Holding Company CVC Ownership Restrictions Eased... Is a Korean Version of 'Google Ventures' Emerging?

Amendment to the Fair Trade Act Allows General Holding Companies to Hold CVCs

Establishment as a wholly-owned subsidiary with 100% equity; investment prohibited in companies owned by the controlling family
Up to 40% external borrowing allowed when raising funds
Concerns raised about intention to undermine the separation of banking and commerce

[Sejong=Asia Economy Reporter Joo Sang-don] The government plans to amend the Fair Trade Act, which prohibits the separation of banking and commerce (separation of financial capital and industrial capital), to allow general holding companies to own corporate venture capital (CVC), anticipating an expansion of venture investments by large conglomerates and activation of mergers and acquisitions (M&A) of startups. There is also hope that a Korean version of 'Google Ventures' could emerge through the entry of holding company system conglomerates into CVCs, which had been blocked until now. However, some express concerns that due to many restrictions, the effect may not be as significant as initially expected.

On the 30th, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, presided over an emergency economic central countermeasure meeting at the Government Seoul Office and stated, "We will, in principle, allow general holding companies to own CVCs." To strengthen holding companies' responsibility for CVCs, the government decided that CVCs must be established as wholly-owned subsidiaries (100% equity ownership), and investments in companies owned by the controlling family are prohibited, thus restricting investment targets. On the other hand, up to 40% external funding will be allowed when raising funds.

General holding companies refer to holding companies that own shares of subsidiaries engaged in financial or insurance businesses, i.e., holding companies other than financial holding companies. According to Article 8-2 of the Fair Trade Act (Restrictions on acts by holding companies, etc.), which states that "holding companies cannot own financial or insurance companies," general holding companies have been prohibited from owning CVCs. However, after discussions, the government decided to include an exception in the Fair Trade Act, which stipulates the principle of separation of banking and commerce for holding companies, to allow holding companies to own CVCs.

However, the government added safeguards to minimize economic power concentration by holding companies and prevent possible private benefits for the controlling family. First, general holding companies must own 100% equity when establishing a CVC. To prevent side effects from relaxing the separation of banking and commerce principle, only 'investment' activities are allowed, and other financial activities are prohibited. Additionally, when raising funds, investments from financial companies related to the controlling family and affiliates are prohibited, and investments in companies related to the controlling family, affiliates, and large business groups are restricted.

The venture industry has welcomed the move. Jung Mina, Policy Director at Korea Startup, said, "Although there are regrets about ratio regulations, there is no reason to oppose it," and evaluated, "This will open the way and also increase the importance of large conglomerates' roles."

Overseas, companies like Google, Apple, and Intel actively invest using CVCs, but domestic holding companies could only invest in venture companies by owning subsidiaries with more than 40% equity or by investing less than 5% equity. Because of this, large conglomerate holding companies such as LG and SK had to establish corporations overseas or operate venture capital through affiliates. On this day, Deputy Prime Minister Hong said, "Major advanced countries allow large conglomerates to own CVCs, and in fact, Google's holding company 'Alphabet' established Google Ventures, which has created many successful investment cases such as Uber, making CVC a global trend."

Civil society groups still voice concerns about the violation of the separation of banking and commerce principle. Park Sang-in, Policy Chairman of the Citizens' Coalition for Economic Justice and Professor of Public Administration at Seoul National University, said, "Even if the current 5% limit on holding companies' equity investment is raised to 10%, it can be effective, so there is no need to introduce CVCs that overlap in function," and added, "Ultimately, it can only be seen as an intention to gradually undermine the separation of banking and commerce."

This content was produced with the assistance of AI translation services.