Disclosure Requirements – South Korea – Equities and corporate bonds
Disclosure Category: 3
Investors holding Korean securities are required to report if they exceed the set thresholds and/or have short-sale positions.
Consent
To align with relevant laws, clients involved in transactions in South Korea’s domestic market, agree and are considered to have agreed to, and to comply with, disclosure requirements in South Korea directly applicable to Clearstream Banking’s clients, shareholders and beneficial owners.
Disclosure requirements
Clients are advised that, under local regulations, the Financial Services Commission (the “FSC”), the Korea Exchange (the “KRX”) and the issuer are entitled to require the investor holding 5% or more in a security issued by a KRX-listed company (this includes KRX-listed Korean banks and KRX-listed Korean bank holding companies) to report such holdings as well as changes of 1% or more of said holdings.
Furthermore, under local regulations, an investor with a short-sale position, that is equal to or over the threshold of 0.01% of the outstanding listed shares and/or with a value of KRW 1 billion (regardless of the short-sale position ratio) is also required to report to the KRX.
Finally, under local regulations, the FSC is also entitled to require the investor holding more than 4% in a security issued by a Korean bank (KRX-listed or non-listed) to report such shareholding status within 10 business days from the settlement date. Similarly for the investor holding more than 4% in a security issued by a Korean bank holding company (KRX-listed or non-listed) either by the last day of the following month of said change or by the tenth day of the following month of said change.
Background and legal basis
The Financial Investment Services and Capital Markets Act (6 April 2021) and the Enforcement Decree (10 May 2021) of the Financial Investment Services and Capital Markets Act states the requirements for disclosure to the Financial Services Commission (the “FSC”), the Korea Exchange (the “KRX”) and the issuer. Whilst the Banking Act (30 December 2021), Enforcement Decree (9 May 2022) of the Banking Act and Financial Holding Companies Act (30 December 2021) state the requirements for disclosure of shareholding status in Korean banks (KRX-listed and non-listed) and Korean bank holding companies (KRX-listed and non-listed) to the FSC.
Obligation to report threshold crossings
Article 147 of the Financial Investment Services and Capital Markets Act requires that an investor holding 5% or more in a security issued by a KRX-listed company (this includes KRX-listed Korean banks and KRX-listed Korean bank holding companies) to report such holdings to the FSC and KRX within five business days from the trade date. Additionally, in the case of a simple portfolio investment (whereby the shareholding purpose is of "no intention of exercising influence over the management") the investor shall also declare its purpose of shareholding by way of a letter of confirmation. Thereafter, if there is a change of 1% or more for a general investment, a subsequent report shall be submitted to the FSC and KRX within ten business days from the trade date. However, if this change of 1% or more is part of a simple portfolio investment then the disclosure report shall be submitted to the FSC and KRX by the 10th calendar day of the following month. In case of change of 1% or more, for shareholdings with intention of exercising influence over the management, a subsequent report shall be submitted to the FSC and KRX within five business days from the trade date.
Such reports shall include the following information for each type of shareholding purpose:
Simple portfolio investment (shareholding with no intention of exercising influence over the management):
- Holding status;
- Purpose of Holding;
- Information concerning the substantial shareholder and his/her related persons;
- Information concerning the issuer and the date, price, and method of acquisition or disposal; and
- A commitment that the person will not engage in any conduct to exercise any other rights other than the right entitled by the law.
General investment (shareholding with no intention of exercising influence over the management):
- Holding status;
- Purpose of Holding;
- Information concerning the substantial shareholder and the related persons;
- Information concerning the issuer and the date, price, and method of acquisition or disposal;
- Details of source of funds necessary for acquisition; and
- Terms and conditions and/or contract related to the holding stocks.
Shareholding with intention of exercising influence over the management:
- Matters concerning the person and his/her related persons;
- Matters concerning the issuer;
- Grounds for such change;
- The date, price, and method of acquisition or disposal;
- The form of holding; and
- Details of procurement of funds necessary for acquisition or the goods subject to the exchange etc.
These reports are to be submitted to the Financial Supervisory Service (the “FSS”) via the website page or using the appropriate form from the FSS.
As per Article 148 of the Financial Investment Services and Capital Markets Act, a copy of the report shall also be provided to the issuer.
