Can Commercial Act revision ease Korea discount?
Market expects KOSPI will soon break all-time high mark of 3,316.08
The electronic display in the dealing room at Hana Bank’s headquarters in Seoul shows that the KOSPI closed at 3,116.27, Thursday, up 41.21 points from the previous trading day. The revised Commercial Act was passed by the National Assembly on the same day. Yonhap
The passage of the revised Commercial Act — previously vetoed during the Yoon Suk Yeol administration — is raising hopes that the legislation could serve as a turning point in addressing the Korea discount, whereby Korean firms are typically priced below their international peers, according to securities analysts on Friday.
They noted that if the revision leads, as intended, to improvements in corporate governance and stronger shareholder rights, it could also positively impact the KOSPI's potential to reach a new all-time high.
The revision, passed during the National Assembly's plenary session on Thursday, aims to strengthen minority shareholder protections by broadening directors' fiduciary responsibilities and enabling electronic shareholder meetings.
Notably, it expands the "3 percent rule," capping the voting rights of the largest shareholders and their affiliates at 3 percent when selecting audit committee members.
President Lee Jae Myung, who took office on June 4, had pledged to reform the Commercial Act during his campaign, making a presidential veto unlikely this time. As a result, the revision is expected to take effect as scheduled.
Suh Sang-young, an analyst at Mirae Asset Securities, noted that the latest revision provides a solid legal foundation for strengthening corporate transparency and shareholder rights. He emphasized that it represents a key turning point likely to boost foreign investment and enhance Korea's standing in the capital market.
"Korea was excluded from the Morgan Stanley Capital International's (MSCI) watch list for developed markets due to low trust from foreign investors, but this revision raises the chances of inclusion next year and strengthens prospects for the MSCI Developed Markets Index inclusion by 2027," Suh said.
Kim Doo-eon, an analyst at Hana Securities, highlighted the inclusion of the 3 percent rule in the revision, which was a major point of contention between rival parties until the last minute.
"By limiting the voting rights of major shareholders, this measure protects minority shareholders in return. The revision signals the beginning of efforts to eliminate the Korea discount," Kim said.
The revised Commercial Act is passed during a plenary session of the National Assembly in Seoul, Thursday. Yonhap
Expectations are also growing that the revision will provide fresh momentum for further gains in the domestic stock market.
Kim noted the upward trend will be supported by capital inflows, particularly from foreign investors, projecting the KOSPI will surpass the 3,700 mark.
"Using a price-to-earnings ratio of 14.2, which reflects the average during past periods when the market exceeded previous highs, the probability of the KOSPI reaching 3,710 has increased," Kim said.
With the passage of the revised Commercial Act, the KOSPI closed Thursday at 3,116.27, up 41.21 points, or 1.34 percent, marking its highest closing level of the year. On Friday, the index fell 61.99 points, or 1.99 percent, closing at 3,054.28.
The all-time high remains 3,316.08, recorded on June 25, 2021.
Meanwhile, the ruling Democratic Party of Korea (DPK) emphasized that the latest revision is only the first step, stating that "a stronger version" is still forthcoming.
To realize President Lee's vision of a "KOSPI 5000 era," upcoming reforms are expected to target separate taxation on dividend income and mandatory cancellation of treasury shares.
Regarding the two other key issues — the adoption of cumulative voting and the expansion of audit committee members — on which rival parties postponed making a decision, the DPK promised to hold public hearings soon and aims to finalize the related legislation during the July extraordinary session of the Assembly.
"Aside from exceptional circumstances, companies holding their own shares is generally considered improper," a DPK official said. "Once cumulative voting and the expansion of audit committee members are addressed, the next priority will be enforcing the cancellation of treasury shares."