South Korea is one step away from bringing the country’s stock exchange under state control, a move that could sit uncomfortably with Seoul’s ambition to cast itself as a financial hub.
The National Board of Audit and Inspection in September recommended that it should supervise the accounting and management of Korea Exchange (KRX).
It argued the bourse was a monopoly and complained a long-promised initial public offering had never materialised. Korea Stock Exchange, Korea Futures Exchange and Kosdaq merged to form KRX in 2005.
On Wednesday, the Financial Services Commission, the regulator, told the Financial Times that it agreed with this proposal. It said: “We have passed our view to the ministry of finance, that we concurred with the audit board. Monopolistic revenues exceed 50 per cent of total revenue”.
Under Korean antitrust law, a company is considered a monopoly if its revenues exceed 50 per cent of the total industry.
The finance ministry, which has the last say in any decision, said it was reviewing the two rulings and would issue a final verdict next month.
Britain’s FTSE Group in September promoted Korea to developed country status, a decision analysts reckoned would attract billions of dollars in foreign investment. Total market capitalisation is Won633,000bn ($454bn).
One of the exchange’s executive directors said: “The government move basically means we will come under state control, regarding management, accounting and other business plans...It’s a step back and totally against global standards. Foreign institutional investors could lose confidence in our capital market, worried about government interference.”
The exchange is owned primarily by Korean securities firms, but JPMorgan Securities (Far East), Macquarie Securities, Prudential Investment & Securities and Citigroup Global Markets each have stakes of more than 2.8 per cent.
The audit board began its investigation into the exchange following a scandal involving one of KRX’s affiliates.
The decision over whether the state audit body will administer the exchange will weigh on plans to expand Korea’s interests into smaller stock markets such as Cambodia, Laos, Malaysia and Mongolia.
KRX has also said it is keen to boost trade by getting foreign companies to list in Seoul. Chinese companies have already done so.
In 2006, the audit board launched another case that became a litmus test for foreign investment in Korea, saying the acquisition of Korea Exchange Bank by Lone Star, a US buy-out firm, contained flaws, but cleared the Texan company of any wrongdoing.
Korean markets have suffered heavy falls during the economic crisis. Bellwether manufacturers are suffering and international investors rate Korea as a market from which they can bail out.