The Financial Services Commission (the “FSC”) stated in its report dated January 30, 2023, that it would step up its measures against unfair trade practices abusing the features of convertible bonds. Accordingly, on July 20, 2023, the FSC held the “Seminar on the Improvement of Fairness and Transparency in the Convertible Bonds Market” and discussed and announced ways to improve fairness and transparency in the market.
The regulations on the issuance of convertible bonds and redeemable convertible preferred shares by listed companies have persistently been strengthened, mainly to secure fairness regarding the issue price and to restrict the issuance of convertible preferred shares by large shareholders intending to strengthen their management control, by way of call options, etc. In December 2021, the issuance of convertible bonds by listed companies became subject to certain limitations on the exercise of call options by the largest shareholder, and the conversion price of privately placed convertible bonds with refixing conditions was required to be raised in case of an increase in stock price (Link). In addition, the relevant authority introduced similar regulations on the issuance of redeemable convertible preferred shares which are analogous to convertible bonds in economic substance, by announcing them in September 2022 and amending the relevant regulations in May 2023 (Link).
During the seminar, So-Young Kim, Vice Chairman of the FSC, pointed out in his opening speech that convertible bonds have served as a major financing means for companies, but that they still have the following three problems:
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(1) |
Lack of transparency in the process of issuance and distribution of convertible bonds; |
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(2) |
Equity dilution by general investors and impact on market due to excessive issuance of convertible bonds; and |
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(3) |
The possibility that various conditions attached to convertible bonds, such as call options and refixing, may be abused for unfair trading. |
Mentioning how the existing regulations to address such problems have been tightened, he stated that the FSC would consider the following additional regulatory measures in the future:
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(1) |
Strengthen disclosure obligations to ensure transparent disclosure of information that may have a significant impact on corporate governance and equity value, such as convertible bond conversion rights and call options; |
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(2) |
Review measures to address problems arising from excessive accumulation of convertible bonds in the market, such as the case where the issuer resells the privately placed convertible bonds it acquired before the maturity date; and |
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(3) |
For the FSC, the Financial Supervisory Service, the Korea Exchange and other relevant authorities to respond thoroughly to cases of abuse of convertible bonds for unfair trades by focusing their investigation capabilities, and to impose strict sanctions on such cases. |
Following the opening speech, Pil-Gyu Kim, a senior researcher from the Korea Capital Market Institute, who was in charge of delivering a presentation at the seminar, compared and analyzed the Korean and foreign convertible bond markets under the theme of “Improving Fairness of the Convertible Bond Market” and mentioned various ways to improve the system that can be reviewed. In particular, the following methods were discussed: (i) the ways to enhance transparency in the convertible bond market (e.g., designation of the exercising party of call option, imposition of the duty of public disclosure upon the issuer’s acquisition of convertible bonds prior to maturity, strengthening of public disclosure upon the issuance of convertible bonds under collateral agreement, etc.), and (ii) direct regulatory measures (e.g., restriction on conversion rights upon the resale of the convertible bonds obtained prior to maturity, imposition of the obligation to conduct external valuation by multiple evaluators upon payment in kind in lieu of cash, restriction on excessive downward adjustment of conversion price, etc.).
The FSC further announced that it would collect opinions from various stakeholders and come up with measures to enhance fairness and transparency in the convertible bond market, based on the results of the discussion at the seminar. As such, there may be significant changes forthcoming in trade practices, with respect to the issuance of convertible bonds by listed companies, their acquisition and resale prior to maturity, the provision of collateral, the determination of refixing conditions, and the granting of call options to large shareholders, etc.
