Proposal for Interest on Refunded IPO Subscription Deposits: Calculation and Issues to Review

A proposal is under consideration to pay interest on the portion of IPO subscription deposits that is returned because it is not used to pay for shares. The direction currently known is intended to return some of the economic benefit generated while investors cannot use their funds for several days.

However, whether the system will be introduced, when it will take effect, the applicable interest rate, and the interest calculation period have not been finalized. The calculations below are examples intended to explain the structure of the system and do not represent actual payment amounts.

What Is an IPO Subscription Deposit?

An IPO subscription deposit is money that an investor pays in advance to the lead securities firm when subscribing for shares of a company newly listed through an initial public offering. It serves a role similar to a security deposit that guarantees contractual performance.

In a typical IPO subscription, 50% of the subscription amount is required as a deposit, but the deposit rate may vary depending on the stock and subscription terms. The exact terms should be checked in the company’s securities registration statement, prospectus, and the securities firm’s subscription guidance.

Basic Calculation Example

Assume an investor applies for 100 shares priced at KRW 10,000 each, with a deposit rate of 50%.

The actual settlement method may reflect fees and terms specific to each securities firm.

Why Refund Interest Is Being Discussed

When IPO competition rates are high, investors receive far fewer shares than they applied for. Unused deposits are returned after the subscription and allocation procedures are completed, but during that period, investors generally cannot withdraw the funds or use them for other investments. If weekends or public holidays fall within the period, the perceived waiting time may be longer.

Investor deposits are managed separately from securities firms’ proprietary assets to protect investors. Securities firms must separately deposit or place the funds in trust with a depository institution in accordance with applicable laws and regulations. The relationship between investment income generated in this process and deposit usage fees paid to investors varies depending on the product and account terms.

The refund interest system is an approach intended to distribute to subscribers the economic benefit generated by holding funds that are ultimately not used for IPO shares for a certain period. Compared with the existing general practice of refunding only the principal, this could be a change favorable to investors.

Difference Between Equal and Proportional Allocation

Shares offered to retail subscribers are allocated through equal allocation and proportional allocation. The specific allocation ratios and calculation methods should be checked in the prospectus for each IPO.

In particular, proportional-allocation subscribers may pay deposits of tens of millions or hundreds of millions of won. If the actual allocation amount is small, most of the deposit will be subject to refund, so these subscribers may be relatively more affected by the refund interest system.

How to Calculate Estimated Refund Interest

Although the final rules have not been determined, a simple daily prorated calculation can be expressed as follows.

Estimated interest = Refund amount subject to interest × Annual interest rate × Number of recognized days ÷ 365

For example, if the refundable amount is KRW 400 million, the annual interest rate is 2%, and the recognized period is 3 days, the simple pre-tax interest is as follows.

• KRW 400 million × 2% × 3 ÷ 365
• Approximately KRW 65,753

Under the same conditions, the result will change if the period or interest rate changes.

The amounts in the table are examples that do not reflect taxes, fees, rounding to the nearest won, or the actual applicable standards.

How Should the Assumption of KRW 450 Trillion Annually Be Interpreted?

Assuming that total annual IPO subscription deposits amount to KRW 450 trillion and that an annual rate of 1% applies to all funds for an average of 3 days, the calculation is as follows.

KRW 450 trillion × 1% × 3 ÷ 365 = Approximately KRW 37 billion

This figure is an arithmetic scenario intended to estimate the scale of the system. It is not equal to the amount that investors would actually receive for the following reasons.

• KRW 450 trillion is a flow figure representing the combined subscription deposits for multiple IPOs, not the balance at a single point in time.
• Only the final refund amount, rather than the entire deposit, may be subject to calculation.
• Refund schedules and fund-holding periods vary by stock.
• The actual applicable interest rate may differ from 1% annually.
• Securities firm costs, taxes, and standards for truncating amounts below KRW 1 may be reflected.
• Even if the system is implemented, it may apply only to subscriptions made after the effective date.

Therefore, approximately KRW 37 billion is not a confirmed source of funds or payment forecast, but a theoretical total based on the stated assumptions.

Key Issues That Have Not Yet Been Decided

1. What Amount Will Be Used as the Basis for Calculation?

It must be determined whether interest will be calculated on the entire subscription deposit or only on the net refund amount after deducting the payment for allocated shares. Considering the purpose of the system, the refund amount is likely to be the focus, but the final rules must be checked.

2. When Does the Interest Calculation Period Begin and End?

The amount will vary depending on whether interest is calculated from the time the subscription deposit is paid until the refund is processed, or from the subscription closing date. A method is also needed for handling cases in which payment times differ.

3. Are Weekends and Public Holidays Included?

Weekends and public holidays would be included if calendar days are used, but they may be excluded if business days are used. This issue could create a significant difference for IPOs that occur around extended holidays.

4. Who Determines the Interest Rate?

It has not been decided whether the government will announce a single interest rate or whether securities firms will independently set their rates under consistent calculation principles. If rates vary by securities firm, investors will need to compare not only subscription fees but also refund interest terms.

5. How Will Taxes and Costs Be Handled?

Detailed standards are needed regarding how refund interest will be classified under income tax law, whether it will be subject to withholding tax, and whether securities firms may deduct administrative costs.

Items Investors Should Check

If the system is actually implemented, investors should check the following before subscribing.

1. The deposit rate and minimum subscription quantity for the IPO
2. The quantities and methods for equal and proportional allocation
3. The subscription closing date, allocation date, and refund date
4. Whether refund interest applies and the annual interest rate
5. The start and end dates of the interest calculation period
6. Whether weekends and public holidays are included
7. Subscription fees, loan interest, and other costs
8. Taxes and the method for truncating amounts below KRW 1

Investors Using Subscription Loans Should Compare Net Costs

Even if refund interest is paid, loan interest may be higher if an investor borrowed money for the subscription. For example, if the annual loan rate is 6% and the annual refund interest rate is 1%, the difference in rates alone is 5 percentage points annually. Loan processing costs or subscription fees may also be added.

Investment decisions should therefore use the following net effect.

Funding cost of the subscription = Loan interest + Fees − After-tax refund interest

Refund interest is partial compensation for funds that are tied up; it does not guarantee the profitability of an IPO or the share price after listing.

Conclusion

An IPO subscription deposit refund interest system would provide a certain level of compensation for investors’ funds while they wait after failing to receive an allocation. In proportional subscriptions involving large deposits, individual interest payments could amount to tens of thousands of won or more, and the total amount across the market could be substantial.

However, the information currently known represents a direction under consideration. Until implementation, eligibility, interest rates, calculation periods, and taxes are finalized, a specific interest rate or payment amount should not be treated as confirmed. Final decisions should be based on announcements from the Financial Services Commission, applicable regulations, and the official subscription guidance of each securities firm.