Korean financial watchdog to up disclosure requirement to prevent false claims

Financial Supervisory Service building [Photo by Han Joo-hyung]

Listed companies in South Korea will be required to disclose the progress of their new businesses from Friday under a revised disclosure form introduced by the financial watchdog.

The Financial Supervisory Service (FSS) on Wednesday unveiled measures to prevent companies that try to entice investors with advanced technologies as new businesses. The FSS will strengthen the disclosure requirement so that companies do not add new business purposes to their articles of association even if they are short of funds and lack technology just to lift up stock prices.

The FSS will implement a revision to disclosure standards from Friday, which will make it mandatory for listed companies to disclose the progress of their new business initiatives.

The measure comes as there were cases recently where unfair trading forces added new businesses to their corporate objectives without any substantial business entities in order to capitalize on the trend of themed stocks, such as batteries, artificial intelligence (AI), and robotics.

“Investors are highly interested in stocks related to batteries, AI, ChatGPT, and robotics, which are evaluated as new businesses for future growth,” said an unnamed FSS official. “As many as 105 listed companies have added these areas to their business objectives in the past year.”

Among the companies, 14 are listed on the main Kospi market and 91 on the secondary Kosdaq. By sector, batteries accounted for the largest number with 54 cases, according to the FSS.

The purpose of the revision is to block side effects.

Under the revised standard, companies must disclose detailed progress and future plans of their newly added businesses regularly in their semi-annual and quarterly business reports. The disclosure obligation applies to all businesses added to the articles of incorporation within the past three fiscal years.

If there is no progress in the business initiatives, specific reasons and future plans should be clearly informed to investors. Companies must also state whether they have plans to implement their new businesses within one year and when they plan to implement the projects.

“Investors will be able to check the status of new business progress and implementation plans approved at shareholders’ meetings on a quarterly basis to make investment decisions,” said the FSS official. “This measure will also be able to prevent unfair trade practices, such as promotion of false new businesses based on specific themes.”

In April, FSS Governor Lee Bok-hyun called for “prompt investigations into stocks that are likely to be involved in unfair trading as the stock market is overheating abnormally with a surge in credit transactions due to a frenzy of investment in future new businesses such as secondary batteries.”

The FSS launched an intensive investigation into companies that launched new businesses to boost stock prices. The investigation is said to be focusing on companies that have no meaningful investment or performance after adding new businesses, experience short-term net losses, and face frequent changes in major shareholders. The results of the investigation are expected to be released in the second half of this year.