Financial authorities to impose stricter obligations on convertible bond market

Financial Services Commission (FSC) Vice Chairman Kim So-young speaks during a meeting on enhancing soundness of the convertible bonds market at the Yeouido office of the Korea Exchange (KRX) in Seoul, Tuesday. Yonhap

Financial authorities are pushing to strengthen the disclosure obligations on the issuances of convertible bonds, aiming to bring more transparency to the convertible bonds market by ensuring a timely provision of sufficient information.

A convertible bond is a type of bond that grants the right to convert it into a common stock, giving the investor the advantages of both relatively safe bonds and profitability of high yields. It has become an important means for small businesses and venture enterprises to raise funds.

According to the Financial Services Commission (FSC), convertible bond issuers now hold a stricter disclosure obligation when designating exercisers of call options, or purchase rights of convertibles at a predetermined price, to enhance financial soundness in the convertible bonds market.

The authorities will prevent excessive refixing, which refers to the adjustment of the ratio between convertible bonds and stock prices when convertible bond holders change them into stocks. Unlike the adjustment of conversion prices based on market fluctuations, the refixing rate of convertible bonds can be determined freely by companies. This led some companies to adjust downwardly conversion prices excessively, harming the interests of ordinary shareholders. To address this issue, the FSC set a specific bar, limiting the excessive downward adjustments.

These are some of the changes that the country's top financial regulator will implement later this year to address chronic issues of unfair trading in the convertible bonds market, which is often used to improperly benefit controlling shareholders at the expense of ordinary shareholders.

Controlling shareholders often misuse the convertible bonds market to increase their stakes of a company. Sometimes companies with weak financial status issue an indiscriminate amount of convertible bonds, transferring their vulnerabilities to general shareholders.

"Many experts point out that Korea's convertible bond market differs significantly from advanced markets like the U.S. and the EU in that it relies heavily on additional conditions like call options and refixing," Kim said. "The government will addressing the issue fundamentally to ensure that convertible bonds are no longer exploited as a manipulative tool for the selfish pursuits of major shareholders."

The FSC vice chief continued to say that the government will take a zero-tolerance stance on unfair trading practices related to the convertible bonds market.

The government plans to implement these measures swiftly by revising related regulations within the first half of this year, while providing legislative support to those that require parliamentary action. Moreover, the FSC expressed its commitment to monitor the condition of the convertible bond market regularly, pledging that it will consider additional regulatory improvements if unfair market trading practices remain rampant.

In 2023, the issuance of convertible bonds in Korea amounted to approximately 5.6 trillion won ($4.1 billion), which is slightly lower than the previous year's 6 trillion won.