Broadening market access
: Korea has to minimize adverse impact of new rules to draw more foreign investors
South Korean financial authorities have announced a set of changes aimed at attracting more foreign investors by removing outdated restrictions and making the local market more accessible. If successful, the country would be able to move closer to join the top grade of global market indices.
Whether the new revisions will indeed draw more foreign investors, however, depends on a mix of other related reform measures on a broader scale.
The Financial Services Commission said Tuesday it will revise the regulation and procedures to end the foreign investors registration system; to make English-language disclosures mandatory for some Kospi-listed firms; and to modify reporting systems for stock trading by foreign investors to improve convenience.
These deregulatory measures came as the country has struggled to be recognized as a developed market on the global stage. In July 2021, the UN Conference on Trade and Development reclassified Korea as a developed economy, marking the first time that the UN agency has upgraded a member state's status since its establishment in 1964.
But the upgrade did little to court foreign investors to Korea's financial market as they fretted about backward regulatory systems and accessibility problems including the lack of English-language information.
Since 2008, the Korean government has pushed for an upgrade from the current "emerging" status to "developed" status from Morgan Stanley Capital International -- only to fail on each try. As recently as in June last year, the Korean stock market failed to get a spot on the watch list of the MSCI for developed market status.
For Korean policymakers, it was a painful reality check for the country that had once tried in vain to become a financial hub in Asia -- an apparently too ambitious goal considering a complex web of regulatory hurdles for foreign investors, not to mention a critical language barrier.
Against this backdrop, the removal of the foreign investor registration system, which the FSC aims to complete this year, is a significant step forward. The registration system, established in 1992 to better monitor foreign investments, requires foreign investors to register in advance with the Financial Supervisory Service. It is a cumbersome process that requires foreign investors to visit the FSC and file documents in Korean to obtain an Investment Registration Certificate.
The procedure is an easy tool for financial authorities to track trading records of foreign investors and manage the foreign stake ceiling on individual stocks. Even though the ceiling for listed firms was lifted in 1998, the system has remained unchanged. It is now regarded as excessive given that other developed markets such as the US, Japan and Germany do not have such strict registration systems.
Once the system is abolished, foreign investors will be allowed to invest in stocks listed on local bourses as long as individuals verify their accounts with their passport number and corporations with their legal entity identifier.
The FSC said it will be able to maintain the same monitoring level as the current registration system even after it is abolished, as the financial watchdog will use the Korea Exchange's real-time data to track key information and prevent foreign investors' orders to take stakes in the 33 stocks classified as key industries beyond the set limit.
A new mandate to require companies to disclose important investment-related information in English will be applied from next year, first affecting Kospi-listed firms with assets worth more than 10 trillion won ($8.1 billion). The new system will be expanded to firms with between 2 trillion won and 10 trillion won in 2026.
The new policies for foreign investors will indeed help attract foreign investors. Up to a certain point, that is. Financial authorities still have a long way to go to reconfigure the Korean financial market to meet global standards.
The MSCI, for instance, calls for a full opening of the Korean foreign exchange market, but the government remains reluctant to lift the limit on its business hours for fear of facing uncontrollable volatility. Removing the much-disputed restrictions on short selling -- a problem pointed out by the MSCI -- is another explosive issue.
To minimize any adverse impact of the eased rules, financial regulators have to explore more safety mechanisms while carefully amending the rules for both local and foreign investors.