Korea to revise dividend policy to ease ‘Korea discount’ concerns

South Korea plans to revise its stock dividend policy as part of a broader financial market reform to help attract foreign investors and obtain MSCI’s developed market status.

The Financial Services Commission (FSC), Korea’s top financial regulator, will unveil a draft of the government’s capital market advancement measures at the Korea Discount Relay Seminar scheduled for Nov. 28.

Under a proposal submitted by a government-commissioned study, the FSC plans to revise Korea’s dividend policy to improve predictability in line with the global standard.

In Korea, unlike other major economies, companies confirm dividend amounts weeks after the ex-dividend date, usually near the end of the year, after which stock buyers don’t receive dividends.

In advanced countries such as the US, Germany, the UK and France, companies determine the size of dividends before closing the year's books and decide which shareholders are entitled to dividend payments.

The FSC said it aims to align its dividend policy with the global standard to remove uncertainty for investors.

“We won’t make the new system compulsory from the start. But it will provide guidance for Korea’s listed companies,” said an FSC official.

The final version will be announced before the end of the year, he said.

LOWER DIVIDEND PAYOUT RATIO

MSCI, one of the world’s leading index providers, has cited Korea’s opaque dividend payment system as one of the reasons for not raising the country to developed market status.

According to market data, Korean firms’ dividend payout ratio, or the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company, stood at 26.7% last year. That compared with the UK’s 56.4%, 41% for the US and China’s 28.4%.

The Korea Capital Market Institute said domestic companies’ dubious shareholder return policy, including the relatively low dividend ratio, is often cited as a Korea discount factor and a key reason for Asia’s fourth-largest economy's absence from MSCI's advanced market index.

The Korea discount refers to a tendency for Korean companies to have lower valuations than global peers due to factors such as low dividend payouts, the dominance of opaque family-run conglomerates known as chaebol and geopolitical risks involving North Korea.

INCLUSION LONG OVERDUE

Since Korea was first categorized as an emerging market in 1992 by MSCI, or Morgan Stanley Capital International, known for its benchmark indexes, MSCI has mentioned the country’s poor market accessibility, largely due to the lack of an offshore currency market, as the most significant reason for its refusal to grant developed market status to the country.

Market accessibility is one of the key criteria alongside economic development, market size and the level of liquidity for MSCI to categorize a country as a developed, emerging or frontier market.

In its recent accessibility review, the global index provider reiterated that the existing four conditions were deemed negative for Korea's upgrade: equal rights to foreign investors; foreign exchange market liberalization level; investor registration and account set-up; and information flow.

The Korean government said it will look into inconveniences that foreign investors face, including registration requirements for foreigners and corporate filings.

Kim So-young, FSC vice chairman, said in September that the regulator will announce a new set of financial reform measures, including corporate filings in English, by year-end.

Other global stock market index providers, such as Dow Jones, S&P and FTSE, have classified the Korean equity market as developed.

Write to Hyung-gyo Seo and Dong-Hun Lee at seogyo@hankyung.com
In-Soo Nam edited this article.