Chaebol could face punishment for intra-group deals

The government will push for the sale of financial affiliates of a conglomerate when its chief is punished for forcing intra-group deals, embezzlement and dereliction of duty. This means the government will directly intervene with corporate governance by exercising the right of ordering a separation of financial affiliates. The government will also make it mandatory for conglomerates to disclose plans for resolving existing circular shareholdings.

According to screening materials of parliamentary subcommittee on governance structure of financial companies released by the National Policy Committee of National Assembly on Monday, the parliament and the government will expand the qualification screening on the major shareholders that was limited to financial holding companies, banks and savings banks to the non-banking sector including insurance, securities and credit card companies.

Until last year, punishing conglomerate heads was difficult even when intra-group deals were discovered. But it will be different from this year. The fair trade law will be revised to punish conglomerate heads when an affiliate whose shake more than 30 percent is owned by the family of conglomerate head is exposed to have promoted intra-group deals, even if evidence is not clear.

If the bill is passed, a conglomerate will have to sell a stake in its financial affiliates when the head is punished for embezzlement, dereliction of duty and tax evasion.

Consequently, a considerable number of large companies including Samsung that maintains a circular shareholding centering on financial affiliates will be hit hard.

The business circle and experts claim the bill is a de facto order for separation of affiliates and thus is against constitution. The system can order groups to separate affiliates if they damage the regulation of separating financial and industrial capital and if affiliates have concerns of monopoly. The plan was examined by President Park when she was running as presidential candidate, but wasn`t selected on judgment that it has too much impact on the overall economy.

Jeon Sam-hyeon, law professor at Soongshil University, said, "Making group head who was already punished based on another law to sell a stake in financial affiliates infringes on the principle of excess prohibition and personal property rights, and thus can go against constitution."

weappon@donga.com