FSC to regulate treasury stock holders over spin-offs

Financial Services Commission Vice Chairman Kim So-young speaks in a meeting to discuss policies aimed to resolve the so-called Korea discount in central Seoul on Tuesday. [YONHAP]

The Financial Services Commission (FSC) is pushing for a regulation that prevents a company holding treasury stocks from receiving stocks of a business it has spun off, a common strategy used by major shareholders in Korea to strengthen their control over the holding firm.

The FSC said it would ban the allocation of the split company’s stocks upon the holding company’s spin-off and strengthen monitoring over the protection of retail investors when the spin-off goes public. It will not affect the allocation of shares of the spin-off to retail investors.

“Unlike in developed nations like the United States, the treasury stock system is being misused to expand the control of major shareholders or protect their management rights, unlike its original purpose to raise the value of shareholders,” said the FSC Vice Chairman Kim So-young Tuesday.

He said the purpose of the treasury stock is to raise shareholder returns through stock cancellation, but many Korean companies are “passive” about acquiring treasury stocks aimed for that purpose.

The average shareholder return rate in Korea over the past decade was 29 percent in Korea compared to 91 percent in the United States and 31 percent in China, according to KB Securities data.

“We will also require companies to thoroughly report the reasons when it increases the stake of treasury stocks to above a certain level,” Kim added, explaining that it could affect the movement of the company’s stock.

Companies that took on the strategy include GS, which split off from LG in 2004.

The FSC said it will push for diverse policies in a bid to resolve the so-called Korea discount, a reference to the overall underpricing of Korean stocks due to weak shareholder returns and geopolitical risks in the region, and raise the trust of investors.

BY JIN MIN-JI [jin.minji@joongang.co.kr]