Revision promoting local IBs draws skepticism
By Park Hyong-ki
The financial regulator’s revision of the Capital Market Law aimed at promoting local brokerages to become large investment banks (IB) is drawing skepticism from the industry given the still relatively high barriers to corporate financing operations.
Even though the revision will enable securities companies with equity capital of more than 4 trillion won to issue short-term commercial papers to raise funds for IB services, they will still face limits in using and investing the money for corporate bonds, loans and real estate.
Brokerages such as NH Investment & Securities, KB Securities, Samsung Securities, Korea Investment & Securities and Mirae Asset Daewoo would fall under the Financial Services Commission’s (FSC) regulatory revision, which is expected to be implemented in April.
They will be restricted to investing more than 50 percent of the money raised via promissory notes in corporate bonds rated below “A,” or lending it to companies. Given that conglomerates would mostly prefer to take out loans from commercial banks, securities companies are likely to provide loan services to small- and medium-sized enterprises (SME) with lower credit ratings.
The Korean IBs will also only be allowed to invest less than 10 percent of the funds they raised in real estate, including property investment management.
The FSC’s initial purpose for the revision was to encourage corporate financing for companies smaller than conglomerates.
However, limiting the scope of their IB operations will only make the already small market much smaller because the brokerages will be reluctant to risk investing in low-rated companies or venture tech firms, analysts say.
“There is a dilemma here given that the regulators are trying to boost capital for SMEs, while seeking to preemptively manage potential risks associated with real estate, and the brokerages want to expand their corporate financing services for bigger companies that pose a less credit risk,” said an industry source.
In addition to raising funds via commercial papers, the revision will allow brokerages with more than 8 trillion won equity capital to launch investment management accounts (IMA) for investors, and use the funds raised via IMAs to extend corporate loans, like banks’ deposit accounts.
Korean securities companies have been pushing to raise their equity capital since the FSC announced the revision last August.
Korea Investment Holdings, the holding company of Korea Investment & Securities, raised 200 billion won via bonds to inject the capital into its securities unit in an effort to meet the regulatory conditions to perform as an IB.
Samsung Securities sold its own shares worth 300 billion won in Samsung Life Insurance. Mirae Asset Daewoo announced a merger with Mirae Asset Securities late last year, becoming the country’s biggest securities company with 7 trillion won equity capital.
As large brokerages seek to become bigger and expand their IB services, analysts say small securities companies will either have to cut costs or seek mergers and acquisitions to stay afloat in the market.