Korea’s over-the-counter market (K-OTC) market is slated to open next month, helping investors trade unlisted stocks in a more transparent and convenient manner, announced Chairman Hwang Young-key of the Korea Financial Investment Association (KOFIA) on June 8.
KOFIA is to hold a launching ceremony for the K-OTC Program and a seminar on private capital market on June 8 before the official opening of the over-the-counter market. "The Korea over-the-counter market, an upgraded version of the FreeBoard market, is a key part of infrastructure to trade stocks of unlisted companies," said Kim Jung-soo, director of the K-OTC Department at the Korea Financial Investment Association (KOFIA). Trading on the K-OTC market begins Aug. 25. In the FreeBoard market, unlisted stocks of small- and medium-sized enterprises (SMEs) are allowed to be traded.
In outside trading, investors have often had difficulty in selling or buying unlisted stocks due to a lack of rules and regulations. They sometimes faced unfair trades and fraud, Kim said.
But the K-OTC market allows investors to trade unlisted stocks without concerns of possible fraud and at fixed commission fees of 0.09 percent for each trade, the KOFIA director said. All trades on the K-OTC market are made through securities companies.
Previously, individual brokers or private firms usually demanded fees of more than 1 percent on the outside trading market, the director said. "We talked with the Financial Services Commission about ways to tackle the difficulties and strengthen consumer protection. The K-OTC market is the outcome," he said. KOFIA, the operator of the K-OTC market, designated 56 companies' stocks eligible for trading in early August and on September 11 more were added to the list. Given that more than 1,000 companies' stocks are subject to outside trading, the K-OTC market has more room to grow, KOFIA said.
The 67 companies met the requirements for designation set by KOFIA based on annual reports for the fiscal year of 2013. Their annual revenue marks 500 million won ($490,000) or higher per company and they are free from capital impairment, it said. Major companies being traded on the K-OTC market include Samsung SDS, POSCO Engineering & Construction, SK Engineering & Construction, Mirae Asset Life Insurance, Hyundai Asan and Jeju Air.
Overall market capitalization on the K-OTC market reached 36.97 trillion won, with Samsung SDS accounting for 25.61 trillion won, or 69 percent, of the total as of Tuesday. But the daily trading volume is small. It was valued at a mere 2.2 billion won on the same day, said KOFIA.
Investors are able to sell or buy stocks on the K-OTC market through the phone, a home trading systems, or at an offline trading floor. The market is open from 9 a.m. through 3 p.m. But some stocks are not available for trading as they do not want to disclose their business results.
"Even if unlisted companies meet other requirements but do not have records of filing their annual reports to the Financial Supervisory Service, they are not permitted to trade on the K-OTC market," Kim explained. For example, he said Cheil Industries has never disclosed its earnings outcome to the financial regulator, so the affiliate of Samsung Group cannot be designated for trading.
The KOFIA benchmarked the OTC bulletin board (OTCBB) in the U.S. to generate the OTC market in March 2000.
"The OTC market was established to help unlisted companies raise capital and boost liquidity. The OTC market was renamed FreeBoard in 2005 to better serve investors in unlisted stocks," Cheong Su-seop, a manager at the K-OTC Department, said by telephone. FreeBoard has been in operation since July 2005 in order to revitalize the direct financing of SMEs. However, when Korea New Exchange (KONEX), a listed market reserved for SMEs, opened in July 2013, the role of FreeBoard became redundant, KOFIA said.
The FSC and KOFIA agreed to integrate the two functions into the K-OTC market.
KOFIA aims to foster the K-OTC market as successfully as the KOSDAQ market. KOFIA launched an over-the-counter stock market in April 1987 and developed it into the KOSDAQ. KOFIA operated the market for 17 years, until it was incorporated into the Korea Exchange (KRX), the country's main bourse, in January 2005.