[Asia Economy Reporter Lee Jung-yoon] Regulations on repricing and call options will be applied to redeemable convertible preferred stocks (RCPS) and convertible preferred stocks (CPS) to prevent their misuse in unfair trading, such as being exploited for the controlling shareholder's illicit expansion of equity, similar to the case with convertible bonds (CBs).
The Financial Services Commission (FSC) announced on the 7th that it plans to issue a preliminary amendment notice this month and revise the "Regulations on the Issuance and Disclosure of Securities" within the year to include these provisions. Convertible preferred stocks refer to preferred stocks granted the right to be converted into other types of shares. Redeemable convertible preferred stocks are a form of preferred stocks that combine redeemable preferred stocks with the right for the company to redeem or for shareholders to request redemption from the company.
When a listed company privately issues redeemable convertible preferred stocks or convertible preferred stocks, it will be mandatory to adjust the conversion price upward if the stock price rises. After adjusting the conversion price downward due to a stock price decline, if the stock price subsequently rises, upward adjustment of the conversion price will be mandatory, and the adjustment range will be limited to within the initial conversion price.
Additionally, limits on call option exercises will be imposed, and disclosure obligations will be required. The exercise limit of call options for controlling shareholders and related parties will be restricted to the shareholding ratio at the time of issuing redeemable convertible preferred stocks and convertible preferred stocks. Disclosure obligations will be imposed on the issuing company when a third party exercises call options or when a listed company sells its own redeemable convertible preferred stocks or convertible preferred stocks to a third party.
Previously, in October last year, the FSC amended the regulations on the issuance and disclosure of securities to prevent cases where CBs were exploited for the controlling shareholder's illicit expansion of equity and other unfair trading practices. From an accounting perspective, supervisory guidelines on the accounting treatment of CB call options were also established to enhance transparency in the CB market.
The FSC reviewed the issuance trends in the CB market and prepared additional institutional improvement measures. It also considered concerns raised during the improvement process about the possibility that strengthening regulations on repricing could excessively restrict corporate financing.
The FSC judged that, so far, the implementation of the amended regulations has not significantly restricted corporate financing through the CB market.
However, concerns remain regarding regulatory fairness issues and potential balloon effects with other mezzanine securities that allow repricing and call options, such as redeemable convertible preferred stocks and convertible preferred stocks. Although these were excluded from the previous institutional improvements considering that they are mainly issued by unlisted companies, since listed companies continue to issue redeemable convertible preferred stocks and convertible preferred stocks with repricing and call option conditions, the FSC deemed it necessary to prepare countermeasures.
The FSC stated, "Given the current situation where the overall financial difficulties of small and medium-sized enterprises are expected to expand due to the base interest rate hike and ongoing instability in raw material supply, we will continue to closely monitor trends in the CB market and seek additional institutional improvement measures."
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