"Retirement of Treasury Shares... Aligns with Direction to Resolve the Korea Discount"

Shinhan Investment Corp. analyzed on the 11th that the Democratic Party's proposed bill to mandate the retirement of treasury shares aligns with the direction of resolving the Korea Discount.

The amendment to the Commercial Act was passed on July 3. However, the cumulative voting system, which is considered the most powerful tool for enhancing shareholder value, was excluded. In response, the Democratic Party’s KOSPI 5000 Special Committee immediately introduced additional measures: mandatory retirement of treasury shares. The committee set a clear direction toward mandatory retirement, with the bill scheduled to be proposed in July and expected to pass the plenary session in September.

Lee Jaewon, a researcher at Shinhan Investment Corp., explained, "Dividends are subject to income tax, but the retirement of treasury shares is a means to enhance shareholder value without taxation. If mandatory retirement becomes a reality, concerns about the potential overhang from existing treasury shares in the Korean stock market will also be alleviated." He added, "Ultimately, making retirement mandatory is positive for both enhancing shareholder value and improving investor sentiment."

He continued, "The valuation of the Korean stock market is currently undervalued compared to major global markets, and the main reason for this undervaluation is the persistent dilution of shareholder value. Since 2002, the compound annual growth rate (CAGR) of the number of KOSPI-listed shares and treasury shares has been 3.7% and 3.2%, respectively, while during the same period, return on equity (ROE) has grown by only 1.2% per year on average."

Lee pointed out, "The purchase and retirement of treasury shares increases ROE, and this process is accompanied by a decrease in the price-to-earnings ratio (PER) and an increase in the price-to-book ratio (PBR). Although there are concerns about overhang risk from the disposal of treasury shares before the bill takes effect, the possibility of block deals with third parties (leading to reduced effectiveness), and criticism of excessive infringement on management rights, the direction itself is aimed at resolving the Korea Discount."