Internal Funding Control
The Financial Services Commission (FSC) said on November 21 that financial arms of conglomerates will face tightened restrictions from next year about funding their parent companies against default. Such a measure intends to close the loophole through which conglomerates divert their affiliates’ assets to avoid a liquidity squeeze.
The FSC briefed that money-lending affiliates of conglomerates will be able to offer their largest shareholders loans equivalent to 100 percent of their equity capital, saying that the measure will be effective in the first half of next year.
The financial regulator has been trying to roll out necessary measures to revamp related rules to prevent conglomerates from taking advantage of their financial affiliates as a private vault.
The financial regulator is also considering banning money-lending affiliates from extending any credit to their controlling stakeholders or other affiliates, if their parent firms are financial firms.
The FSC’s plan was ironed out as excessive and arbitrary funding by financial affiliates to their parent companies has been blamed for the recent spate of defaults of mid-size conglomerates here.
The latest case was Tong Yang Group, South Korea’s 38th-largest family-run conglomerate, which filed for court receivership of some of its key affiliates after the business group failed to repay debts. Before the default, its brokerage house Tongyang Securities had provided liquidity to the troubled parent company, incurring massive losses for individual investors.
The financial regulator will also review a separate credit rating system for individual company of conglomerates, which is calculated based on the assumption that the firm is excluded from any financial support from the parent company or other affiliates.
The FSC is also considering asking for conglomerates’ affiliates to disclose their borrowing besides bank loans, including commercial papers and hybrid bonds, to let creditors better know the company’s financial risks.