FSC Vice Chairman Kim Yong-beom
South Korea’s financial authority hinted at revising the country’s “5-percent rule,” which mandates any investor that owns 5 percent or more of outstanding shares of a listed company in the country to file a report with the regulator.
“It is about time we revise the 5-percent rule to reflect current trends,” Kim Yong-beom, vice chairman of the Financial Services Commission (FSC), said during a public hearing on policy improvement measures to boost shareholder activities of institutional investors hosted by the Korea Institute of Finance in Seoul on Monday.
In Korea, a shareholder with 5 percent or more of total outstanding equity securities in a listed company is required to file a report with the financial regulator within five days of any changes to ownership such as of objectives or status of the holding. This so-called 5-percent rule was introduced for the first time in Korea in 1992 under the country’s Securities and Exchange Act, and has been maintained for almost a decade after modification easing reporting duty in 2009.
Under the current law, a shareholder must file a report with the financial regulator whether his or her investment purpose is either to influence a company’s strategic decisions and governance or to simply aim for a return on their investment. Such disclosure requirements have been blamed for refraining shareholders from actively exercising their voting rights due to the risk of unintentionally violating disclosure requirements, Kim said.
Because of the 5-percent rule, the individual stock holding records of the National Pension Service, Korea’s largest institutional investor, and its detailed investment portfolios are also made public, making other investors follow suit and limiting active exercise of its voting rights, Kim added.
He also noted that many foreign institutional investors except private equity funds could hesitate to exercise their voting rights as they are, by internal investment policy, principally prohibited from holding stocks for management control purpose.
Kim also said that it is now time to positively review easing the rule citing suggestions that the scope and boundary of shareholder activities that affect management so vague that the intention of a shareholder who is vocal on the company’s dividend policies can be often interpreted as exercising influence on the management.
The policymaker also called for the need to create an environment in which shareholders that have no intention of threatening business management are encouraged to promote moderate and constructive activities that allow both companies and investors a win-win.
By Jin Young-tae and Lee Eun-joo
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