The FSC announced its ‘Plan to Stimulate M&As among Securities Companies’ on December 16 in a bid to revitalize capital markets as part of the so-called ‘10-10 Value-up Plan’ previously announced on November 27, 2013.
BACKGROUND
Korea’s securities industry has 62 securities firms, small in size compared to those of the advanced countries, and their business scope is mostly limited to brokerage businesses in domestic market.1 Securities firms have been competitively lowering their brokerage fees to compete over the limited size of the domestic market, consequently hurting their profitability.2 Against this backdrop, the FSC came up with measures to encourage the securities industry’s consolidation through market-led M&As.
MAJOR CONTENTS
1. Incentives for securities firms pursuing M&A
The FSC will offer securities firms incentives for M&As by easing requirements eligible for investment banking (IB) licenses or allowing enter new businesses such as pension fund trusts or PEFs.
① The Minimum equity capital requirements eligible for investment banking licenses will be eased from the current KRW 3 trillion to KRW 2.5 trillion for securities firms making M&As that would increase their equity capital by KRW 500 billion.
② Securities firms making M&As that would raise their equity capital by KRW 100 to 300 billion will be allowed to enter new businesses such as personal pension fund trusts.
③ Securities firms making M&As that would increase their equity capital by KRW 50 to 150 billion will be preferentially granted approval for operating private equity funds.
2. Strengthened supervision for poorly-performing securities firms
Currently, securities firms are either recommended or required to take necessary measures for management improvement in case their net capital ratios (NCR) fall below certain levels.3 However, the NCR is to evaluate securities firms’ capability in case of liquidity risk. It is not enough to encourage securities firms to improve their management in a more timely and proactive manner.
The FSC will revise conditions for prompt corrective actions to include a broader range of criteria such as leverage ratios.
|
Prompt
Corrective Actions |
Criteria for
PCAs |
Corrective
measures |
|
|
Current - NCR <150%; or - Composite
rating 3 or higher; capital adequacy rating 4 or lower |
- Improvement of manpower and
organization management - Curtailment of expenditure - Efficient
management of branches - Disposal of non-performing assets - Restriction on
any practices causing a decrease in
net capital - Increase or
reduction of capital stock - Restriction on advancement
into a new business - Establishment
of special allowance for bad debts |
|
Management
Improvement Recommendation |
To be added - Net losses for
two consecutive years &
leverage ratio≥900%; or - leverage ratio≥1,100% |
|
|
|
Current - NCR <120%; or - Composite
rating 4 or lower |
- Restriction on
the holding of high-risk assets and disposal
of assets - Closure and
consolidation of business offices, or restriction
on opening new offices - Curtailment of organization - Disposal of subsidiaries - Demand for the
replacement of corporate
executives - Suspension of
business in part - Merger or
acquisitions |
|
Management
Improvement Requirement |
To be added - Net losses for
two consecutive years & leverage ratio≥1,100%;
or - leverage ratio≥1,300% |
3. Improve Net Capital Ratio(NCR) rules
The FSC will improve net capital ratio(NCR) rules, one of barriers to M&As. Currently, NCRs of securities firms are calculated on an individual basis; therefore, if a brokerage firm acquires other brokerage firm as a subsidiary, the acquirer’s NCR sharply drop with acquisition investment deducted from its equity capital.
In order to address such a problem, the FSC plans to introduce consolidated accounting standards in calculating NCRs so that brokerage firms’ investments for acquisition could be differentially reflected into a total risk depending on the acquired firm’s risks.
IMPLEMENTATION SCHEDULE
|
Measures |
Implementation
timing (expected) |
|
Incentives for
M&As |
2nd half of 2014 |
|
- easing
requirements eligible for IB licenses |
(A revision bill on the FSCMA will be submitted
for |
|
- allowing
personal pension fund trusts |
parliamentary approval in the first quarter of |
|
- allowing
private equity fund management |
2014) |
|
Revised
criteria for prompt corrective actions |
2nd
half of 2014 |
|
Improved NCR
rules |
2nd
half of 2014 |
*Please read the attached file for details.