Korean Version of 'Google Ventures' to Emerge... Established as a Wholly Owned Subsidiary, Cannot Invest in Companies Owned by the Controlling Family (Comprehensive)

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

Up to 40% External Borrowing Allowed When Forming Funds
Concerns Raised Over Intent to Undermine Geumsan Separation

[Sejong=Asia Economy Reporter Joo Sang-don] The government has decided to amend the Fair Trade Act, which prohibits the separation of financial capital and industrial capital (Geumsan Separation), to allow general holding companies to own corporate venture capital (CVC), opening the way for large corporations to expand venture investments and activate mergers and acquisitions (M&A) of startups. There is also anticipation that through the entry of holding company system conglomerates into CVCs, a Korean version of 'Google Ventures' could emerge. 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, chaired 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 plans to require establishment in the form of a wholly-owned subsidiary (100% equity ownership) and restrict investments in companies where the controlling family holds shares. On the other hand, up to 40% external funding is allowed when forming funds.

A general holding company is a holding company that owns 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 Holding Companies, etc.), which states "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 Geumsan Separation for holding companies, to allow holding companies to own CVCs.

However, the government has added safeguards to minimize economic power concentration by holding companies and to prevent possible private gain by the controlling family. As a preemptive control measure, general holding companies must own 100% of the shares when establishing a CVC. The borrowing scale of CVCs is also significantly reduced compared to current venture capital regulations, limited to 200% of equity capital, the level of venture holding companies.

To prevent side effects from relaxing the Geumsan Separation principle, only 'investment' activities are permitted, and other financial activities are prohibited. To prevent expansion of large corporations' control using third-party capital, investments by financial companies among the controlling family and affiliated companies are prohibited when forming funds. External capital contributions can be up to 40% of the fund formation amount.

To prevent private gain by the controlling family, investments in companies where the controlling family of the affiliated business group holds shares are prohibited. Overseas investments are limited to 20% of the CVC's total assets.

The government requires regular reporting on operational status. Accordingly, CVCs owned by general holding companies must report to the Fair Trade Commission on investor status, investment details, fund loan relationships, and related-party transactions.

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

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

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

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