Facilitating Access to Korean Capital Markets: Lifting the Foreign Investor Registration Policy and Mandating English Disclosures

On January 25, 2023, the Financial Services Commission (the “FSC”) announced its proposed measures to ease foreign investors’ access to Korean capital markets (the “Proposed Measures”). The current foreign investment system has been criticized for impeding upon global investors’ active investments in the local stock market and drifting away from international standards. Needless to say, the limitations on foreign investors played its part in causing the undervaluation of Korean stocks (the so called “Korea discount ”) and slowing the growth of the local stock market. With the Proposed Measures, financial authorities anticipate growing foreign investment in the domestic capital markets. The key features of the Proposed Measures are as follows:

1. Scrapping of the Foreign Investor Registration Policy

Under the current foreign investment system, foreign investors are required to pre-register with the Financial Supervisory Service (the “FSS”) and obtain a registration number (a “Foreign ID”) prior to their investment in locally listed securities (the “Registration Policy”). To ease the burdens of foreign investors investing in Korea, the FSC announced the lifting of the mandatory Registration Policy which has been around for over 30 years to better monitor foreign investments. Once the Registration Policy is completely scrapped (through revision of applicable laws and regulations by the end of the second quarter), foreign investors will be permitted to invest in locally listed securities without registering with, and obtaining a Foreign ID from the FSS. Foreign IDs will be replaced with a simpler verification process involving individual passport numbers or legal entities’ legal entity identifier (LEI) numbers.

2. Revival of the Omnibus Account System

The omnibus account system was launched in 2017 by the FSC in an effort to promote a more convenient environment for foreign investors to trade locally listed securities. Through the omnibus account system, a global asset management firm or brokerage house can open a single account to receive trading orders from their clients and place them with a Korean securities company. These orders also can be settled through a single “omnibus account”. Nevertheless, the omnibus account system proved to be inefficient due to the lingering obligation of local securities firms to report investment information within a certain timeline each time they made settlements. The Proposed Measures intend to remove this reporting requirement whereby the investment details will only be required to be submitted when deemed necessary by the financial authorities for market monitoring and taxation purposes.

3. Broadening the Scope of Over-the-Counter (“OTC”) Transactions

OTC transactions by foreign investors are somewhat restricted in a sense that they require prior examination by, and approval of the FSS. OTC transactions may be allowed on a post-reporting basis but only in exceptional cases – even so, the OTC transaction report still needed to be officially accepted by the authority. In order to reduce these limitations, the FSC proposed expanding the scope of the transactions eligible for post-reporting. Under the Proposed Measures, transactions of low need of examination and high demand of OTC trades will be eligible for post-reporting (the “Post-Reporting Transactions”). Some of the Post-Reporting Transactions with low need for document review will be allowed to be entered into the Foreign Investment Management System without further review.

4. Mandating English Disclosures

Current applicable laws and regulations do not obligate companies to disclose material public disclosure information in English. With this lack of regulation, a mere 17.6% of Korea Composite Stock Price Index (“KOSPI”) listed companies had made English disclosures in 2022. From 2024, the FSC looks to expand the English disclosure obligations of listed companies as follows:

- Phase 1 (2024 – 2025): (i) heavyweight KOSPI listed companies with assets of KRW 10 trillion won or above or (ii) KOSPI listed companies with assets of KRW 2 trillion won or more; provided, that 30% or more of its shares are held by foreign investors; and

- Phase 2 (2026 – ): KOSPI listed companies with assets of KRW 2 trillion won or above.

With this expansion of English disclosure obligations, listed companies will be required to disclose, among other things, matters related to audited annual financial statements, customary statutory disclosure items and matters pertaining to trade suspension.

Implementation Timeline

For the implementation of the Proposed Measures, the financial authorities look to amend the Enforcement Decree of the Financial Investment Services and Capital Markets Act and the Regulations on the Financial Investment Services within the second quarter of 2023. Furthermore, Korea Exchange’s Regulation on Public Disclosure is planned to be amended in the first quarter of 2023 for the (above-mentioned) envisaged Phase 1 expansion of English disclosure obligations.

Anticipated Effects

According to financial experts, the Proposed Measures would work as a positive development for the Korean stock market’s movement away from Morgan Stanley Capital International(“MSCI”)’s Emerging Markets Indexes and future inclusion into MSCI’s Developed Markets Indexes, which, according to the former Minister of Economy and Finance ‘is necessary and already overdue’. It is anticipated that the inclusion into MSCI’s Developed Markets Indexes will prompt over $44 billion in potential incremental foreign investor portfolio flows, according to a report from Goldman Sachs.