Korea to allow investors to sell stocks at pre-split-off values

South Korea is set to allow individual shareholders to sell their stocks at prices before a split-off if they oppose a company’s separation plan while toughening rules on major stockholders’ disclosure of changes in their stakes in a move to protect retail investors.

The Cabinet on Tuesday approved a revision of the Capital Markets Act to introduce buyback requests by individual investors, who object to a company’s split-off plan, and strengthen rules on disclosures of the separation and reviews for a listing of the split-off unit, according to the Financial Services Commission (FSC). The amendment will take effect immediately after the announcement this year.

The revision was a follow-up step after the government in September unveiled measures to protect individual shareholders from corporate split-offs.

Regulators have warned against the listed companies' practice of carving out a profitable business into a new entity and taking the separated unit public, which would undermine shareholders' value in the parent company.

TOUGHEN RULES ON DISCLOSURES OF LARGE SHAREHOLDERS

The Cabinet passed another amendment to the Capital Markets Act to strengthen the disclosure obligation of major shareholders.

An investor with a stake of 5% or more in a listed company is required to report if he/she raises or cuts the stake by 1% or more within five days. The disclosure is one of the most important to other investors, but a violation of the rule has resulted in a fine of 350,000 won ($272) on average.

The FSC raised the cap of the fine for violations of the rule by 10 times to a 10,000th of a company’s market capitalization from the current 1 millionth.

“The revision is expected to allow the authorities to impose effective sanctions as the fine will be increased to some 15 million won on average,” an official from the financial regulator.

The amendment required companies to announce plans of convertible bonds or bonds with warrants at least a week before investors make payments to buy them.

It also made it mandatory for newly listed companies to file reports on the latest quarterly and semiannual performances before going public. In addition, the fines for smaller listed companies were increased to at least 1 billion won if they violate disclosure rules.

The FSC plans to submit the revision to lawmakers for approval later this month. It will take effect six months after the announcement once the National Assembly passes it.

Write to Hyeong-Gyo Seo at seogyo@hankyung.com
Jongwoo Cheon edited this article.