Over 2 Trillion Won Cross Shareholding and over 5 Trillion Won Equity Investment to Be Restricted

The government plans to abolish the top-30 conglomerate designation system applying only the asset ranking of the companies starting next April. Instead, it will implement a new regulation under which the large business groups with aggregate assets of more than 2 trillion won will not qualify for cross shareholding and debt payment guarantee between affiliates. The total 47 groups will be subject to this new regulation.

The restriction on equity investment prohibiting the investment to other firms in excess of 25 percent of their net assets will be applied only to the large business groups with aggregate assets of more than 5 trillion won. The total 24 groups will be under this regulation.

The Fair Trade Commission (FTC) announced yesterday that it would present to this year`s regular session of the National Assembly a program to overhaul the current regulatory framework for large conglomerates through the consultation with the Ministry of Finance and Economy and the ruling New Millennium Democratic Party, and will plan on executing it starting next April.

The new framework added many exceptional stipulations. For instance, a company can be relieved from the restriction on equity investment when it invests in related business area in order to strengthen the competitive edge of the business. In order to improve the core competency, the companies can invest in related companies without any restrictions.

And the state-run enterprises will also be subject to the restrictions on equity investment and cross shareholding.

However, the government will introduce `the early graduation system` allowing exceptions to the equity investment limit for financially sound large groups under 100 percent debt ratio such as the Pohang Iron and Steel Co. and Lotte.

With the introduction of the new regulatory framework, 17 private large groups such as Samsung and Hyundai and 7 state-run enterprises such as Korea Electric Power Corporation and Korea Telecom will be subject to the restriction on equity investment. The large conglomerates, whose current equity holdings exceed the 25 percent limit, must dispose the excess stake holdings until next March. However, the government decided to restrict only the voting rights of the firms, which would fail to sell out the excess holdings due to the decline of stock price, without imposing the fine.

Chairperson of the FTC Lee Nam-Ki stressed, ``We are trying to revitalize investment for the business groups to strengthen their core competency through free competition. But indiscriminate expansion of investment will be strictly prohibited.``

Chairperson Lee added, ``The restrictions on equity investment and cross shareholding will be implemented only temporarily until the operation of the companies will become transparent without doubt. Therefore, if the class action is introduced and the surveillance system on stock price manipulation is improved, such regulations will be abolished.``

Among the non-top 30 large groups with aggregate assets of 2-3 trillion won, Saehan and KCC will be newly subject to the restrictions on cross shareholding and the dept payment guarantee.

Meanwhile, since the Grand National Party has maintained the restriction on the equity investment only to the large groups with assets of more than 10 trillion won, it will bring about a considerable dispute in the National Assembly session.

Chan-Sun Hong hcs@donga.com