New Capital Act
The amendment to the Financial Investment Services and Capital Markets Act, which was proclaimed in late May this year, takes effect on August 29. It will allow securities companies with capital of over three trillion won (US$2.7 billion) to be engaged in corporate credit granting and prime brokerage for pension funds and foreign hedge funds, while asset management and investment consulting companies that have not done sales activities are driven out of the market.
Alternative trading systems (ATSs) are expected to be established to compete with the Korea Exchange (KRX) and the annual salaries of the registered directors of listed companies, which have not been subject to public announcement, will be opened to the public. At the same time, the reward paid to those who report unfair business practices such as stock price manipulation is increased from 100 million won (US$89,900) to 20 billion won (US$17.98 million) and specific criteria for the payment are specified.
| Revitalization of Investment Banking | -Prime brokerage allowed -Corporate credit granting expanded |
|---|---|
| Improvement of Capital Market Infrastructure | -Alternative trading systems introduced |
| Relaxation of Regulations on Asset Management Business | -Scope of business of investment advisory firms expanded to cover real estate -Investment in mezzanine securities allowed on condition of participation in private equity fund management |
| Flexibility about Listed Companies’ Financial Management | -Contingent capital instruments introduced |
| Regulations on Unfair Business Practices and Public Announcement of Salaries | -Stockholding reporting regulations eased for executives and major shareholders -Annual salaries of individual directors made public (500 million won, US$449,500, or higher) |
Era of Investment Banking Opened but Things Remain to be Fixed
Many experts are saying, though, that the revised bill is unlikely to have a significant impact for the time being. This is because the regulations regarding the net capital ratio (NCR) still remain, and the ATSs are subject to those limiting trade volume.
Also, when it comes to corporate credit granting, securities firms have little room for lending due to equity capital and NCR regulations. The NCR is an index showing the financial soundness of these firms. According to the Financial Supervisory Service (FSS), the ratio has to be at least 150%.
Besides, pessimistic opinions have been expressed as to the ATSs. Although it is true that the stock trading fees would go down once ATSs are set up as alternatives to the KRX, it is also pointed out the former will take time until they get some boost due to trading volume restrictions.
License-only Asset Management and Investment Advisory Firms Expected to Go Out of Business
With the revision becoming effective, asset management firms and investment consultants that have not been involved in business activities are going to be wound up. In fact, the current regulations also require such entities to go out of business within six months from approval, but the number of actual cancellations has been low owing to the controversies surrounding the scope of the sales activities. However, the new act is expected to make it difficult for them to continue their business, as the requirements have been further specified to drive out the firms recording zero trust money for six months. An exception clause has been included in the act so that the grace period becomes one year for real estate and special asset management companies. Under the circumstances, the investment consultants and asset management firms that have maintained their licenses only in expectation of trade-up are likely to be pushed out of the market. As of the end of June, there are 85 asset management firms and 157 investment consulting companies in Korea.
In the meantime, the scope of advisory firms’ investment targets is expanded from financial investment products to real estate. In addition, domestic funds are allowed to make 100% investments in more overseas funds while partial investment in private equity funds is permitted on the condition of participation in management, and contingent capital instruments are introduced for the diversification of corporate financing means.
The FSS has set up a special investigation bureau at this time to eradicate stock price manipulation, and the Financial Services Commission is going to establish a new division to the same end soon.
The annual pay and bonuses of registered directors, including heads of large corporations, are also made public if the amount is 500 million won (US$449,500) or higher. Until now, only the average by company has been opened to the public. 623 directors at 200 or so corporations are expected to be subject to the public announcement.