hankyoreh

The sons of South Korea’s major conglomerates, or chaebol, have been involved in a high-stakes money game through the practice of something called “third-party stock issuance,” resulting in damage to many individual investors and prompting financial authorities to take countermeasures designed to keep such irregularities at bay.

Third-party stock issuance refers to the practice of assigning new shares to board members or other executives exclusively designated by the company, rather than offering the shares to existing stakeholders. Compared with ordinary stock issuance, which takes place via a public offering, this is a much easier process. Those who are given the new shares pay for them at a price that is usually lower than that of outstanding shares. If stock prices spike, those holding the stock can make a huge profit by selling it.

Recently, the Financial Supervisory Service rejected a request by Dongil Steel to issue new shares by assigning them to its executives. Dongil Steel’s major shareholders include Koo Bon-ho, a grandson of the late chairman of LG Group, and Cho Hyeon-beom, the second son of the chairman of Hankook Tire.

After Dongil Steel decided on a capital increase on August 27 and a news report showed that Koo and Cho will be involved, its share prices soared from 391,800 won apiece, to over 1.45 million won on October 11.

After reviewing the request for the capital increase from Dongil Steel, the financial watchdog expressed an adverse opinion, and as a result, the company withdrew its demand. This is the first time that the government has vetoed a capital increase in which the family members of the nation’s conglomerates were involved.

A high-ranking FSS official said, “We understand that some people, especially the second and third-generation offspring of certain business heavyweights, use this kind of stock issuance as a way to augment their wealth. We will keep tabs on this kind of action.”

The Dongil Steel case is not the first in which family members of the major conglomerates were found to have been involved in stock issuances. In a stock issuance case involving a KODSAQ company on August 11, the sons and grandsons of the owners of large conglomerates were found to have earned huge profits from their stock transactions. Cho, the second son of the Hankook Tire chairman, was also among them, along with Kim Young-jip, a grandson of the Hankook Chinaware chairman, Na Seong-gyun, a grandson of Neowiz chairman and Jang Seon-woo, a son of Kukdong Oil & Chemicals Group chairman.

The financial watchdog has observed that this kind of money game is distorting the stock market, since stock prices usually fluctuate after it is made known that chaebol family members are involved.

A stock market official said, “We hear more frequently the names of the sons and grandsons of conglomerate owners among the major shareholders of the KOSDAQ companies. Currently, we are keeping a close eye on some of these people to determine whether they are involved in any illegalities.”

Meanwhile, Cho told The Hankyoreh in a telephone interview that he has known Koo Bon-ho for a long time and that he participated in the Dongil Steel capital increase on Koo’s recommendation.

Please direct questions or comments to [englishhani@hani.co.kr]