A Possible Hike in Investment Cap on Conglomerates

The Ministry of Finance Economy decided to lower the Total Ownership Limit, a cap on a conglomerate`s ownership into another firm. The Ministry is likely to increase the existing 25% limit up to 150%

In a report titled `the Direction for the Improvement of Total Ownership Limit,` the Finance Ministry proposed measures to impose differentiated ownership limits on companies according to the proportion of their owners` share ownership and voting rights. Currently the same single ownership cap is applied to all companies.

The report was commissioned by the Ministry and compiled by the Corporate Competitiveness Research Center at Seoul National University. It will be presented Friday to `the Market Reform Task Force Coordinated Conference,` which will draw up policies on conglomerates for three years to come.

The report proposed to determine an ownership cap for individual conglomerate based on `a voting right multiplier,` a figure calculated by dividing the conglomerate owner`s voting rights by his stock ownership.

For example, when a voting right multiplier is less than `1.25,` the cap would be 150% of the investor`s net asset. When the multiplier is above `1.25 and less than 1.5,` the cap would be 100% of the conglomerate`s net asset.

The voting right multiplier increases when an owner CEO of a conglomerate has small direct ownership in his firm but has high ownership in subsidiaries.

An Economics professor Lee Sang-seung at Seoul National University, who complied the report explained, ˝The existing ownership cap has only hindered conglomerates` sound investment activities. If the voting right multiplier is considered in setting the limit, the cap would be much eased.˝

It was found that the new measure could much lower the cap on modest-sized conglomerates, whose asset is less than top 5, since their owner CEOs have high ownerships.

If the new measure is adopted, new investment of 190.9 billion won could be made by Dongbu Construction Corporation, 287 billion won by Korea Kumho Petrochemical and 2 trillion 689.3 billion won by Hyundai Heavy Industry.

The report predicted that higher investment cap would improve corporate governance by allowing firms to easily transform themselves into a holding company.

It also recommended the government to exempt companies with less than 100% debt ratio from the investment limit for a while and eliminate all exceptions to the regulation.

Also urged by the report was easing or total elimination of required ownership ratio into affiliates (30% for listed companies and 50% for non-listed firms) and required debt ratio (100%).

Shin Jong-ik at the Federation of Korean Industries said, ˝The possible reduction in the Total Ownership Limit is positive. The cap should be ultimately abolished to motivate companies and sharpen their competitive edges.˝

Meanwhile, the Fair Trade Commission which has argued for the strengthening of the regulation said, ˝Since the report is just a proposal of the Finance Ministry and not a government bill, it would be thoroughly reviewed at the Task Force Conference on Friday.˝

koh@donga.com smhong@donga.com