[EDITORIALS]Free the jaebeol

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[EDITORIALS]Free the jaebeol

Controversy surrounding the current ceiling on conglomerates’ shareholdings in subsidies has increased after the Uri Party’s chief policymaker, Kang Bong-kyun, recently commented that it should be abolished by the end of the year. The corporate sector, which has been constantly championing the reversal of the policy, naturally welcomed Mr. Kang’s remarks, but some civic groups said that would mean a backtracking in conglomerate reform and called for the government to strengthen the current standards.
We believe that the restrictions should be discontinued according to original plan at the end of the year. The negative effects of the system are too great, while its effectiveness and necessity continue to decline. Also, it is reasonable for the government to keep to its original deadline in order to bring stability and trust to the administration’s other policies.
The limits on conglomerates’ shareholdings have already gone through changes in the past. Business groups with assets exceeding 5 trillion won ($5.1 billion) are forbidden from financing other subsidiaries in excess of 25 percent of their net asset values according to current restrictions. The limits were first introduced in 1987 to prevent conglomerates from expanding into other business areas through establishing subsidiary companies or acquiring existing companies in the same business. The limits on financing were gradually reduced before being abolished in 1998 to prevent Korean companies from being sold off to foreign investors at undervalued prices, as hostile mergers and acquisitions were allowed after the foreign exchange crisis in 1997. After many groups raised problems with the ownership structure of business groups, however, the restrictions were brought back in April 2001. History shows that the policy itself was never quite stable: It was subject to added clauses or the granting of exceptions during its lifetime.
This administration vowed to end the restrictions. In November 2003, Kim Jin-pyo, then the finance minister, announced that the regulations would be dropped in three years. That time has arrived. But the chief of the Fair Trade Commission, Kang Chul-kyu, said that he would like to see the restrictions continued as he retired from his post last week, saying that bad results from cross-investments were still a danger.
That would be bad for the administration’s credibility, especially because the rules are of questionable value and apply only to domestic companies.
The bad effects are well known. The policy blocks business expansion and is also a handicap to the ability of domestic companies to defend themselves from hostile takeover attempts by foreign capital. Korean conglomerates already have their hands tied with restrictions on guaranteeing loans of other affiliates, mutual investments and voting rights for financial subsidiaries, and here is the world’s only restrictions on the amount of cross-affiliate shareholdings.
With the current policies, it will be very difficult to make the nation corporate-friendly. The limits must not be extended, and we believe that it is correct to move up the date to abolish them.
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