The Financial Services Commission (FSC) has disclosed a draft of its plan to reduce cross shareholding among financial companies affiliated with seven financial groups, including Samsung, Hyundai Motor, Hanwha and Lotte.
The seven financial groups have a total of 97 financial subsidiaries whose assets are often used by the parent companies to acquire new affiliates or provide financial support to weak subsidiaries.
One primary goal of the commission’s new regulatory initiative is to prevent financial groups from attempting to expand their businesses by using the assets of their financial affiliates.
Another main goal is to protect the financial companies from risks arising from cross shareholding. The capital structure of these companies is characterized by a high reliance on equity investment from other affiliates.
Such internal investment, especially investment from non-financial affiliates, poses risks to financial companies as their capital soundness can be affected by the performance of sister companies.
The new regulatory scheme, if implemented from July as planned, will allow the commission to push the targeted financial companies to increase capital or reduce cross shareholding to mitigate their risks.
Specifically, the commission can advise them to improve their risk management measures if necessary. The improvement can take the form of a business improvement plan, which should include measures to reduce risky assets, disperse risks and scale back financial transactions with non-financial subsidiaries.
If a financial group fails to implement its business improvement plan, the FSC can urge it to remove cross shareholding with subsidiaries in the non-financial sector.
According to industry sources, most of the target companies regard the draft as an excessive intervention in the private sector.
The main target of the new supervisory scheme is the Samsung Group, which has a complex shareholding structure among its subsidiaries.
At present, Samsung Life Insurance owns 7.55% of Samsung Electronics. The former’s capital adequacy ratio can deteriorate significantly once its investment in the electronics company is excluded from its capital.
Under the current law, Samsung Life Insurance’s equity investment in Samsung Electronics is seen as eligible capital. Under the new supervisory system, however, such intra-group investment is not regarded as eligible capital. This means Samsung Life Insurance may have to dispose of its Samsung Electronics shares for recapitalization.
Under the Insurance Business Act, an insurance company is banned from investing 3% or more of its total asset in a subsidiary. Yet the calculation of the ratio is on an acquisition cost basis rather than the current market value basis according to the Insurance Business Supervisory Regulations.
Civic organizations have demanded that market prices of stocks be used in calculating the capital ratio of an insurance company. One notable advocate of this approach is Kim Ki-shik, the newly appointed chairman of the Financial Supervisory Service.
If this approach is adopted, Samsung Life Insurance will be forced to dispose of much of its shareholding in Samsung Electronics.