Korea's economy has been in a relative slump recently. But a new crop of young, vibrant, venture-backed companies signal hope for invigorating the nation's economy with their success stories. That, along with government measures to boost venture businesses is drawing the spotlight to the new KOSDAQ market.

The KOSDAQ is a stage of unlimited possibility because it is home to many of these listed businesses which are showing signs of high-growth potential armed with new technology development in cutting-edge industrial fields like computers, information technology, medical equipment and environmental technology.

Such vivid potential is exemplified by companies like semiconductor maker CTI; KC Tech, a semiconductor equipment production company; PanTech, in information technology; and the Hangul & Computer software developer, all of whose stock prices skyrocketed after they were listed on the KOSDAQ. Other companies, like Mirae Industry, Medison, Sungmi Electronics and Sinsung Engineering, which moved from KOSDAQ to the Korea Securities Exchange market (KSE), still show optimistic growth rates even after already providing big returns for investors-and giving this group the nickname "Dream Stocks." These companies's dreams in the challenging capital markets are fast becoming reality. And their success offers opportunity, for industrial restructuring for the government, direct financing for venture businesses, and diverse investment offerings for investors.

Market Background
Until the end of the 1970s, the Korean government had been successful in generating high economic growth by employing an export policy centered around the conglomerates. However, the development gaps between industrial sectors widened and the volume-oriented export policy hit an obstacle due to the loss of price competitiveness caused by the fast build-up of newly developing countries' manufacturing and assembly industries. In an effort to blaze a trail toward continuous development without losing ground on the previous economic accomplishments, the Korean government in the early 1980s, extended tax breaks and financial support to nurture the growth of small and medium sized businesses and new ventures.

In the local capital market, however, the listing requirements for the stock exchange, namely the Korea Stock Exchange (KSE), were quite strict. This made it very difficult for fast growing small businesses to obtain funds in the securities market. After having examined this impediment, the Ministry of Finance announced in 1987 the "Market Organization Plan for Vitalizing the Stock Tradings of Small and Medium Sized Businesses" to facilitate raising capital for the targeted firms.

Consequently, Korea's "OTC" market was organized in April 1987, where small companies not listed on the KSE could raise capital through the securities market. This market was also aimed at providing investors more diverse investment offerings.

The KOSDAQ System
In the early 1990s, the need for an organized system for the operation of the OTC market became evident as the number of listed companies escalated, bringing with it rising investor interest. Consequently, the Korea Securities Dealers Association (KSDA) adopted a computerized quotation system called the Korea Securities Dealers Association Automated Quotation (KOSDAQ) system. With the support of this new system, it became possible to trade listed stocks by linking of all the member securities firms. Market information became more readily accessible, leading to investor protection and vitalization of the OTC market.

The KSDA established in May 1996 the KOSDAQ company to mediate the tradings of KSDA listed stocks, thereby giving birth to the KOSDAQ market later July in 1996. This company, commissioned with the sole responsibility of transaction on the KOSDAQ market, was formed to invigorate and to enhance the efficiency of management of the market. For its financing, it is jointly funded by the KSDA and its member securities firms.

In mediating trades, KOSDAQ devised a system whereby buy and sell orders are instantaneously converged to its central computer. This helps to prevent the gap in trading prices among securities firms and to arrange the fairest market price.

Modeled after the NASDAQ Stock Market, the second largest stock market in the world, the KOSDAQ Market aims to become Korea's stock market for the twenty-first century by facilitating corporate financing for venture businesses and emerging businesses; providing new and diverse investment opportunities for investors; and facilitating the retrieval of investment capital and assisting the formation of new investment funds by venture capital firms.

Transaction Details
A. Limitation on Transaction
Transactions are limited to only stocks listed on the KOSDAQ market.
B. Places and Times of Transaction
Transactions can be conducted at any securities company from 9:30 am to 3:00 pm on weekdays and 9:30 am to 11:30 am on Saturdays.
C. Methods of Transaction
All orders are transmitted directly to the KOSDAQ company and executed on the basis of multi-price auction. The principle of auction used for transaction is based first on price priority followed by time priority.
D. Trading Unit and Minimum Price Variation
The trading unit on the KOSDAQ market is multiples of one share. The minimum price variation on this market varies according to the price level.
E. Price Fluctuation Limits
On the KOSDAQ market, daily price fluctuation limits exist to protect investors and the securities market from the excessive movements of stock prices. The limit is set at the rate of 8 percent higher or lower than the previous day's closing price.
F. Brokerage Commissions and Taxes
Securities companies collect brokerage commissions from customers at the rate of 0.4 percent of the trading value. There is also a 0.3 percent sales tax levied to the seller of the securities.
G. Settlement
For transactions through KOSDAQ, settlements must be executed under the book-entry system of the Korea Securities Depository on the second business day following the day of contract (T+2).
H. KOSDAQ Market Indicators
Beginning January 1997, KOSDAQ implemented the use of the KOSDAQ Index, using a base date of July 1, 1996 and a base index of 100. The KOSDAQ company also publishes five subordinate indices by industry: manufacturing, services, construction, financial institutions, and others. This is to compensate for the shortcoming of the KOSDAQ Index by allowing the pinpointing of price movements.

