Large-scale Paid-in Capital Increases Weigh down KOSDAQ Market

More and more companies listed on the secondary KOSDAQ market are announcing plans to increase capital by issuing new stocks on a large scale. These capital increases can further weigh down the KOSDAQ market which has lost steam.

The total amount of funds raised by KOSDAQ-listed firms through paid-in capital increases from Aug. 1 to 31 came to 281.90 billion won (US$231.83 million), according to the Korea Exchange (KRX) on Sept. 3. It is the highest figure for a month this year and is about five times higher than 47.80 billion won (US$39.31 million) in August last year.

Companies which increase capital to raise funds for operation and maintenance of facilities showed a downward trend in stock prices. Wisol Co. closed at 13,300 won (US$10.94) on Aug. 30, the next day after the firm made an official announcement of a paid-in capital increase, down 8.9 percent from the previous day, recording the lowest level in 52 weeks. The price of Good People Co. shares also plunged 23.43 percent on Aug. 29 and 6.87 percent on Aug. 30, reaching a record low of 3,455 won (US$2.84).

Some companies saw their size of funds raised through paid-in capital increases account for half of their market cap. Golden Century Co. officially announced to raise 30.80 billion won (US$25.33 million) of facilities and operational funds through a paid-in capital increase after the market closed on Sept. 2. The firm’s market cap rapidly decreased from 67.80 billion won (US$55.76 million) on Sept. 2 to 52.60 billion won (US$43.26 million) on Sept. 3.

A paid-in capital increase in the bearish market has bigger effects on the decline in shareholder value from the rise in the number of issued stocks than the bullish market. This is because the downward adjustment in price of new stocks is inevitable especially in offering to shareholders and stockholder-priority offering when the price of shares falls. The KOSDAQ index closed at 551.50 on Aug. 6, the lowest level in four years and seven months, and then slightly rebounded. However, securities companies still say it is hard to expect a full-scale rebound.

Successive large-scale paid-in capital increases take place despite the possibility of lower share prices because companies need to improve their weak financial structure caused by poor earnings.

Hwang Se-woon, a senior researcher at the Korea Capital Market Institute, said, “A paid-in capital increase usually leads to the decline in shareholder value. Therefore, it shows how desperate companies are to improve their financial structure through a large-scale paid-in capital increase, though it is a burdensome decision for major shareholders particularly when stock prices fall.”