Major Shareholders Cannot Abuse CB... Mandatory Increase of CB Conversion Price When Stock Price Rises

[Asia Economy Reporter Ji Yeon-jin] Starting December 1, the purchase option (call option) limit on convertible bonds (CB) granted to major shareholders will be restricted based on their shareholding ratio at the time of issuance, and the conversion price must be mandatorily adjusted upward if the stock price rises.

The Financial Services Commission announced on the 27th during its regular meeting that it had approved an amendment to the "Regulations on the Issuance and Disclosure of Securities" reflecting these changes.

CBs are bonds that can be converted into stocks, and most of them grant a call option, which is the right for a third party to purchase the CB from the holder at a predetermined price set at the time of issuance. Additionally, when converting CBs into stocks, conversion price adjustments (repricing) are possible, but currently, regulations only apply when the stock price falls, leading to concerns that major shareholders exploit this to expand their holdings. Last year, 41.5% (32 cases) of unfair trade cases approved by the Securities and Futures Commission involved CB-related incidents.

The amendment limits the call option granted to major shareholders and related parties at the time of CB issuance to within their shareholding ratio at issuance and imposes disclosure obligations on CB issuing companies.

Furthermore, in the case of private placement CBs, the conversion price must be mandatorily adjusted upward when the stock price rises after a downward adjustment due to a price drop. However, since strengthening CB issuance regulations may cause difficulties in fundraising for some venture companies, these rules will not apply to public offerings.

A Financial Services Commission official stated, "It is expected that cases where CBs are used for major shareholders' illicit shareholding expansion or various unfair trading practices will be curbed, and the protection of existing shareholders' equity value will be further strengthened," adding, "This will serve as an opportunity to normalize the corporate bond issuance market, including public CB issuance and high-yield bonds."