Restrictions in Doing Business
As South Korean court sentenced Samsung Electronics Vice Chairman Lee Jae-yong to five years in prison for bribery and embezzlement, Samsung Securities, a financial subsidiary of the group, has hit a snag in its ambition to transform itself into a mega investment bank (IB). The company will not be able to issue promissory notes, which is a core business allowed for IBs, for years until the court ruling is confirmed.
As Vice Chairman Lee was given a five-year jail sentence for bribery on August 25, Samsung Securities will have difficulties in receiving approval for the issuance of promissory notes. When the largest shareholder of a company is sentenced to imprisonment, the company will become disqualified for the note-issuing business.
The Financial Supervisory Service (FSS) suspended a review of Samsung Securities’ licensing application for the new note-issuing business until the court ruling on Vice Chairman Lee after it expanded the range of eligibility for the issuance of notes to major shareholder’s affiliated persons.
Samsung Life Insurance is the largest shareholder of Samsung Securities with a 29.39 percent stake and Chairman Lee Kun-hee is the largest shareholder of Samsung Life Insurance with a 20.76 percent share. However, the financial regulator said Vice Chairman Lee is an affiliated person of Samsung Securities who has a 0.06 percent stake in the company. So, it decided to put on hold its review of Samsung Securities’ application for issuance of promissory notes until the court’s final verdict on Vice Chairman Lee.
As Vice Lee was sentenced to five years in prison in the first trial, Samsung Securities will have to give up on the new note-issuing business. The ruling can be overturned in the second and third trials in the future. However, Samsung Securities will suffer a major setback for the note-issuing business during the trial.
An official from the FSS said, “The ruling on the first trial has reasons for disqualification of issuance of promissory notes, but the second and third trials will be under way. We will suspend the review until the court ruling is confirmed unless Samsung Securities demands a retraction of application.”
However, Samsung Securities is planning to focus on businesses other than issuance of promissory notes rather than giving up on its plan to transform into a mega IB. Since the company already has more than 4 trillion won (US$3.57 billion) in equity capital, it will be easily selected as a mega IB.
An official from Samsung Securities said, “The FSS only suspended the review of our licensing application for the new note-issuing business. Other reviews of mega IB licenses are under way. When we are designated as a mega IB, we can still run businesses related to foreign exchange and prudential deregulation, except for issuance of promissory notes. So we are preparing for the businesses.”
The FSS will start conducting an actual inspection on the spot for one company a day in the order of equity capital from July 28. Mirae Asset Daewoo, which ranks first in terms of equity capital, will be the first company which is put under on-the-spot inspection. In particular, the company will be under the inspection mainly on its computer system for issuance of promissory notes. The note issuance, which can issue notes within 200 percent of equity capital, is the core business of mega IBs. Securities firms can raise funds for business finance by issuing notes.
Meanwhile, other securities companies also focus on the review of mega IB licenses. Notably, Korea Investment & Securities has a variable for eligibility of major shareholder as a private fund established by its largest shareholder Korea Investment Holdings went bankrupt in 2015. Mirae Asset Daewoo has had the highest number of sanctions as the company received rebates and issued asset-backed securities (ABS) when it employs funds of cash management accounts (CMAs). KB Securities faced sanctions for illegal cross trading when it was Hyundai Securities before the merger. NH Investment & Securities also faced sanctions for receiving rebates while managing CMAs.