“Korea needs to strengthen the stance on separating industrial and financial capital to prevent Chaebol owners from using banks and other financial affiliates as their private cash boxes,” said the head of the Fair Trade Commission (FTC) on October 13.
FTC Chairman Noh Dae-lae made the remark, saying that such a need is growing as shown in the aftermath of the Tong Yang Group scandal, which was recently accused of engaging in financial fraud and other illegal activities to secure money for its cash-strapped affiliates.
Shin Je-yoon, chairman of the Financial Services Commission, said “I will make sure Tong Yang Group’s majority shareholders take responsibility for the recent turmoil of the group.”
“The consistent principle underlying corporate restructuring has been that majority stakeholders take responsibility and protect innocent victims,” Chairman Shin told reporters of Maeil Business Newspaper Thursday. The chief of the regulator added “I am also willing to meet with individual investors who bought commercial paper issued by Tong Yang Group’s subsidiaries.” His comment refers to the nationwide defaults on credit card payments in 2004 and the debacle regarding the LIG Group’s commercial paper, in which majority stakeholders were held accountable.
As for some other cash-strapped conglomerates, chairman Shin said, “The government executes restructuring in accordance with capitalism and the rule of law.” Therefore, “the government cannot determine either to stifle or keep a company that still runs a business beforehand.” He said, “Corporate restructuring is entirely left to the hands of the market and creditors,” and in this regard, “Tong Yang Group’s fate has been determined by the market.”
On Tuesday, following a meeting of cabinet members and also prior to his comment, Chairman Shin and Choi Soo-hyun, governor of the Financial Supervisory Service (FSS), discussed measures to deal with the embattled Tong Yang Group with Chung Hong-won, prime minister, and Hyun Oh-seok, deputy prime minister and finance minister.
The FSS has decided to thoroughly examine Hyun Jae-hyun, chairman of Tong Yang Group, and his family regarding the insolvency of the Group’s affiliates, and track down his hidden assets, with the help of the investigative authorities.
Five affiliates of Tong Yang have been placed under court receivership after the default by failing to pay for debts of around 110 billion won (US$102.7 million). The business group is the 38th largest conglomerate in Korea.
“The lesson that we have learned from the Tong Yang scandal is that we should strengthen the separation of financial capital and the industrial capital,” Noh said in an interview with a news agency.
Even now, the Korean government places some restrictions on the ability for industrial capital to own stakes in financial institutions in order to make it hard for Chaebol to take advantage of their financial affiliates as private cash boxes. The rule was a little bit eased in 2009 in order to help domestic financial institutions improve their competitiveness by using industrial capital, but the Tong Yang scandal has recently bolstered the case to toughen the rule.
“In order to prevent one affiliate’s risk from spreading to another, it is necessary to improve the current holding company system, through which we should strengthen the mechanism to separate the financial business and industrial business,” Noh said, adding, “Of course, we need to have coordination and consultation with financial authorities and the National Assembly on the matter.”
The industrial sector, however, has argued that such a separation could leave not a few companies easily exposed to M&As by foreign capital, weakening the competitiveness of Korea’s economy.