Financial Authorities: "Difficult to Verify Individual Financial Status of Offshore Holding Companies... Caution Advised for Investment"

85% of Delisted Offshore Holding Companies Are Chinese Firms

[Asia Economy Reporter Minji Lee] Financial authorities urged on the 4th that investors should carefully check the individual financial status of offshore holding companies listed on the domestic stock market. They also announced that they would review institutional improvement measures to prevent investment damage.

Earlier, the Financial Services Commission's Securities and Futures Commission detected and took action against fraudulent trading activities related to foreign companies listed domestically at the 15th regular meeting held on August 19. Regarding this, the Securities and Futures Commission explained, "During the review process, although the financial structure was sound, reasons for unpaid bonds were discussed. As a result, it was found that while the offshore holding companies had a healthy capital structure on consolidated financial statements with parent companies located in the home country, they had no repayment ability on their own."

The listing methods of foreign companies on the domestic stock market can be divided into offshore holding company stock market listings and listings of stocks and depositary receipts of companies engaged in core businesses. In the case of offshore holding company stock listings, it refers to small and medium-sized enterprises that find it difficult to list in their home country establishing offshore holding companies (SPCs) overseas and listing their stocks on the domestic stock market. The latter refers to companies engaged in core businesses in their home countries or elsewhere directly listing their stocks and depositary receipts domestically.

Since 2007, a total of 36 foreign companies have been listed on the domestic stock market, of which 25 companies listed offshore holding company stocks and 11 companies listed stocks and depositary receipts of companies engaged in core businesses. Among them, a total of 14 companies have been delisted, and among the delisted companies, 12 were Chinese companies' offshore holding companies.

Offshore holding companies disclose only consolidated financial statements including parent companies in accordance with capital market laws, making it difficult for investors to grasp the offshore holding companies' own revenue structure and liquidity status, such as repayment ability. Furthermore, there is a high risk of misjudging the financial repayment of offshore holding companies due to the illusion created by the strong performance of the parent companies in the consolidated financial statements.

Additionally, offshore holding companies remit substantial amounts raised from paid-in capital increases and convertible bond (CB) issuances in the domestic stock market to parent companies in the home country in the form of equity investments and loans. However, disclosures regarding the risk of unrecovered funds due to compliance with foreign exchange remittance procedures and foreign exchange transaction regulations are insufficient.

The Financial Services Commission advised, "Since information between offshore holding companies and parent companies in the home country is sometimes not separated, special caution is required when making investment decisions," and added, "Attention is also needed regarding the expected foreign exchange transaction regulatory risks in the home country when foreign currency is procured from the parent company to pay interest and repay bonds issued domestically."

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