The Financial Services Commission (FSC) has disclosed a draft of its plan requiring major financial groups to sell off their shares in non-financial affiliates in case such cross-shareholdings pose risks to the financial system. The new rules are scheduled to be implemented with effect from July.
The rules are expected to affect seven financial groups, including Samsung, Hyundai Motor, Hanwha and Lotte. The seven financial groups have a total of 97 financial subsidiaries, reports Business Korea.
One primary goal of the commission’s new regulatory initiative is to prevent financial groups from attempting to expand their businesses or provide financial support to weak subsidiaries by using the assets of their financial affiliates.
Another main goal is to protect the financial companies from risks arising from cross shareholdings. The capital structure of the financial groups is characterised by a high reliance on equity investment by group units.
The new regulatory scheme will allow the FSC to push the targeted financial companies to increase capital or reduce cross shareholdings to mitigate their risks. Specifically, the commission can advise them to improve their risk management measures if necessary. The improvement can take the form of a business improvement plan, which should include measures to reduce risky assets, disperse risks and scale back financial transactions with non-financial subsidiaries.
If a financial group fails to implement its business improvement plan, the FSC can urge it to dispose of cross shareholdings with subsidiaries in the non-financial sector.
Among the main targets of the new rules is the Samsung Group, which has a complex shareholding structure across its subsidiaries. The group controls South Korea's largest life and non-life insurance companies.
Samsung Life Insurance and Samsung Fire & Marine Insurance may have to sell off affiliate stocks worth as much as KRW21 trillion (US$20 billion), if the Financial Supervisory Service revises the Insurance Business Act.
Under the Act, an insurance company is barred from investing 3% or more of its total asset in a subsidiary. Yet the calculation of the ratio is on an acquisition cost basis rather than the current market value basis according to the Insurance Business Supervisory Regulations. There are calls for the current market prices of stocks to be used in calculating the capital ratio of an insurance company. One notable advocate of this approach is Mr Kim Ki-shik, the newly appointed Chairman of the Financial Supervisory Service.
At present, Samsung Life owns 7.55% of Samsung Electronics. The former’s capital adequacy ratio can deteriorate significantly once its investment in the electronics company is excluded from its capital.
Under the current law, Samsung Life’s equity investment in Samsung Electronics is seen as eligible capital. Under the new rules, however, such intra-group investment is not regarded as eligible capital. If this approach is adopted, Samsung Life will be forced to dispose of much of its shareholdings in Samsung Electronics.