The South Korean financial regulatory framework is undergoing significant reshaping as the Financial Supervisory Service (FSS) intensifies scrutiny on initial public offerings (IPOs) and capital increases. On February 27, 2025, the deputy head of FSS, Lee Seung-woo, convened with executives from 16 securities firms to outline new guidelines aimed at protecting shareholder interests and ensuring transparency during the IPO process.
At the heart of these regulations is the introduction of pre-examination protocols for capital increases deemed potentially harmful to shareholder rights. This directive appears to be a direct response to growing concerns among minority shareholders, who have recently expressed anxiety over dilution of their ownership and potential risks associated with new capital raising measures. "This improvement aims to help disclose investment risk factors related to concerns raised about issued shares, thereby increasing trust in the issuing market," said Lee during the meeting.
The FSS has defined several criteria under which capital increases will be subject to focused examinations. These include fears of shareholder dilution, concerns about the erosion of rights for ordinary shareholders, and instances where the underwriting firm may have neglected its fiduciary duties. Specifically, capital increases exhibiting one of these characteristics will undergo stringent reviews aimed at determining the justifications for such actions. The emphasis is not only on assessing the necessity of capital raises but also ensuring transparent decision-making processes and the rationale behind the boards’ discussions.
FSS representatives articulated their goals to "conduct focused examinations based on shareholder dilution and potential harm to general shareholders' rights." By publicizing the basics of the evaluation guidelines, they aspire to bolster investor protection and instill predictability within companies participating in the IPO market.
This move is particularly timely, as some recent cases—including disputes over management control and poor financial performances—have highlighted the inadequacies of prior evaluations. The agency noted incidents such as those involving companies like 고려아연 (Korea Zinc) and others, where intervention was needed to address drastic stock price declines post-announcements of capital increases due to management disputes.
To strengthen investor trust and clarify expectations, the FSS has mandated securities firms to solidify their criteria surrounding capital allocations and pricing for new share offerings. Among the firms reviewed, it was noted by the FSS, "We expect to improve the predictability for the companies and strengthen investor protection through prompt and clear examination," ensuring the overall health of the stock market remains intact.
Internal checks conducted on the 19 securities firms showed compliance with newly established internal control standards since the May 2024 reforms. All firms were reported to have implemented the necessary protocols encompassing internal procedures for pricing and the governance of underwriters. Still, the results unearthed some areas requiring improvement. The agency acknowledged, "While firms have adopted the measures, some exhibited insufficient specificity concerning allocation criteria for institutional investors and pricing provisions for new public offerings."
Moving forward, the FSS aims to address these shortcomings by enhancing detail-oriented regulations and consistent evaluations across the board, particularly concerning compliance and potential unethical practices during securities-related endeavors. Given the history of rapid market changes and prior regulatory downsides, these initiatives represent proactive behavior by regulators to prevent opaque practices and restore faith among investors.
Lee emphasized the desire for all firms to align their practices with the newly proposed improvements: "I ask all underwriters to swiftly adapt to the recently announced IPO reform measures, paying close attention to the risks associated with capital increases, especially as they deter minority shareholders' interests."
With structured guidelines now set to be enforced effectively, the FSS hopes to weave together both investor protection and efficient capital resource management, ensuring the South Korean IPO and capital market not only meets local expectations but shines on global stages as well.