Once the holdings reach 10%, the investor, as per Article 9 (1) of the Financial Investment Services and Capital Markets Act, is considered a major shareholder and as per Article 173 of the Act, shall file a report to the FSC and KRX within five business days from the settlement date. All subsequent acquisitions and disposals of any size shall also be reported to the FSC and KRX within five days from the settlement date. This is in addition to the reporting required, as per Article 147 of the Financial Investment Services and Capital Markets Act, whereby a holding of 5% or more in a security issued by a KRX-listed company (this includes KRX-listed Korean banks and KRX-listed Korean bank holding companies) shall be reported.
Such reports shall include the following information:
- The background of the person or group;
- The source of funds used and the purpose of the acquisition;
- The number of shares owned; and
- Any relevant contracts, arrangements or understandings.
These reports are to be submitted to the Financial Supervisory Service (the “FSS”) via the website page or using the appropriate form from the FSS.
As per Article 148 of the same Act, a copy of the report shall also be provided to the issuer.
Sanctions
When an investor fails to comply with the disclosure requirements related to the 5% threshold (including, but not limited to, late disclosure, misrepresentation or omission of material facts), then:
- According to Article 150 of the Financial Investment Services and Capital Markets Act, such a person shall be restricted from exercising their voting rights with respect to the ownership of equity securities exceeding 5% and/or the FSC may issue an order to sell or dispose of those shares within six months; or
According to Article 151 of the Financial Investment Services and Capital Markets Act, the FSC may issue an administrative order to:
- Provide relevant information for their investigation; or
- Submit a corrected report; or
- Suspend trading activities or the shareholder; or
- Recommend the dismissal of officers; or
- Refer the matter to the prosecutor’s office; or
- Issue a warning letter or letter of caution.
Under Article 445 of the Financial Investment Services and Capital Markets Act, when the case related to the 5% threshold is referred to the prosecutor’s office and:
- The violation is a case where the investor fails to submit the 5% disclosure report within the deadline, then the investor shall face a penalty or sanction of up to maximum three years of imprisonment or a fine of up to maximum KRW 100 million; or
Under Article 444 of the Financial Investment Services and Capital Markets Act, when the case related to the 5% threshold is referred to the prosecutor’s office and:
- The violation is a case where the investor submits the disclosure report on time, but provides false details or neglects to report important facts, then the investor shall face a penalty or sanction of up to maximum five years of imprisonment or a fine of up to maximum KRW 200 million.
When an investor fails to comply with the disclosure requirements related to the 10% threshold (including, but not limited to, late disclosure, misrepresentation or omission of material facts) then according to Article 446 of the Financial Investment Services and Capital Markets Act, such person shall face a penalty or sanction of up to maximum one year of imprisonment or a fine of up to maximum KRW 30 million and/or the FSC may issue an order for corrective action, censure, and/or referral to the law enforcement authorities for criminal prosecution.
Under Article 445 of the Financial Investment Services and Capital Markets Act, when the case related to the 10% threshold is referred to the Securities and Futures Commission and the investor fails to comply with the investigation, then such person shall face a penalty or sanction of up to maximum three years of imprisonment or a fine of up to maximum KRW 100 million.
Obligation to report short-sale positions
Under Articles 180-2 of the Financial Investment Services and Capital Markets Act and 208-2 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act and with regards to shares listed on the KRX, an investor with a short-sale position, that is equal to or over the threshold of 0.01% of the outstanding listed shares, shall report the following information to the KRX, via FSS:
- Details of the stock;
- Details of the seller – name, address, nationality, date of birth, and IRC number (if the seller is a foreign investor);
- Details of the proxy agent (if the disclosure is made by a proxy agent); and
- Date when the short-sale position became applicable for disclosure.
An investor with a short-sale position with a value over KRW 1 billion shall also be required to report the information above, regardless of the short-sale position ratio. Where the value of the short-sale position is less than KRW 100 million, the short-sale position reporting shall be waived, regardless of the short-sale position ratio.
The report shall be made immediately after the market closes, on the second business day from the day that the short-selling position exceeds the threshold.
Investors should also keep the data of the reporting for up to five years and be ready to provide the data to the FSC, as and when requested.
According to Articles 180-3 of the Financial Investment Services and Capital Markets Act and 208-3 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act, when the threshold of the short-sale position is equal to or over 0.5% of the outstanding listed shares, the details of the seller that are reported by the investor shall be published on the KRX website.
Sanctions
According to Article 449 of the Financial Investment Services and Capital Markets Act, an investor who fails to comply with the disclosure requirements related to short-sale positions (including, but not limited to, late and/or false disclosure) shall be penalised with a fine for negligence not exceeding KRW 100 million.
