This article summarizes a talk by Honghee Shin, Executive Director of Korea Exchange, at the World Exchanges Congress in March 2016, which highlighted the KRX experience and lessons to be learned.
Building an exchange environment for small and medium-size enterprises and hi-tech companies to raise capital on a securities exchange requires strategic coordination and support by many different government agencies. The Korean Exchange (KRX) has grown to be the world’s third biggest stock exchange for listing and trading SMEs by creating a virtuous cycle in each stage of growth generates cash-flows which in turn fuel other stages.
The original Korea Stock Exchange was set up in 1956 and KRX evolved in 2005 to offer comprehensive front-to-end services. It has KSD (depository) as a 70% owned-subsidiary and also owns 76% of >koscom, a technology subsidiary. It offers a full range of products, trading and market data, as well as the central counterparty (CCP) and it is a self-regulatory organization performing its own market surveillance.
In 2015, KRX had 1,961 listed companies, 8th highest in the world, and traded $1,929 billion of securities, achieving the 10th highest level globally, according to World Federation of Exchanges. The main board is called KOSPI market and it has a futures and options market that was rated 12th in the world.
It has two boards for SMEs:
• KOSDAQ was launched in 1996, and provides funds for well-established SMEs and “technology-savvy” area including information technology (IT), bio technology (BT) and cultural technology (CT).
• KONEX was launched in 2013 exclusively for SMEs and start-up companies to support their early-stage financing and development through the capital market.
The ratio of market capitalization compared to GDP is higher at KOSDAQ in Korea than any other major SME markets in Asia. In global terms it ranks third among world SME markets for market capitalization and daily trading volume and 4th with 1,061 listed companies. Technology has been the main driver of the market – IT, BT and CT companies made up 68% of the market in 2015, up from 63% in 2005. In particular, biotech has grown its share 4 times and forms 17% of the total market.
KONEX had 24 companies in the third quarter of 2013, but increased that 5 times to 128 listed companies by the end of 2015. Market capitalization is up 8x, and daily average trading value is up 4x over the period. It offers a fast-track “ladder system” which 14 companies have scaled to transfer from KONEX to KOSDAQ.
Much of the success of the exchange can be attributed to the coordinated efforts of Government, the exchange and other stakeholders.
Key supports from Government include:
1. Tax incentives
– Corporate tax exemption for investing in newly-listed shares(within 2 years)
2. De-regulation for M&A
– Between KONEX and unlisted stocks
– Relieving corporate governance structure
– Waiver of obligation on appointment of external director and full-time auditor
3. Eased accounting standard application
– Exemption of K-IFRS accounting standard.
Concessions offered by KRX are:
1. Relaxation of Listing Requirements
– Lightened listing requirements for corporations with 20% of total investment from angel investors and venture capital
2. Modified disclosure obligation
– Reduction of timely-disclosure
– Exemption of quarter and semi-annual reports
– Mitigation of obligation to submit registration of securities
3. Minimum deposit requirement for investors adjusted from $300,000 to $100,000.
The exchange brings together companies from diversified industries, with a convergence of the high-tech companies that are the driving force of the economy. There is a solid investor base, including active retail investors with ample liquidity, and the exchange offers them a new way to find investment opportunities. The KRX itself offers relaxed listing requirements and less disclosure and maintenance costs. Government offers supportive policies towards gradual de-regulation as well as tax incentives and benefits.
The 2 Korean boards, KOSDAQ and KONEX play a critical role in a virtuous circle of growth and investment. Typically venture capital (VC), angel investors and government (through policies as well as funds) invests into start-up companies. These grow to list on KONEX, where professional investors tend to invest in what re now start-up SME companies, and VC investors can take some funds out to re-invest into fresh start-ups. As the company grows further, it can more to KOSDAQ where often non-professional investors may be interested in what have evolved into established SMEs, and the VCs can take more funds to reinvest into the earlier growth stages. The virtuous circle means that each stage adds momentum to the other stages, fuelling further growth – for the diagram see above.