To Prevent Recurrence of 'Split Listings' by Listed Companies...

Financial Seminar Hosted by People Power Party Rep. Yoon Chang-hyun
KCMI "Strengthening Listing Review and Corporate Governance Requirements"

[Asia Economy Reporter Lim Jeong-su] A proposal has been made that the board of directors of subsidiaries should secure independence to suppress the simultaneous listing of parent and subsidiary companies (split listing), which is considered a major cause of the Korea discount (the undervaluation phenomenon of Korean stocks). It is argued that when conflicts of interest arise between controlling shareholders and general shareholders, the board should equally consider the interests of all shareholders, not just the major shareholders.

Nam Gil-nam, Senior Research Fellow at the Korea Capital Market Institute (KCMI), who attended a financial seminar hosted by Yoon Chang-hyun, a member of the People Power Party, on the 4th, pointed out the issue of simultaneous listing of parent and subsidiary companies in a dependent relationship and made this proposal. He also suggested that to resolve the Korea discount, the dividend system should be improved to increase the shareholder return ratio (the ratio of dividends and share buybacks to net income), and the accessibility of foreigners to the Korean stock market should be raised to the level of advanced stock markets.

Value Loss from 'Split Listing'... Need for Board Independence and Strengthened Listing Review

According to the Korea Capital Market Institute, the price-to-book ratio (PBR) of the Korean stock market is only 52% of that of advanced countries and 58% of emerging countries. One of the main causes is the simultaneous listing of subsidiaries. When a subsidiary in a dependent relationship is listed, the PBR of the parent company decreases by 33%, and the PBR of the existing holding company also declines.

Research Fellow Nam proposed strengthening the listing review and corporate governance requirements for split listing companies as a solution. He particularly argued that it is necessary to specify the independence of the board of directors related to simultaneous listing and shareholder protection requirements in corporate governance reports and listing reviews.

He said, "In Japan, after specifying requirements such as excluding independent directors from the parent company and equal treatment of minority shareholders in corporate governance reports, the number of simultaneous listing companies has gradually decreased." In 2014, Japan had 324 simultaneous listing companies (9.5%), but after strengthening governance requirements, the number decreased to 293 (8%) in 2021, several years later.

The Korea Capital Market Institute also pointed out the low shareholder return ratio as another factor of the Korea discount. According to the institute, the shareholder return ratio of Korean listed companies ranks last among 45 advanced, emerging, and Asia-Pacific countries. It is lower than not only advanced stock markets such as the US and Europe but also those of Romania, Egypt, Nigeria, South Africa, Indonesia, Peru, India, and T?rkiye.

As a measure to raise the shareholder return ratio, institutional improvements such as reforming the dividend tax system are necessary. Research Fellow Nam said, "To encourage dividend payments, the taxation system on dividend income over 20 million won should be changed from comprehensive income aggregation taxation to a single tax rate or separate taxation, and the current dividend payment practice, which requires dividend decisions within three months of the dividend record date, should be improved."

Many Restrictions on Foreign Capital Market Investment... Barriers Should Be Lowered

He also proposed measures to increase foreign investors in the domestic stock market by improving accessibility for foreign investment. The institute analyzed that the proportion of foreign investment peaked at 40% in 2004 but fell to 26% as of July last year. Research Fellow Nam advised, "Although foreigners are required to pre-register their personal information with the Financial Supervisory Service to manage foreign acquisition limits of national key industry stocks and monitor foreign transaction trends, the system is operated too rigidly and needs improvement."

According to the institute, the omnibus account management system, which allows global asset management companies to bundle multiple funds into one account for order placement, settlement, and integrated post-reporting, was introduced in 2006. However, in back-office operations, processing has been done on a per-account basis under the existing Foreign Investment Registration System (IRC), limiting the use of omnibus accounts.

Research Fellow Nam emphasized, "It is necessary to allow back-office processing on an omnibus account basis," and "foreign investment limits should be managed ex post, and existing IDs should be replaced with internationally accepted methods." He added, "Accessibility for foreign investors should be enhanced by providing disclosures currently only in Korean in English."

Need for Proactive Response to Securities Firms' Liquidity Crisis Triggered by PF

A proposal was also made for proactive preparation against liquidity crises in securities firms. This is due to concerns that liquidity crises in securities firms may recur this spring when project financing (PF) loan maturities are concentrated.

According to the Korea Capital Market Institute, the bond market liquidity crisis triggered by the Legoland incident in the second half of last year is somewhat stabilizing, with bond and commercial paper (CP) market interest rates declining. The 3-year maturity AA- rated corporate bond interest rate rose to 5.73% in October last year but fell to 5.17% last month. The A1-rated 3-month maturity CP interest rate surged to 5.54% at one point but stabilized at 5.17% the previous month.

However, the institute warned that if real estate values decline and unsold housing increases continue, PF defaults in securities firms could expand, worsening the situation. Especially since PF maturities are concentrated in the first quarter of this year, there is a high possibility that securities firms' liquidity ratios will sharply decline this spring.

Research Fellow Nam advised, "If securities firms experiencing liquidity difficulties due to PF defaults appear, it is necessary to carefully review in advance whether current market stabilization programs such as repurchase agreements (RP), CP purchases, and bond fund formation can effectively respond."

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