SOUTH KOREA: An Introduction to Capital Markets

Anticipating a Mixed 2024 for Korean Capital Markets

The year 2023 has certainly been a challenging one for the Korean capital markets. With ever increasing geopolitical risks, wars in Ukraine and the Middle East, aggressive rate hikes by global central banks including the Federal Reserve System (the “Fed”) and deepening property sector crisis and weakening confidence in China, almost all large initial public offerings (IPOs) have disappeared. Although the number of IPOs in 2023 is not too far removed from the number of IPOs during the same period in 2022, there has been a sharp decline in the capital raised. Despite the foregoing, some heaved a sigh of relief upon successful consummation of the IPOs of small and medium-sized (i) semiconductor companies (such as GigaVis., Ltd., Fadu Inc. (“Fadu”) and ASICLAND Co., Ltd.), (ii) robotics companies (such as Doosan Robotics Inc.) and (iii) secondary batteries companies (such as EcoPro Materials Co., Ltd. and Philenergy Co., Ltd.).

With 2024 right around the corner, many warn of a grim economic outlook in Korea. The upcoming US, Russian and Taiwan presidential elections are heightening the uncertainties surrounding Korean economic policy. Further, the outcome of April’s general elections, which sees all 300 seats in the National Assembly open for re-election, will shape the future policies of the Yoon Suk Yeol administration. Rising speculations about eventual rate cuts by the Fed from the third quarter of 2024 is casting a positive light but it would be a tough decision for the Bank of Korea to proceed with rate cuts considering soaring levels of household debt and sticky inflation. It is, therefore, almost inevitable that the Korean financial markets (which are dependent on the export-oriented Korean economy) will shrivel with increasing internal and external uncertainties.

On a more positive note, favourable effects on the Korean financial markets are predicted with the anticipated restructuring of the so-called zombie companies and industries (previously halted by April’s general elections) getting into full swing from the third quarter of 2024. Further, with activities picking up in the semiconductor industry and new opportunities arising in respect of AI semiconductors, Korean financial markets may benefit from increased liquidity led by Korea’s conglomerates such as Samsung Electronics Co., Ltd. and SK Hynix Inc. However, it is worth noting that short sale restrictions, high exchange rates and a rather slow return of foreign investment – owing to lingering doubts about the recovery of Korean economy – may see slow growth away from the economic downturn stretching to 2025.

With the welcoming of the Korea Exchange’s new chairman and CEO in early 2024, tighter regulations on the listing track for tech firms (due to recent controversy surrounding the IPO of Fadu) and stronger scrutiny of the preparation of the registration statements are expected to affect the Korean IPO scene. As such, issuers need to take a more methodical approach with the help of prudent arrangers and other advisers (including legal counsel) to ensure successful consummation of IPO transactions.

Key developments 

Some noteworthy changes in the Korean financial markets in 2024 are as follows.

 – Although major listed companies are proactively responding to ESG demands, Korean financial regulators currently require listed companies to address non-financial corporate governance issues only, leaving other elements of ESG to be voluntarily disclosed. Recent developments have shown a shift in mandatory sustainability-related disclosure timelines, with the Financial Services Commission (FSC) deciding to defer the implementation of ESG disclosure mandates to after 2026. The roles and opportunities of the parties of the Korean financial markets are expected to be determined based on the level of ESG disclosure mandates.

 – The FSC is looking to broaden the English disclosure obligations of listed companies from 2024 gradually expanding from (i) heavyweight KOSPI-listed companies with assets of KRW10 trillion or above or (ii) KOSPI-listed companies with assets of KRW2 trillion or above (if 30% or more of their shares are held by foreign investors) to all KOSPI-listed companies with assets of KRW2 trillion or above. With this expansion of English disclosure obligations, foreign investors will enjoy full access to information on listed Korean companies that would otherwise not have been available to them.

 – The movement by the FSC to improve rather opaque dividend distribution procedures in early 2023 effectively permitted a number of Korean companies to voluntarily drop the customary end-of-year dividend record date in a bid to attract more foreign investment in the local equity market. The investors will now know the amount of dividends they would receive before purchasing a stock, which is more in line with the global standard.

With the talk of the lowest global growth forecast in decades, Korean financial markets also remain volatile. During these trying times, perhaps the proverb “when life gives you lemons, make lemonade” needs to be kept in mind. Notwithstanding the full impact of a sharp slowdown in Korea still to be felt, the Korean economy has and will remain resilient, gradually winning back investor’s trust once lost to internal and external uncertainties.