South Korea's unexpected short-selling ban not only sparked its biggest stock market rally in three years but also boosted ECM deals last week.
The Financial Services Commission, South Korea’s market regulator, on November 5 announced a ban on short-selling, effective from November 6 to the end of June 2024, citing concerns about increasing market volatility and illegal short-selling practices undermining market stability.
The country had imposed such bans before – in 2008, 2011 and 2020 – but the most recent restrictions were lifted in May 2021 for shares of large companies included in key indices. This comprised 200 companies on the Kospi board and 150 on Kosdaq.
On Monday, the sudden ban lifted the stock market with the benchmark Korea SE Kospi 200 Index surging 5% and EV battery giant LG Energy Solution leading the rise with a 22.8% gain.
Mobile game developer Netmarble took advantage of the surge in share prices on Monday to sell shares in Hybe, the company that manages K-pop group BTS.
The offering of 2.5m secondary shares, or 6% of the share capital, was priced at W209,400, or a discount of 8% to Monday’s close of W227,500. It drew strong demand from about 50 investors and was more than five times covered. The demand came mainly from hedge funds, and there was also participation from long-only and sovereign wealth funds, with the top 10 investors taking 70% of the deal.
A banker away said Netmarble had considered using the Hybe shares as the underlying stock for an exchangeable bond, but gave up on the idea when the short-selling ban was announced because it has become practically impossible for mid-sized companies to sell equity-linked deals. While investors can still use index futures and single-name company futures to hedge, this will increase costs for investors and only the largest companies have single-name futures.
"For most mid-cap names without single-stock futures, the market is shut," he said. "If you can't hedge, no one will buy." He added that even outright equity-linked investors want notes to be available for hedge funds, since hedge funds provide most of the liquidity in the secondary market.
The block activity continued on Wednesday, when an undisclosed vendor sold about US$40m of shares in gaming developer Krafton. The club deal, which drew demand from hedge funds, was priced at W183,350 or a 3.9% discount to the close on Wednesday.
Both deals were led by Citigroup.
"Within the short-selling ban period, the sizes of block trade deals are likely to be smaller as we won't be seeing demand from investors that want to cover their short positions," an ECM banker said.
However, another banker said there was likely to be little impact on block deals.
"Hedge fund investors do not short ahead of the deal, unless it is a widely expected one and not all hedge fund guys short only individual stocks, but indices and futures as well," he said. "The ban is likely to make retail investors more confident in the IPO market but it is not a huge sentiment shift."
IPO impact
Monday's surge also shored up the IPO of rechargeable battery materials maker Ecopro Materials, which priced its deal within its guidance range, having previously considered pricing below range.
The shares were priced at the bottom of the W36,200–W44,000 range to raise W419.2bn (US$319.6m) but the offering size was cut by 20% from 14.48m primary shares to 11.58m. A person familiar with the situation said it was not deemed necessary to price below the range after the unexpected move by regulators provided a fillip to the stock market. The company offered fewer shares because it managed to price within the range, the person said.
More than 1,100 institutional investors participated in the deal and more than 75% of them had indicated a willingness to buy shares below the range.
The company was established in 2017 by secondary battery materials manufacturer Ecopro and Shenzhen-listed battery and metal recycling company GEM. It produces precursor materials for nickel-based anode materials for secondary batteries.
Ecopro will hold a 43% stake in Ecopro Materials after the IPO.
Mirae Asset Securities and NH Investment & Securities led the float. The shares are expected to list on November 17.
Naked indiscretion
Korea's Capital Markets Act already prohibits investors from selling shares without first making sure they can borrow enough to cover the trade.
In a statement, the FSC said the authorities had discovered a number of illegal naked short-selling practices conducted by foreign and institutional investors, raising concerns about the fair pricing function of domestic stock markets.
In October, the Financial Supervisory Service, which oversees financial institutions under the oversight of the FSC, said it would likely fine two Hong Kong-based investment banks that engaged in naked short-selling transactions of W40bn and W16bn respectively. It did not name the banks.
The government will work on proactive measures to improve the system in a way that will help to root out illegal short-selling activities, the FSC said, first working on measures to level the playing field between institutional and retail investors.
A special short-selling investigation unit was also launched on Monday to look into the matter thoroughly.
“The top priority of the government’s capital market policy is to create a fair and efficient market to protect investors and ensure confidence in the market,” said FSC Chairman Kim Joo-hyun at a media briefing held on Sunday, according to the FSC statement.
The FSC will look for an alternative way to prevent naked short-selling before it takes place, and step up efforts to detect and punish naked short-selling activities including strengthening penalties and diversifying sanctions measures.
(Additional reporting by Daniel Stanton)