As the National Assembly discusses an amendment to the Commercial Act centered on mandating the cancellation of treasury shares, attention is turning to how KT will handle its treasury shares, with foreign equity at the statutory cap of 49%. KT earlier released a large-scale plan to cancel treasury shares, but if the cancellation actually takes place, the total number of outstanding shares will decrease, and the foreign equity ratio could unintentionally exceed the legal cap. The foreign equity restriction and the mandatory cancellation of treasury shares are on a collision course.
As of the 24th, KT's foreign equity ratio is 49%, and it has remained at that level for more than a year since reaching the cap in Nov. last year.
The current Telecommunications Business Act limits the foreign equity cap of key telecommunications operators such as KT, SK Telecom, and LG Uplus to 49%. The measure reflects that communications networks are a core national security asset. If foreign equity exceeds the legal cap, the voting rights of the relevant shareholders are restricted, and the operator or shareholders are ordered to lower the equity ratio to 49% or less within six months.
Because of this regulation, KT shares listed on the New York Stock Exchange (NYSE) in the form of depository receipts (ADR) sometimes trade at a premium. The government once reviewed easing this limit to resolve the Korea discount, but it is maintaining the regulation as is, judging that the need to protect industry and maintain security is significant.
However, as the ruling party and government discuss the third amendment to the Commercial Act mandating the cancellation of treasury shares, a situation could arise that conflicts with the foreign equity restriction. This is because canceling treasury shares under the Commercial Act amendment would unintentionally push foreign equity over the legal cap.
As of the end of June, KT holds 3.95% in treasury shares. Through a corporate value enhancement plan released last month, KT announced it would buy back and cancel a cumulative 1 trillion won in treasury shares from this year through 2028.
Lee Seung-ung, an analyst at Yuanta Securities Korea, said, "There is a possibility that the mandatory cancellation of treasury shares and the Telecommunications Business Act, which sets a cap on foreign equity, will conflict," and added, "We also need to discuss ways to resolve this."
Potential solutions include exempting the cancellation mandate and conditional cancellation. The Commercial Act amendment could allow holding treasury shares by creating an exception when other laws impose foreign equity limits, or set conditions to cancel treasury shares sequentially when the foreign equity ratio falls below the cap.
The analyst said, "A likely approach is to cancel treasury shares within the range that keeps foreign equity within the cap for a set grace period after foreign equity declines to a certain level."
Given this situation, some analysts say KT is more likely to increase dividends rather than strengthen shareholder returns through buybacks and cancellations. Kim Hong-sik, an analyst at Hana Securities, said, "If the mandatory cancellation of treasury shares is codified, KT's handling of treasury shares will face difficulties due to the foreign equity cap," adding, "It looks hard for KT to buy more treasury shares, and the company will likely pay the total shareholder return in dividends."
In the case of SK Telecom and LG Uplus, as of the 24th, foreign-held equity stands at about 36% and 41%, respectively, and treasury share holdings are around 1% each, leaving some room for now.