demand of private sector," said Choi.
According to Choi, the so-called "growth ladder fund" will invest part of its money into the KONEX market as part of efforts to boost the new system. The public fund, the size of which will rise to 6 trillion won over the next three years, will be launched to provide diverse financial support to small companies.
The bourse operator also planned to create the private sector investment demands by developing the indirect investment products such as the expansion of venture capital investment, principal investment of securities firms and investment by private funds.
