A ban on cross-shareholding among subsidiaries of large companies in South Korea is necessary in preventing management rights transfer to family members and their inheritance tax evasion, market watchers said Monday.
The large family-run conglomerates, or chaebol, are known to employ tactics like cross-shareholding to increase the number of the group's affiliates and gain control over them with small stakes.
The tactics include what is called a circular-shareholding method, in which subsidiaries of a group may own each other's shares, thereby increasing capital for the group.
In a hypothetical example, Unit A with 10 billion won of capital can acquire 5 billion won worth of shares in Unit B which buys a 3 billion won stake in Unit C. Unit C would then purchase a smaller share in Unit A.
Through this circular method, Unit A comes out as a heavy shareholder in B and C, increasing its capital on its balance sheet to 11 billion won.
"Cross-shareholding could be abused to help the conglomerate owners share their fortune with their families and evade huge amounts of inheritance tax in the process and provide help to their financially distressed subsidiaries," said Kim Sang-jo, an economics professor at Hansung University.
"(The National Assembly) should first pass a bill to ban the conglomerates from new cross-shareholding and then the whole system should be abolished."
The cross-shareholding system has long been accused of being an expedient means that helped chaebol owners transfer their management rights to their family members.
Under the system, one subsidiary's financial trouble often has an adverse impact on other subsidiaries, making them vulnerable to hostile takeovers. It has also been cited as a major factor in the undervaluation of South Korean companies due to their opaque governance.
Another market watcher said cross-shareholding should be banned to stop the conglomerates from transferring their management rights to their family members.
Park Sang-in, a professor of the Seoul National University, said, "A ban on cross-shareholding is needed to prevent the family-run conglomerates' hereditary management right transfers."
The Park Geun-hye government, which was launched in mid-February, pledged to impose a ban on new cross-shareholdings among the conglomerates' subsidiaries, but the bill failed to be passed during the June parliamentary session.
According to the data by Chaebul.com, which tracks the country's conglomerates, the number of local conglomerates that have the cross-shareholding structures among their subsidiaries reached 12 as of end-June.
All stakes held by 76 subsidiaries affiliated with the 12 conglomerates via the circular-shareholding were worth about 86.8 trillion won (US$79.8 billion). The figure was tallied on the basis of the closing prices of listed-companies' shares on Aug. 30 and the book value of non-listed companies' shares.
Nine companies under the country's top conglomerate, Samsung Group, were financially linked through cross-shareholding, with the stakes held by the companies estimated at 39.5 trillion won.
"Nearly 90 trillion won is virtually tied up in the cross-shareholding stakes of subsidiaries under the 12 conglomerates," said Jeong Sun-seop, the head of chaebol tracking website.
Last year, the Economic Research Reform Institute, a private economic think tank, led by Kim Sang-jo, predicted that about 9.5 trillion won is needed to break the cross-shareholding structure of 15 conglomerates.
However, the local business circle claims that if the cross-shareholding is forbidden, the local companies are easily exposed to hostile takeovers by foreign companies and their investment could further shrink.