Deepening of 'Korea Discount' through price manipulation

Bae Jae-hyun, the head of investment at Kakao, has been arrested for artificially inflating the company's stock price during the acquisition of SM Entertainment. Arrest warrants have also been requested for four individuals suspected of involvement in stock price manipulation related to the Youngpoong Paper incident. In this incident, the stock price, which had surged nearly ninefold earlier this year, recently experienced a sharp decline. This negative news has further eroded market credibility, with foreign investors departing the market amid unfavorable developments.

Bae, who has been arrested, is the individual who spearheaded the M&A activities of Kakao Group. He is suspected of allocating approximately 240 billion won to artificially inflate the stock price, with the alleged intention of obstructing the public offer of Hive, which was vying for control of SM Entertainment in February of this year. When Hive was publicly bidding for SM Entertainment stocks, they could not attain the targeted stake as the stock price escalated beyond the tender offer price, thus halting the acquisition.

Subsequently, Kakao purchased additional shares and emerged as the largest shareholder of SM Entertainment. The Financial Supervisory Service believes that Kakao manipulated the market price artificially during this period and violated its obligation to disclose its holdings once it reached more than 5% of listed stocks. Financial authorities are reportedly planning to summon and investigate Kakao's founder and former chairman of Kakao's board of directors, Kim Beom-soo, to determine whether he had prior knowledge of these actions.

Youngpoong Paper was previously considered a theme stock in the secondary battery business, and its stock price, which started the year at approximately 5,800 won, surged to over 50,000 won last month. However, on the 18th of this month, the stock suddenly hit its lowest point, and shares of Daeyang Metal, which held a 45% stake in the company at that time, also plummeted by nearly 30%, leading to a suspension in trading. The Seoul Southern District Prosecutors' Office had apprehended Mr. Yoon and other individuals on charges of market manipulation the day before the stock price nosedived and subsequently requested an arrest warrant. This incident bears similarities to the stock price crash that occurred in April of this year, involving SG Securities led by H Investment Consulting CEO Ra Deok-yeon.

Global investment funds are exiting the Korean stock market due to the 'King Dollar' phenomenon resulting from prolonged tightening in the United States and escalating geopolitical risks in the Middle East. However, compounding these challenges, the revelation that the largest shareholder of an information technology (IT) company, a cornerstone of the Korean stock market, is under suspicion for stock price manipulation, delivers a devastating blow to the market. Moreover, a small group of manipulative entities has developed a pattern of exerting control over the stock prices of mid-sized companies.

As these incidents persist without repercussions, the 'Korea Discount,' where Korean companies with exceptional performance are not adequately recognized, is poised to worsen. It is imperative to eliminate fraudulent entities from the market to prevent them from tarnishing it through stock price manipulation, even on a single occasion.