Financial Services Commission Vice Chairman: "Blocking Unfair Trading Exploiting Convertible Bonds"

Kim So-young, Vice Chairman of the Financial Services Commission, stated on the 20th, "We will block unfair trading abuses involving convertible bonds (CBs) to ensure they can properly function as a means of corporate financing." Vice Chairman Kim made these remarks at the 'Seminar on Enhancing Fairness and Transparency in the Convertible Bond Market' held at the Korea Exchange Conference Hall that day.

CBs are bonds that grant the right to convert into stocks under certain conditions. They offer the advantage of allowing companies to raise funds under favorable terms while providing investors with diverse opportunities.

Vice Chairman Kim pointed out, "There are cases where some exploit the special characteristics of convertible bonds to expand their equity stakes through loopholes and gain unfair profits," adding, "Convertible bonds are becoming a tool for unfair trading."

Regarding issues with convertible bonds, Vice Chairman Kim highlighted concerns about a lack of transparency in the issuance and distribution processes, dilution of general investors' equity due to excessive issuance, and potential market shocks. She also raised the possibility that various conditions attached to convertible bonds, such as call options, could be exploited for unfair trading. She promised to strengthen disclosure obligations related to the issuance and distribution of convertible bonds to provide sufficient information to the market.

She also announced plans to consider measures to prevent reckless issuance and distribution that lead to investor harm, such as re-selling privately placed convertible bonds acquired by issuing companies before maturity. Vice Chairman Kim said, "We will concentrate the investigative capabilities of related agencies including the Financial Services Commission, the Financial Supervisory Service, and the Korea Exchange to respond to unfair trading activities," and added, "We will broadly review various alternatives to enhance fairness in the convertible bond market."

Kim Pil-gyu, Senior Research Fellow at the Korea Capital Market Institute, who presented at the seminar, noted the high potential for convertible bonds to be abused for unfair trading and the risk of dilution of existing shareholders' stakes. He proposed measures such as designating call option exercisers, imposing disclosure obligations when issuing companies acquire convertible bonds before maturity, and strengthening disclosure when issuing secured convertible bonds. During the panel discussion, there was consensus on the problems of the domestic convertible bond market and the need for institutional improvements, with opinions raised that appropriate levels of regulation are necessary since convertible bonds are a major means of corporate financing.