Level playing field for SMEs

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As the new President took office last month, many changes are ahead for Korea during the next five years of her term. In particular, level playing field for small and mid-sized enterprises (SMEs) is one of the main agenda for the new government. So, today I want to talk about KONEX, which is a stock market especially for small and medium sized enterprises (SME) in this context. The Financial Services Committee (FSC) approved the revision to the ‘Regulation on Listing, Business, and Disclosure’ on February 25 submitted by KRX, which laid a foundation for establishment of KONEX.

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Compared to large companies, SMEs face more difficulties in raising funds through stock market. In particular, listing cost and requirements are heavy burdens for SMEs. As a result, SMEs tend to heavily rely on bank loans.

This can be risky because financing through bank loans is much sensitive to changes in interest rate and economic fundamentals. All these factors make SMEs financing condition unstable.

To support SMEs’ financing, some efforts were made previously. In 1996, KOSDAQ was established to facilitate off-board transactions, which help SMEs’ smooth financing.

However, things have been changed now. From 2010, after the financial crises, listing requirements of KOSDAQ have been stricter, and have been a market for enterprises of middle standing, rather than small and infant enterprises. KONEX will have lower requirements to be listed, as the table below shows, as SMEs can actively participate in equity financing. And it means their financial condition will be improved.

p02Some experts worry about establishment of KONEX, though. First, investing on small and infant enterprises means higher risk, because nothing can actually prove that enterprises have growth potential. But it is not sure investors can get benefit in return. They worry about individual investors might ‘gamble’ in this market. And secondly, in global economic recession, lack of investor sentiment can lead much less investment in new market than expectation.

Nevertheless, establishment of KONEX is expected to bring positive effect to capital markets. In order to ease such concerns, SMEs which want to be listed to KONEX will be required to meet certain criteria, and designated consultant system will be put in place. And many of the experts also agree that even if it cannot guarantee high profitability for now, the new market will surely improve SMEs’ financial condition and bring about technological innovations or ripple effects through various industries.

By Minjung Kwon (Kwonm21@naver.com)

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