I will resolve the Korea discount (undervaluation of the Korean stock market) and open avenues for the Korean economy and 10 million investors.
Four years ago, Yoon Seok-yeol, the presidential candidate of the People Power Party, presented the revitalization of the capital market as one of his core promises. As a result, this promise was not kept. On the day he was inaugurated as president, the KOSPI index started at 2,590.13 points (p) and fell to 2,360.18p last December. This was due to foreign investors leaving the Korean stock market following the declaration of martial law on December 3, leading to a collapse in investment sentiment.
The start was good. In the Yeouido securities district in Seoul, there were comments such as "It's the first time that so many capital market-related policies have been mentioned in a presidential pledge." As shareholder-friendly promises centered on the advancement of the capital market poured in, expectations for reclaiming the KOSPI at 3,000p also grew.
At that time, former President Yoon promised five things: ▲ strengthening tax support for individual investors ▲ enhancing investor protection when partitioning listing of new businesses ▲ unlimited sale restrictions on insider equity ▲ reasonable improvement of the short selling system ▲ revolutionary improvement of transparency and fairness in the capital market.
However, the only positive evaluation from the market stemmed from the "strengthening of tax support." The remaining policies were filled with gaps and were criticized for further eroding trust from domestic and foreign investors. Let's look at the five promises one by one.
The first promise of strengthening tax support was realized by abolishing the financial investment income tax (fin tax). Originally, as of January 1 of this year, if one made a profit of more than 50 million won from stocks or more than 2.5 million won from bonds, one would have to pay up to 27.5% in taxes. Concerns arose that if a new tax was added to an already stagnant domestic stock market, investors would flee.
Former President Yoon attended the 'Korea Exchange securities and derivatives market opening ceremony' on January 2 of last year and declared that he would abolish the fin tax. This statement garnered support from the Donghak Ant (individual investors in the domestic market), and ultimately, the fin tax was discarded in the National Assembly about three weeks before its implementation.
The second promise of "enhancing investor protection when partitioning listing of new businesses" ended up being a typical patchwork solution. The issue arose three years ago when LG Chem spun off its profitable battery division and listed it as LG Energy Solution. Through an initial public offering (IPO), the company raised funds, but LG Chem shareholders, having lost their golden egg, had to helplessly watch the stock price decline.
Subsequently, the Financial Services Commission announced that it would strengthen listing reviews for corporations that had undergone a material partitioning within five years. This in effect meant blocking listings. However, no special measures were provided for corporations that had been established for more than five years. Criticism followed that it would not fundamentally prevent relisting after the material partitioning.
Academics have criticized that five years is too short. During the special seminar held in February this year to discuss revisions to the Commercial Act and the Capital Market Act, Professor Kim Hong-ki of Yonsei University proposed extending the ban on listing to 10 years.
The third promise of "limiting insider unlimited equity sales" led to the abolition of insider pre-disclosure obligations, but this too was half-hearted. Since last July, executives and employees of listed companies have been disclosing the purpose and amount of transactions 30 days before selling company stock. The market assessed this measure as failing to reflect the characteristics of the stock market, which experiences sudden price fluctuations. Even during the second Black Monday incident (last August) when the KOSPI index dropped nearly 9% in a day, executives and employees could not engage in follow-up purchases if they did not make a disclosure.
Additionally, private equity funds (PEFs) were excluded from the disclosure targets. This was the reason why MBK Partners, which held a 40% stake in Korea Zinc last October, could acquire additional shares in addition to a public takeover bid for the company's stock. The period during which they were buying shares coincided with when MBK filed for an injunction urging Korea Zinc to stop buying back its own shares amidst a management dispute, at a time when the potential for a rise in stock prices was limited due to a possibility of an end to the dispute.
The fourth promise of "reasonable improvement of the short selling system" was realized in a way that lost the trust of foreign investors. It has been said that they would create a system to catch illegal short selling by placing sell orders without borrowing, leading to an outright ban on short selling until then. Short selling had been banned in the past during times of global financial crises, such as the 2008 global financial crisis, the 2011 European debt crisis, and the COVID-19 pandemic in 2020.
Because of this, voices arose that the justification for the short selling ban was weak. An official from a Hong Kong asset management firm stated, "Korea has developed an image of changing its policies based on politics" and noted, "it has diminished investment appeal abroad." This was evidenced by foreign investors dumping 1.5 trillion won worth of stocks as soon as short selling resumed on the 31st of last month.
The final promise was the "revolutionary improvement of transparency and fairness in the capital market." This promise became insignificant as the government opposed a revision to the Commercial Act that aimed to widen the target that directors must be loyal to from the existing "company" to "shareholders." Many participants in the capital market wanted a revision to the Commercial Act rather than the capital market law revision proposed by the government. Although the amendment to the Commercial Act was passed in the National Assembly led by the opposition, Prime Minister Han Duck-soo, acting in place of the President, exercised veto power this month.
A rupture is heard within the domestic economic team (F4). Lee Bok-hyun, the head of the Financial Supervisory Service who had vowed to prevent the veto of the Commercial Act revision, appeared on the radio and criticized publicly, saying, "I firmly believe that if (President Yoon Seok-yeol) were here, he would not have exercised veto power." The head has already expressed resignation to the higher authority, the Financial Services Commission.