South Korean regulator Tightens Scrutiny of Corporate Capital Increases
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South Korea’s Financial Supervisory Service (FSS) is intensifying its oversight of corporate capital increases following a series of controversial moves that have shaken investor confidence and sent stock prices plummeting. The increased scrutiny comes amid a challenging year for the domestic stock market,with a noticeable decline in capital increases compared to the previous year. However, the FSS is especially concerned about instances where minority shareholder interests appear to be overlooked.
The FSS is demanding corrected securities reports from companies undertaking important capital increases, effectively putting the brakes on several large-scale initiatives. This action is driven by growing distrust among investors,fueled by concerns about the true purpose and impact of these capital raises.
Capital increases, while designed to bolster a company’s financial resources, often dilute earnings per share. This is particularly true when new shares are issued at a substantial discount to the current market price, a common practice that frequently leads to immediate and significant stock price declines. This effect has been acutely felt by several South Korean companies this year.
Korea Zinc’s October 31 announcement of a ₩2.5 trillion capital increase, amidst a management rights dispute, serves as a prime example.The proposed price of ₩670,000 per share, significantly below the tender offer price of ₩890,000, sparked intense shareholder backlash, ultimately forcing the company to withdraw its plan. The episode, however, left a lasting negative impact on investor sentiment.
Similarly, ISU PETASYS‘s ₩550 billion capital increase to acquire J.O., a secondary battery material company, raised eyebrows due to the late-hour announcement and questions surrounding the strategic rationale of the acquisition. the announcement resulted in an immediate 22.7% drop in the company’s stock price.
even Real Estate Investment Trusts (REITs) haven’t been immune. Hanwha REITs’ ₩383.7 billion capital increase to acquire the Hanwha Group headquarters building, a deal exceeding the company’s market capitalization by 1.6 times, has seen its stock price fall by approximately 30% since last September.
Adding to the concerns, some companies that recently completed initial public offerings (IPOs) are already pursuing further capital increases. GI Innovation, a KOSDAQ-listed company, provides a case in point.After its IPO in March at ₩13,000 per share, the company’s stock price had fallen significantly to ₩9,220 before announcing a 26% capital increase at a planned issue price of ₩6,870 – a 25% discount, or half the IPO price.”It was announced that it would increase paid-in capital by 26% of the issued shares at a planned issue price of 6,870 won by applying a 25% discount rate,which is half of the public offering price,” the company stated.
The FSS’s actions highlight the growing need for transparency and accountability in corporate finance, particularly in the context of volatile market conditions. the regulator’s intervention underscores the importance of protecting investor interests and maintaining confidence in South Korea’s capital markets.
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South Korean Regulator Scrutiny Sparks Debate on Capital Increases
Amid a volatile stock market and growing investor unease, South korea’s Financial Supervisory Service (FSS) is cracking down on corporate capital increases, demanding greater transparency and highlighting the need to protect minority shareholder interests.
This intensified scrutiny comes on the heels of several controversial capital increases by South Korean companies this year, which have led to meaningful stock price declines and fueled concerns about transparency and shareholder protection.
Increased Scrutiny, Questionable Practices: A Conversation wiht expert Analyst Dr. Min-Jun Kim
Dr. Min-Jun Kim, a leading financial analyst at Seoul National University’s Business School specializing in corporate governance, recently spoke with World-Today-News.com Senior Editor, Kim Ji-Eun, about the FSS’s recent crackdown and its implications for South Korean businesses and investors.
Kim Ji-Eun: Dr.Kim, thank you for joining us today.Can you provide some context on the FSS’s recent actions regarding corporate capital increases?
Dr. Kim: Certainly. The FSS is responding to a series of concerning capital increase practices that have eroded investor trust. Several companies have been announcing large-scale capital increases, often at significant discounts to their current market prices, which leads to immediate stock price drops and dilutes existing shareholders’ stakes.
Kim Ji-eun: Korea Zinc’s recent capital increase withdrawal, following shareholder outrage, stands out as a prominent example.
Dr. Kim: Precisely. That case highlighted the potential for shareholder pushback against what are perceived as unfair or opaque capital raising tactics.
Another issue is the timing of some announcements. Companies releasing news of large capital increases late in the day, without providing sufficient explanation for the need or the rationale behind the share price, raises red flags.
Kim Ji-Eun: How prevalent are these practices, and are they a new phenomenon?
Dr. Kim: While these practices aren’t entirely new, they’ve become more apparent recently, particularly in a volatile market environment where share prices are already under pressure.
The FSS’s actions, while warranted, also exemplify a broader concern: the need for heightened corporate governance standards in South korea. Greater transparency and a stronger emphasis on shareholder rights are essential for fostering a healthy and enduring capital market.
Kim Ji-Eun: What are the implications of the FSS’s increased scrutiny for South Korean companies?
Dr.Kim: Companies will need to be more thoughtful and clear in their decision-making regarding capital increases.
They need to clearly communicate the reasons behind raising capital, the intended use of funds, and the potential impact on existing shareholders. It’s crucial to ensure that these practices deliberately benefit the company’s long-term prospects, rather than serving short-term interests or aiming to benefit specific stakeholders at the expense of others.
kim Ji-Eun: And for investors?
Dr. Kim: For investors, this raises awareness of the importance of due diligence. They must carefully scrutinize any proposed capital increase, paying close attention to the details, the offering price in relation to the current market price, and the company’s overall financial health and future plans.
The FSS’s actions remind investors that they have a voice and a right to question corporate decisions that may affect their investments.
Kim Ji-Eun:
Thank you for sharing your insights, Dr. Kim. This has been a very informative discussion.
Dr.Kim: My pleasure. I believe that open dialog and increased transparency are critical to fostering a more robust and investor-friendly capital market environment in South Korea.
