The South Korean government is planning to strengthen regulations on holding companies. It is moving to tighten the limit of debt ratio and prohibit holding companies from owning grandson companies that are irrelevant to their main businesses.
The Fair Trade Commission (FTC) announced on July 3 an analysis of the current state of the holding companies that control 18 conglomerates.
The FTC has decided to reform the current holding company system for the first time in 19 years after its introduction. The trade watchdog believes that stronger regulations are needed because transactions with affiliates account for 55 percent of the total transactions of the surveyed holding companies.
Furthermore, these holding companies own grandson and great-grandchild companies that are irrelevant to their main businesses. The FSC judged that the grandson and great-grandchild companies are lacking in corporate transparency and are often used by group owner families as a means of expanding their control and gaining personal benefits.
The subjects of investigation are large business groups including SK, LG, GS, Hanjin, CJ, LS, Kolon, Hankook Tire, AmorePacific and Celltrion.
Dividends of subsidiaries are the main source of revenue for the holding companies. According to the analysis results, however, dividend incomes accounted for 40.8 percent of the total sales of 18 holding companies on average, while the earnings beside dividends took up 43.4 percent.
In particular, Celltrion’s earnings beside dividends accounted for 100 percent of the total sales. Hankook Tire also had an 84.7 percent of earnings beside dividends, followed by Hansol with 78.8 percent and Kolon with 74.7 percent. In short, conglomerates made profits from royalty fees, real estate rents and management consulting fees instead of their main business.
The FTC also said the holding companies have expanded the control of their affiliate companies by increasing the number of grandson and great-grandchild companies. In fact, the average number of firms affiliated with holding companies showed a sharp rise from 15.8 per holding company in 2006 to 29.5 in 2015. The number of subsidiaries of business groups slightly increased from 9.8 to 10.5 over the same period, while that of grandson companies more than doubled from 6 to 16.5.