[EDITORIALS]Foreign capital hits and runsMonaco-based Sovereign Asset Management Ltd. has bought a significant stake in LG Group. The deal has added fuel to concerns in Korea that since the financial crisis in 1997, the domestic financial market has become a playground for foreign investors to come and go.
Sovereign announced that it has purchased stakes of more than 5 percent in both LG Corp. and LG Electronics for about 1 trillion won ($976 million), becoming the second-biggest shareholder in LG Corp. and the third-biggest shareholder in LG Electronics. Attention is focused on this, because of the showdown between Sovereign and SK Corp. Sovereign, the second-largest shareholder in SK Corp., is pushing management changes at the refiner in the wake of a 2003 accounting scandal at its trading unit, SK Networks Co. Ltd. Sovereign invested 176 billion won in 2003 to buy SK Corp. shares. The asset management firm saw profits of 900 billion won in two years on SK.
It is unlikely that Sovereign’s investment in LG will lead to a second “SK incident.” LG Group is a holding company and both LG Corp. and LG Electronics have major shareholders that hold more than 36 percent of the shares. Sovereign also denied any intentions of mergers or acquisitions or plans to alter the current management. However, it is likely that the firm will demand higher dividends from the LG companies and will demand it buy or sell shares in affiliates. This could be a burden even for LG Group, the second-biggest South Korean group.
The problem is that our domestic financial market is vulnerable to the turbulence of foreign capital flow. As soon as Sovereign announced its investment, the prices of LG Corp. and LG Electronic skyrocketed in the off-board electronic transaction market. At the end of last year, Hermes Investment Management sold off all its shares in Samsung Corp. after a rumor of a hostile merger attempt propelled prices up. There are allegations that in 2003, a foreign investment firm, the second-largest shareholder in LG Card, used insider information and sold all 19 percent of its shares.
Now that capital knows no borders, financial supervision should also know no borders. There have been too many cases of “hit-and-run” foreign investments since the 1997 financial crisis. Fair trade laws should be applied as strictly to foreign investment funds as to domestic capital.