On January 19, 2023, the Financial Services Commission (“FSC”) issued a press release on regulatory improvement measures, including the elimination of the foreign investor registration requirement, to promote foreign investments in Korea (Link). The press release outlined key regulatory changes concerning foreign investments as described below. These capital market improvement measures will change the 30-year-old requirement for foreigners’ investments in listed securities that had been in place since its implementation in 1992, and are significant because they incorporate regulatory reforms highlighted by Morgan Stanley Capital International (“MSCI”) through its “Global Market Accessibility Review (June 2022),” as necessary to mainstream Korea into the indices of advanced countries.
1. Abolition of the Foreign Investor Registration Requirement
The current laws and regulations require a foreign investor to register with the Financial Supervisory Service (“FSS”) in order to invest in securities listed on the Korea stock market. This requirement has caused inconvenience to foreign investors by requiring them to submit a number of notarized and translated documents, including the investment registration application form, identification documents, and the standing agent agreement.
The proposed regulatory changes intend to eliminate the existing foreign investor registration requirement, and allow foreign investors to invest in listed Korean securities by using their legal entity identifiers (“LEIs,” standardized ID assigned to corporate entities) or passport numbers (in case of individuals) without having to go through a pre-registration process. For foreigners who have already been registered as foreign investors, they will be allowed to use the “investment registration numbers,” issued to them at the time of registration.
2. Relaxation of OTC Trading by Foreigners
Under the current laws and regulations foreign investor may trade listed securities on the Korea Exchange (“KRX”) only, and are in practice restricted from most over-the-counter (“OTC”) transactions; OTC transactions are limited in practice because foreign investors must undergo preliminary examination and approval by the financial supervisory authorities for OTC transactions, except for specific types of transactions that can be reported on an ex-post basis (e.g., foreign direct investment, exercise of the appraisal right of dissenting shareholders, inheritance/gift, exercise of the rights associated with CBs/BWs, repurchase agreement, etc.).
The proposed regulatory changes will further expand the scope of OTC transactions eligible for ex-post reporting. Accordingly, for OTC transactions currently subject to preliminary examination and approval by the financial supervisory authorities, those that are considered to have low need for review, high in demand from market participants will be eligible for ex-post reporting, and thus be exempt from the requirement of preliminary examination and approval. Examples of such OTC transactions include those involving no change of beneficial owners (e.g., fund merger, transfer between master and feeder funds, transfer between an asset management company and a fund under its management, transfer of a fund within the same asset management company, etc.), M&A/corporate restructuring, and in-kind dividends. In addition, among the types of OTC transactions currently subject to ex-post reporting, the authorities will select those that have low need for a documentary review (e.g., foreign direct investment, repurchase agreement, etc.), and allow them to be directly entered into the Foreign Investment Management System (FIMS) to alleviate reporting burdens.
3. Elimination of the Investment Reporting Requirement to Facilitate the Use of Omnibus Accounts by Foreign Investors
When foreigners invest in KRX-listed securities through an omnibus account opened by a foreign securities company, etc., each end-investor is obligated to report the details of stock trading immediately (T+2) at the time of settlement. Due to this burden of immediate reporting, the omnibus account system for foreign investors has not been used since its launch in 2017.
The proposed regulatory changes intend to abolish the investment reporting requirement whereby each end-investor investing in KRX-listed securities through an omnibus account is required to report the transaction details. With the elimination of this requirement, a securities company or asset management firm, under whose name the omnibus account is opened, will be required to verify end-investors, and the securities company that has offered the omnibus account will have to manage investment records in detail.
4. Phased Implementation of the English Disclosure Requirement
Under the proposed regulatory changes, public disclosures in English will be mandated in phases. During Phase one, scheduled to begin in 2024, KOSPI-listed companies with (i) total assets of KRW 10 trillion or more (except those with the foreign ownership of less than 5%), or (ii) foreign ownership of at least 30% and total assets of between KRW 2 and 10 trillion, will be required to publicly disclose the following disclosures required by the KRX in English as well, within three business days from the date of Korean disclosures: (a) matters related to closing financial statements, (b) common statutory disclosure items, and (c) matters pertaining to suspension of trading.
During Phase two, scheduled to begin in 2026, all KOPSI-listed companies with total assets of KRW 2 trillion or more will be required to make English disclosures, and the scope of disclosure items will be expanded. In addition, during Phase two, English disclosures will be required to be made simultaneously with the corresponding Korean disclosures. The authorities will finalize the plan for mandatory English disclosures after reviewing the implementation results of mandatory English disclosures from Phase one.
According to the FSC, the proposed regulatory changes concerning foreign investments (Sections one through three above) will amend the Enforcement Decree of the Financial Investment Services and Capital Markets Act, as well as the Regulations on Financial Investment Business, to come into effect by the end of this year after developing an IT system. For the phased implementation of the English disclosure requirement (Section four), the authorities plans to amend the KRX’s disclosure regulations in the first quarter of this year in order to require mandatory compliance with the English disclosure requirement in Phase one. After reviewing the implementation results of mandatory English disclosures in Phase one, the authorities will finalize and push ahead with the plan for implementing the English disclosure requirement in Phase two.
These regulatory changes are expected to significantly streamline the regulations on foreigners’ investments in KRX-listed securities, and allow a much more flexible transaction structure to foreign investors’ investments in the control shares and minority shares in listed companies, as well as to transactions selling a portion of shares after such investments. Please be also advised that the planned introduction and expansion of the English disclosure requirement may lead to issues of improper disclosures depending on the consistency between Korean and English disclosures, and therefore large-scale listed companies should prepare well in advance for such potential issues.
