[Reporter’s Notebook] Malicious Investment Associations Exploit '5% Rule' and 'Lock-Up' Loopholes as Authorities Stand By

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] The stock price of Edison EV, an affiliate of Edison Motors which is pursuing the acquisition of Ssangyong Motor, plummeted. It was revealed that the shareholding ratio of investment associations that bought the existing largest shareholder’s stake in Edison EV last May drastically shrank. There is fierce controversy that they effectively ‘ran away with the money’ by selling stocks when the stock price soared due to the positive news of the Ssangyong Motor acquisition.

There was no illegality. Although the investment associations collectively exceeded the largest shareholder in total size, they were not considered the largest shareholder because the shares were divided among them, thus escaping the lock-up regulation. They could sell stocks anytime and simply sold them when the stock price surged.

The damage from the stock price crash fell entirely on individual investors. If the shareholding ratio in a listed company is below 5%, there is no disclosure obligation. This means individual investors had no way of knowing that the investment associations had sold their shares.

The investment associations exploit the loopholes in the large shareholding reporting obligation (5% rule) and the 6-month to 1-year lock-up period to deceive individual investors. They boost the stock price through various strategies such as positive disclosures, then sell the stocks and pocket the profits. Individual investors who learn belatedly about the dissolution of the associations are left only with losses.

Financial authorities are just standing by. The Korea Exchange passes the responsibility for improving the shareholding disclosure system to the Financial Supervisory Service, playing ‘ping-pong’. The investment associations only issue a general statement that the investment entities are unclear and that they are under close watch for unfair trading activities.

The Financial Supervisory Service maintains that nothing can be done under the current system. Since last month, it has only shown attempts to raise fines for violations of the 5% rule to avoid criticism of lenient sanctions. It passes the responsibility for strengthening lock-up regulations to the Korea Exchange, playing ‘ping-pong’.

Transparency must be enhanced before individual investors, who are in an information blind spot, leave the stock market. Minimum measures are needed to prevent investment associations from ruthlessly roaming the market (strengthening lock-up regulations, improving the disclosure system for changes in major shareholder stakes).