Under Article 445 of the Financial Investment Services and Capital Markets Act, when the case related to the short-sale position is referred to the Securities and Futures Commission and the investor fails to comply with the investigation, then such person shall face a penalty or sanction of up to maximum three years of imprisonment or a fine of up to maximum KRW 100 million.
Obligation to report shareholding status on Korean banks1
Article 15 (2) of the Banking Act requires the investor holding more than 4% in a security issued by a Korean bank (KRX-listed or non-listed) to report such shareholding status to the FSC within 10 business days from the settlement date. Thereafter, if there is a change of 1% or more, a subsequent report shall be submitted to the FSC within 10 business days from the settlement date.
Article 15 (2) of the Banking Act also requires the investor holding more than 4% in a security issued by a Korean bank (KRX-listed or non-listed) to report the shareholding status to the FSC within 10 business days from the settlement date when the investor:
- becomes the largest shareholder in the Korean bank; or
- is part of a private equity fund and obtains the holding of more than 4% as a result of changes in partners in the fund; or
- is part of a special purpose company and obtains the holding of more than 4% as a result of changes in shareholders or partners in the company.
Thereafter, if there is a change of 1% or more, a subsequent report shall be submitted to the FSC within 10 business days from the settlement date.
Such reports shall include the following information:
- Matters concerning the same person;
- Matters related to the following items in cases of a private equity fund, etc.
- Stockholders or partners;
- The amount of investments by limited partners or general partners of a private equity fund;
- Matters concerning the status of stockholding and change, and reasons therefor;
- Matters on the purpose of stock holdings and the involvement in the management of a bank holding company, etc.; and
- Other details necessary to verify changes in stockholding status and stock holding ratio, as determined and publicly announced by the Financial Services Commission.
Note: Per the FSS, the investor who is looking to acquire more than 4% shareholding of a Korean bank (KRX-listed or non-listed) should inform the FSS in advance and discuss on how the report is to be submitted or presented.
Sanctions
According to Article 69 of the Banking Act, an investor who fails to comply with the disclosure requirements related to shareholding status on Korean banks (including, but not limited to, late disclosure, misrepresentation or omission of material facts), shall face a fine of up to maximum KRW 100 million.
Obligation to report shareholding status on Korean bank holding companies
Article 8 (2) of the Financial Holding Companies Act requires the investor holding more than 4% in a security issued by a Korean bank holding company (KRX-listed or non-listed) to report the shareholding status to the FSC by the last day of the following month of said change. Thereafter, if there is a change of 1% or more, a subsequent report shall be submitted to the FSC by the last day of the following month of said change.
Article 8 (2) of the Financial Holding Companies Act also requires the investor holding more than 4% in a security issued by a Korean bank holding company to report the shareholding status to the FSC by the tenth day of the following month of said change when the investor:
- becomes the largest shareholder in the Korean bank holding company; or
- is part of a private equity fund and obtains the holding of more than 4% as a result of changes in partners in the fund; or
- is part of a special purpose company and obtains the holding of more than 4% as a result of changes in shareholders or partners in the company
Thereafter, if there is a change of 1% or more, a subsequent report shall be submitted to the FSC by the last day of the following month of said change.
Such reports shall include the following information:
- Matters concerning the same person;
- Matters related to the following items in cases of a private equity fund, etc.
- Stockholders or partners;
- The amount of investments by limited partners or general partners of a private equity fund;
- Matters concerning the status of stockholding and change, and reasons therefor;
- Matters on the purpose of stock holdings and the involvement in the management of bank holding companies, etc.; and
- Other details necessary to verify changes in stockholding status and stock holding ratio, as determined and publicly announced by the FSC.
Note: Per the FSS, the investor who is looking to acquire more than 4% shareholding of a Korean bank holding company (KRX-listed or non-listed) should inform the FSS in advance and discuss on how the report is to be submitted or presented.
Sanctions
According to Article 72 of the Financial Holding Companies Act, an investor who fails to comply with the disclosure requirements related to shareholding status on bank holding companies (including, but not limited to, late disclosure, misrepresentation or omission of material facts) shall face a fine of up to maximum KRW 100 million.
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1. Article 2 of the Banking Act defines a Korean bank as "all corporations, other than the Bank of Korea, which regularly and systematically manage banking business” and Article 2 (10a) of the same Act defines a local bank as “a bank which does not operate nationwide”.