Chaebol Will Be Reined in as Promised by Roh

The incoming Roh Moo-hyun administration has decided to speed up its pushing for introduction of several new regulations designed to rein in chaebols. Thus, the tax code will be modified by the end of this year in such a way as to frustrate any attempt to illegally pass down wealth from one generation to the next. Once modified, therefore, inheritance and gift tax will be levied even where there is no specific provision for the taxation. In addition, regulations will be toughened to prevent chaebol affiliates from illegally helping each other financially.

Moreover, the current financial supervisory system is to be overhauled to foil off a chaebol owner`s illegitimate intervention in management of affiliate companies. As part of the plan, the Fair Trade Committee will beef up its monitoring activities over chaebol.

The proposals are included in the report submitted yesterday by the Presidential Transition Committee to President-elect Roh Moo-hyun. The proposals, therefore, will command the priority of the incoming administration.

The chaebol-related policy envisioned by the committee has accommodated most of the campaign promises of Roh. Thus, it is likely that the new administration will initiate various measures to reform the chaebol.

According the report, if a chaebol affiliate gives financial supports to another affiliate by manipulating its subsidiary bank, the overseeing government agency can ask the court to forcefully sever the bank from the chaebol. The transition committee has also decided to revise the tax code so that, without specific provisions, heavy taxation can be imposed once it is determined that an inheritance has occurred in fact. Some legal scholars, however, consider the revision unconstitutional.

Another reform-oriented bill is now pending Congress. Once the bill becomes law, shareholders can file a class action suit against a company suspected of having employed illegal accounting practices like window-dressing. Thus, if passed within this year as intended by the transition committee, the new legislation will lead to more lawsuits by non-majority shareholders.

Additionally, the transition committee has decided to extend for a considerable time the authority of the Fair Trade Committee to track down banking transactions. Originally, the authority is supposed to expire by the end of this year. The transition committee also reportedly favors appointing Fair Trade Committee members as police officers. Furthermore, in the future, civil rights groups and the Korea Consumer Protection Board can file criminal claims against a chaebol suspected of committing illegal transitions. So far, only the Fair Trade Committee has the privilege.

If the bill passes through Congress, a person wishing to invest in a bank or to have majority of its shares has to go through more toughened scrutiny and meet more requirements. In the meanwhile, a bank is to be allowed to loan a much smaller amount of money to its majority shareholder and its affiliate. The transition committee also plans to subject to supervision of the government those financial institutes that are not traded in the stock market.

The committees will reportedly maintain the current investment cap applied to a company whose asset is more than 5 trillion won (or approximately $4 billion). Under the system, a person can invest only up to certain amount in the company. Under the committee`s plan, chaebol affiliates will be prohibited from making mutual investments and guaranteeing for each other in obtaining loans.

Young-Hae Choi Hyung-gwon Pu yhchoi65@donga.com bookum90@donga.com