Fake Foreign Investors
Korea’s IPO market is having headaches due to investors disguising themselves as foreigners.
The disguised investors increased in number all of a sudden in the past couple of years, and are disturbing the market order by suggesting unreasonable prices to get more shares during the demand forecasting process. “The fake foreign investors have done great damage to both companies going public and their lead managers,” said an industry insider, adding, “The financial authorities, the Korea Exchange, and the Korea Financial Investment Association would be well advised to tackle such attempts right away.”
A local investment bank official echoed the sentiment by saying, “The number of foreign institutions we have never heard of has skyrocketed in the IPO demand forecasting since 2011 or 2012, and we are guessing that they are fake foreign investors, but there is no way to verify it.”
“In the past, the number of foreign entities participating in IPO demand forecasting was just around 50 to 60, but it recently surged to 200 to 300,” said an IPO manager at a local securities firm, continuing, “Meanwhile, that of domestic institutional investors has remained still.”
Another IPO manager remarked, “We have examined if they really are foreign investors and found that we have never head of their names, since when we have given them a low weighted value.” No less than 355 foreign institutional investors took part in the demand forecasting for Interpark INT, which was listed on February 6.
Many people are assuming that these entities are small-sized institutional investors or big players experienced in IPO investment, and that they are disguising themselves in order to get around regulations. The Capital Market Consolidation Act is capable of finding foreign investors in domestic institutions, but does not cover foreign entities that make their investment on an agency basis in most cases.
The problem is that they not only affect initial public offering prices but also undermine the growth of the local capital market. “They suggest abnormally low prices in demand forecasting, to lower the IPO price band and put in their volume in those price ranges,” said the IPO manager, “We are very worried about the fact that there are too many fake foreign investors, and they affect the price setting process more than substantially.”
Their presence in the market signifies that real foreign investors, oriented toward long-term investment, can get fewer shares than before. Besides, the shares owned by the disguised come out to the market for profit-taking right after listing. This means greater difficulties in attracting long-term investors on the part of listed companies and less chance of distribution to major clients for IPO managers.
“The industry itself has no way to put a brake on them,” said an industry source, advising, “The financial authorities will have to step in to provide countermeasures.”