Abolition of Investment Limit to Alter Biz Landscape
By Ryu Jin
Staff Reporter
South Korea’s business landscape is likely to go through a sea change, as the new administration is set to get rid of investment limit rules that have been in place over the past two decades.
At Monday’s Cabinet meeting, the first since his inauguration late last month, President Lee Myung-bak and his economy-related aides decided to abolish the equity investment ceiling system in the first half of this year.
Subsidiaries of a large business group with assets of 2 trillion won ($2.13 billion) or more are banned under current fair trade laws from making equity investments in sister or non-affiliated firms, a rule aimed at preventing the concentration of economic power.
Units of the large business groups ― better known as chaebol here ― are also prohibited from purchasing stakes in their sister or other companies in excess of 40 percent of their net worth, according to the laws.
State regulators have advocated the rules since the 1990s to prevent chaebol from making indiscriminate investments which could hinder fair competition in the market as well as weaken their core businesses.
But the guideline is set to be scrapped as Lee, a former chief executive of Hyundai Group’s construction arm, was elected in the Dec. 19 presidential race with platforms typified by what he calls ``business-friendly’’ policies.
Major Changes
According to the Federation of Korean Industries (FKI) and other business organizations Wednesday, there may not be major changes in the near future. But, in the long term, there could be a paradigm shift.
In particular, experts say, the abrogation of the investment ceiling system will help enterprises have a broader vision, accelerate asset increases and activate mergers and acquisitions (M&As).
``Major conglomerates, which have been affected by the investment limit rules so far, will have a broader vision for their future businesses, once the regulation is eliminated,’’ said Park Kyu-won, head of the corporate policy team of the FKI.
As of July last year, there were a total of 25 enterprises belonging to seven conglomerates that were subject to the rules, including Samsung Group, Hyundai-Kia Automotive Group and Lotte Group.
On the other hand, the abolition of investment limits will also bring about changes to other business groups that have not been affected so far. Some groups have been quite ``conservative’’ in their investments because of the rules.
If the rules are abolished, conglomerates with assets over 10 trillion won and their subsidiaries with assets over 2 trillion won will rapidly expand, according to experts.
According to the Fair Trade Commission (FTC) Wednesday, a total of 1,292 chaebol affiliates were on its watch list as of March 3, up 18 from 1,274 about a month ago.
Shinsegae Group and LS Group, which had assets of about 9.9 trillion won respectively last July, will be freed from the ``pressure’’ of the investment ceiling system.
As the abolition of the system will allow chaebol to buy stocks of not only their subsidiaries but also non-affiliate firms, it is also expected to bring about significant changes in the M&A market.
Some large-scale M&As including those involving Hyundai Engineering & Construction and Hynix Semiconductor (among others) could be affected by the abolition of the investment ceiling system, the experts said.