December 16, 2012 3:10 am

South Korean election funds a big draw

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South Korea's ruling Saenuri Party's presidential candidate Park Geun-Hye©Reuters

Park Geunhye, ruling party candidate, dances with her cheerleaders during the campaign in Seoul last week

South Koreans are flocking to so-called “election funds” run by politicians as politicians try to raise cash from retail investors to finance their political campaigns.

Korean politicians have come up with this unconventional way of funding their costly campaigns by offering annual interest rates of 3-6 per cent to investors.

This is particularly attractive to politicians as they face strict regulations about receiving contributions from individual sponsors, while companies are also forbidden from making political donations.

The country’s main presidential candidates have raised political funds from retail investors ahead of the December 19 presidential election. In April, many politicians also resorted to retail funding for parliamentary elections.

In October, Moon Jae-in, the candidate for the opposition Democratic United party, hit his fundraising target of Won20bn ($18m) in less than three days as some 34,800 people offered to join his fund with half of them investing small amounts of less than $100. His fund was so popular among his supporters that his website crashed temporarily, unable to cope with the flood of investments.

His rival Park Geun-hye, the presidential candidate from the ruling New Frontier party, also raised Won25bn within 52 hours as about 11,800 people invested in her fund. Independent frontrunner Ahn Cheol-soo raised about Won15bn through his fund, about half of his target of Won28bn, before dropping out of the race in late November. Mr Ahn is in the process of giving back the funds to his investors with the promised return.

“These funds offer short-term interest gains to investors that are higher than banks’ deposit rates,” says Chang In-whan, who runs KTB Asset Management.

The country’s benchmark interest rate stands at 2.75 per cent while the average return on domestic equity and fixed-income funds are 4.8 per cent and 4.7 per cent respectively as of the end of November, according to market research firm FnGuide.

It is an attractive way of raising funds for politicians because they can pay back their investors with state reimbursements after the election.

Under the country’s election laws, each presidential candidate can spend up to Won55.9bn on their campaigns while they are allowed to receive contributions from their patrons of up to 5 per cent of the total sum.

So they have to finance the rest of it with subsidies from their political party and their own money or have to create ways to raise funds legally

But Ock Jin-joo, a manager at Han Bank’s private banking team, notes that those investing in political funds are keen to express their political support for a certain candidate rather than making capital gains. “These funds are more like personal borrowings rather than traditional financial instruments, because they are spent for political campaigns, not invested in capital markets,” he says.

The growing popularity of these political funds has, however, sparked some controversy about the absence of legal guidelines to protect retail investors. Politicians usually use the funds for about three months for campaign activities with investors getting back their principal plus a fixed interest rate at a promised date after the election.

The election funds do, however, carry risks for investors as some candidates have trouble paying them back, as they have to return the investments with their personal money if they fail to win more than 15 per cent of the votes in the election.

The state reimburses the entire campaign costs for the candidates only if they win more than 15 per cent of the total votes in the election.

“This is still a type of public fund because they raise funds from the general public, so there should be some legal framework to protect investors,” says Mr Chang at KTB.

“Otherwise, it will definitely raise a question of regulatory responsibility.”

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