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Easier Establishment of Private Equity Funds

Posted January. 24, 2008 08:52,   


The incoming government is considering measures to ease regulations on private equity funds, which invest money of a few investors into stock markets and properties, and introduce hedge funds earlier than expected.

The government is also expected to allow foreign banks with reliable credit ratings in the global market to set up local branches in Korea without any further requirements. Financial institutions will also be allowed deal with deposits, securities, and insurance products at the same time in a branch.

A source from the presidential transition committee said yesterday, “Under the premise that competition between financial firms should be promoted and financial firms with poor performance records should be ousted from the market, we have intensely discussed measures in details after choosing which regulations to be eased.”

The transition team’s plan to ease regulations on the financial sector include following eight measures: easing limitations on the ownership of banks’ shares, lowering standards for approval, depending on business features, easing regulations on the establishment of PEF and introducing hedge funds earlier than expected, introducing a new system related with financial products sales, minimizing regulations on foreign financial firms’ establishment of local subsidiaries or branches, easing rules on expanding branches of savings banks, privatizing state-owned banks earlier than scheduled, and stepping up measures to close unqualified financial firms.

Out of the eight measures, the transition team focuses on easing limitations on the ownership of banks’ shares and privatizing state-owned banks. Accordingly, it now puts priority on adjusting the scope of ‘non-financial business operators’ provided by the Banking Act, so as to allow the pension funds to buy shares of the Korea Development Bank.

With regard to the establishment of PEF, the transition team is expected to allow PEFs to increase the share of debts in its portfolio and run hedge funds. By doing so, hedge funds, which have been originally scheduled to be introduced late next year, could appear in Korea one year earlier than expected.

Another member of the transition team said, “It is not difficult to introduce hedge funds earlier than expected. However, given recent volatility in the financial market, many experts believe that it will not be too late if the government introduces hedge funds after introducing the Capital Market Integration Act next year.”

In an effort to establish an Asian financial hub in Korea, the transition team plans to significantly reduce qualifications and processes required for prominent foreign financial firms to establish their local branches in Korea.

Currently, a foreign bank should have more than 100 billion won in capital to establish a subsidiary in Korea. Lots of foreign banks have urged the Korean government to improve current regulations since the capital owned by the headquarters is not considered as their capital.

Moreover, foreign banks without subsidiaries in Korea have to obtain authorization whenever they set up a new branch, regardless of their credit ratings.

The financial product sales system is designed to allow a business operator to sell funds, deposits and insurance products at one branch. The measure to ease standards for approval is made to lower the required amount of capital of commission houses.

koh@donga.com legman@donga.com