The Fair Trade Commission (FTC) will consider changing its criterion on the designation of large enterprise groups (cross-shareholding-restricted business groups) to gross domestic product (GDP). A lot of attention is being paid to this matter as the FTC is considering whether it should be based on the current 10 trillion won (0.7% of GDP) or 1.0% of GDP that can ease the regulation.
According to related industry sources on March 6, the FTC has recently made a bid announcement for a service report on this issue. The results of the service report are expected to come out at the end of July. "We will pursue entrusting a study on the introduction of a criterion based on GDP,” said Chung Jae-chan, chairman of the FTC in an annual audit last year.
A kernel of the service is to change the system so that the criterion on designating the large business groups with limited cross-shareholdings can be changed every year in conjunction with economic growth. Until now, large business groups have been selected based on their total assets at a certain point in time. The government has changed the designation criterion on the designation of large business groups by changing the criterion based on their total assets four times since 1987 (asset: 400 billion won). In 1993, the top 30 business groups were named such big business groups. Since 2002, business groups with total assets of 2 trillion won (US$1.7 billion) or more were designated as large business groups. The FTC raised the asset criterion to 5 trillion won (US$4.2 billion) in 2009, and changed it to 10 trillion won (US$8.5 billion) last year as Kakao, Celltrion, and Harim exceeded 5 trillion won (in total assets) and became targets of the regulations and controversies ensued.
Such practices invited a lot of criticisms that designation criterion itself was a kind of regulation. The size of the new Korean economy grew by 316 trillion won (US$268 billion) to 1.504 quadrillion won (US$1.27 trillion) in 2016 from 1.188 quadrillion won (US$1.01 trillion) in 2009. As the economy grows, firms grow naturally and become a subject of such regulations at any moment.
The point is that every time the criterion is changed, it stirs up controversy over whether or not it is beneficial to big companies. This is why the FTC is trying to change the designation criterion on the large business groups to GDP. The designation of the large business groups linked to economic growth also can reduce unnecessary misunderstandings and controversies. The United States has also linked the minimum transaction size of companies with obligations to report corporate combinations to gross national product (GNP).
The name of the game is whether the target is 1% of GDP, 0.7% or less. Korea’s GDP last year was about 1.504 quadrillion won (US$1.27 trillion). If 1% passes, the criterion based on total assets is around 15 trillion won (US$12.7 billion). It is eased from the present criterion of 10 trillion won (US$8.5 billion). Nine corporate groups including Hyundai Department Store, Hyundai, Hyosung, Mirae Asset and one government-run company can avoid the regulations. If the criterion is sat at 0.7%, criterion assets will be 10.5 trillion won (US$8.9 billion), which is as much as the current one. There is a possibility that 0.5% or 7.5 trillion won (US$6.3 billion) will be the criterion. In this case, 14 companies including Harim, KCC, Dongbu, Halla, and E-Land, are subject to restrictions such as cross-shareholding restrictions.
"When the criterion is based on the amount of assets such as 5 trillion won (US$4.2 billion) and 10 trillion won (US$8.5 billion), the number of business groups subject to the regulations increases over time, and the criterion should be raised after a few years,” said professor Kim Sang-jo of Hansung University who is the director of the Economic Reform Solidarity Team. "If we switch to GDP, we can increase the predictability of the regulations and consistently manage a certain number of large companies."