FTC proposes toughening up the fair trade act

Korea’s antitrust watchdog recommended changes to the country’s fair trade act that would come down harder on local conglomerates in its latest move to tighten the country’s regulatory framework.

The Fair Trade Commission (FTC) on Friday held a public debate at the headquarters of the Korea Chamber of Commerce and Industry in Seoul, where a special commission on fair trade reform gathered with academics to discuss possible revisions to the antitrust law.

The commission proposed that the government revise its definition of a conglomerate.

Under the currently law, the government defines a business group as an “enterprise group subject to limitations on debt guarantees,” or a conglomerate, when the total value of its assets exceeds 10 trillion won ($8.9 billion). The commission’s members recommended classifying conglomerates as business groups with assets equivalent to 0.5 percent of Korea’s gross domestic product (GDP).

According to the Bank of Korea, Korea’s GDP was 163.7 trillion won last year. Based on this figure, a business group would be considered a conglomerate if it has more than 8.18 trillion won in assets, lower than the current standard.

“The standard has been altered repeatedly based on changing economic conditions,” said the commission. “But each time that the standard is revised, it entailed various costs and made it more difficult for companies to predict the cycle of the change as well as the new standard.”

The commission recommended that the government wait until 0.5 percent of the country’s GDP is worth around 10 trillion won to reclassify conglomerates to avoid confusion.

The commission also advised the government to impose tougher regulations on conglomerates to limit inter-affiliate trading and prohibit their owner families from to making unfair profits. According to recent findings from the FTC, these practices are prevalent in Korean conglomerates.

Under current regulations, any publicly-listed conglomerate affiliate is subject to a government regulation that bans inter-group trading if the group’s owner family owns more than 30 percent of the affiliate.

The data by the commission showed that the total amount of inter-group trading amid conglomerate affiliates that family members owned between 20 to 30 percent of was 6.5 trillion won last year.

The commission recommended that the threshold should be lowered to 20 percent ownership in response. Local conglomerates with overseas subsidiaries may also face stricter regulations. At the moment, business groups only have to reveal the shareholding structures of its domestic subsidiaries.

The commission recommended that the government force conglomerates to disclose the shareholding structure of its subsidiaries abroad as well, citing conglomerates such as Lotte Group that have extensive overseas operations.

The FTC also discovered during a recent investigation that some owner family members of conglomerates with holding companies expand their hold over groups by increasing the number of second- and third-tier subsidiaries. Although the commission members agreed that a regulatory framework is necessary to prohibit the practice, they didn’t provide a specific proposal on the matter.

The final reform proposal will be made later this month. The FTC will submit an outline based on the proposal for approval by the National Assembly before the end of the year.

BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]