The State of the Current KOSDAQ Market
The number of listed companies on the KOSDAQ is 325, and the number of issues 338 as of April 15th. The number of venture businesses out of that number is 63, up from 42 in the previous year. (On the KOSDAQ, businesses are categorized as venture businesses when shares owned by new technology financial firms and foundation and investment financial firms exceed 10 percent of the total outstanding shares.) Venture businesses get special preferences under the measures that allow them to list on the KOSDAQ with ease and to meet less strict requirements for share distribution. Futhermore, the government is considering expanding the definition of venture businesses to include various kinds of companies such as promising advanced technology enterprises.

In April, the growth of venture business stock prices was high at 14.94 percent on average, compared with the 4 percent of overall growth of the KOSDAQ. Seventy percent of the total amount traded and 39 percent of the total volume traded were done in venture stocks. Venture businesses saw 24.8 percent increase in profits last year, while the other businesses suffered a 28.4 percent loss on profits. However, venture businesses' ratio of equity to capital was low, at 18.8 percent, so it is urgent that the KOSDAQ's original function to support small and medium sized businesses' direct financing be activated.

Average daily trading volume has increased to 2,167 million won from 1,826 million won last year. In 1996, businesses listed on the KOSDAQ acquired 1,580 billion won through the KOSDAQ, 1,450 billion won through issuance of bonds, and 123.7 billion won through capital investment.

Improvements
- The KOSDAQ market introduced an individual auction system based first on price priority followed by time priority.
-Country funds were also allowed to invest in unlisted stocks, including those on the KOSDAQ market within 25 percent of the net assets of the funds. Currently, foreigners are only able to purchase unlisted stocks indirectly through country funds or investment trust funds. Foreigners will be allowed to invest directly in blue-chip stocks issued by listed small and medium sized businesses on the KOSDAQ market during the first half of 1997.
- Sales tax was lowered to 3% from 5% and income transfer tax was exempted.
- Price fluctuation limits were extended to add flexibility to the stock prices.
- A bidding system was introduced to offer economic incentives for big shareholders to enter the KOSDAQ.
- Share distribution requirements were stepped up.
- Trading specifications (issue traded, trading volume and premium) between foreigners on the KOSDAQ market were required to be disclosed on the information transfer system so that all foreign investors can share the information. Moreover, a simultaneous bidding system will be introduced so that more investors will be able to participate in the KOSDAQ and share distribution will be precipitated.

Stones Left to be Turned
There are several things still to be discussed for the development of the KOSDAQ market. Suk-Tae Goh, the president of a venture firm that accomplished its dreams on the KOSDAQ, said, "There is a misunderstanding among general investors who do not view the KOSDAQ as mature stock market. Understanding that the KOSDAQ is a field of opportunities where investors can take advantage of investing in promising businesses at an early stage should be understood more widely among investors."

Listed companies are having difficulty in attracting general investor capital through capital increase, because stocks are often dominated by only a couple of owners, not distributed widely. Beefing-up share distribution requirements will increase stock supply and lead to the invigoration of the market. Currently, the companies listed on the KOSDAQ should distribute 10 percent of the shares when listing, and an additionally 5 percent for two years. Venture businesses must distribute 5 percent when listing, and an additional 5 percent for two years. The ratio of share distribution listed on the KSE is 30 percent of the total number of stocks issued.

Most venture businesses look at listing on the KOSDAQ market as a way to publicize their companies or as a preliminary step to listing on the KSE. This contrasts with the fact that NASDAQ plays a key role in not only financing venture capital but also forming the basis for the growth of other businesses in America. Venture firms should more actively utilize the KOSDAQ as a source of direct financing.

Financial firms also need to improve their ability to analyze venture businesses' technology, potential growth, and anticipated risks and returns. This will attract more investors who are willing to invest in risky but potentially profitable stocks.

Institutional investors such as public pension funds should also be allowed to invest in the KOSDAQ.

The KOSDAQ must be reorganized to become a competing stock market shoulder-to-shoulder with the Korea Securities Exchange. The major reason for NASDAQ's success is that NASDAQ was a competing and differentiated stock market, not a complimentary market to the main securities exchange markets in the U.S. Transparency in the KOSDAQ management based on the principle of free market policy must be ensured to recover and maintain investors's trust in the KOSDAQ. And overall, favorable economic circumstances should be created.

What's Next for the KOSDAQ?
The KOSDAQ market will be widely opened in the near future. Advanced investment skills and techniques will be introduced along with the influx of foreign capital that is expected to fill up the shortage of capital supply. The government will encourage foreigners to freely invest in the domestic venture start-ups without regard to their investment ceiling, now set at 23 percent of a listed company. It is also considering lowering the face value of venture business stocks to below the current uniform price of 5,000 won. As the face value of a share here is higher than those of other countries, it has been hard for the venture businesses to acquire necessary funds from the shareholders. These plans were included in a package of measures aimed at encouraging capital inflow into the venture businesses.

Beginning in October, new technology businesses listed on the KOSDAQ will be given treatment equal to the listed companies on the KSE. The companies will be allowed to issue new kinds of bonds and pay stock dividends.

by Jae-Kwan Kim