Something remarkable has happened on the Korea Stock Exchange (KSE). The KSE Price Index, or KOSPI, has more than doubled over the course of the last year to break the 800-point level twice this year and at the time of going to press (June 17th) stands at the 846-point mark. Furthermore, attracted by the upswing and the industrial turnaround which has underpinned it, as well as being permitted an unprecedented level of entry following a massive wave of liberalization, foreign investors have returned with new confidence to the KSE plus the bond market and other markets. "Amongst all the Asian countries, everyone agrees that Korea has the best chance for recovery," said Christian Park, chief dealer for LG Securities's International Sales Department in Seoul explaining renewed foreign interest in Korean securities. He noted too that over the last year "there have been significant corporate changes and everyone agrees Korea has the best upside opportunity, especially since the government is committed to make changes. So from that perspective every investor is optimistic about Korea's prospects." With estimates for growth in 1999 varying from the International Monetary Fund's 2 percent and United States investment firm J. P. Morgan's 4 percent, foreign reserves topping $50 billion, production in April up 17 percent on the year, plus employment levelling off, investors have every reason to be bullish on Korea once more. The situation is certainly vastly different from that almost two years ago when Korea's economy began to falter and portfolio investor confidence weakened. Total company capitalization on the KSE stood at 129 trillion won in August of 1997. When the crisis hit in December after overseas investors pulled their short term loans, pushing up interest rates to 30 percent and pushing down the Korean won to 2,000 to the U.S. dollar, total capitalization tumbled to 71 trillion won as the KOSPI plummeted from 740.47 to 390.30 over the same time period. The immediate response by the then newly-elected government of President Kim, Dae-jung as part of the guidelines stipulated by the International Monetary Fund's assistance package, was to throw open the capital market in a bid to lure back badly needed foreign capital. Ceilings Eliminated The ceiling on aggregate foreign ownership of Korean Stock Exchange (KSE) listed stocks was raised from the 26 percent level in November 1997 to 50 percent on Dec. 4th and abolished on May 25th 1998. The foreign ownership ceiling on stocks listed on KOSDAQ, Korea's exchange for hi-tech companies and other growth companies, was lifted from 10 percent to 15 percent Dec. 1st 1997, to 55 percent April 1st 1998 and removed altogether May 25th 1998. At the start of 1997, the only bonds open to purchase by foreigners were non-guaranteed convertibles issued by small- and medium-sized companies (SMEs), and then only to a ceiling of 10 percent for individuals and 50 percent in the aggregate. Ceilings on bonds issued by SMEs were abolished Dec.12th 1997, followed by the abolition of ceilings on all bonds almost three weeks later Dec. 30th.
On the final day of trading, the KOSPI closed at 562.46, up 49.5 percent from the closing index of 1997. The market continued to show strength through 1999, and underwent a correction around 800 only after the government appeared to favor a high interest rate policy. The government publically renewed its commitment to keeping interest rates low and the market has since surpassed the 800 point level. The phenomenal performance of the KSE has both attracted and been fueled by intense active interest by fund managers across the world. "We like it," said Jardine Fleming's Michael Yuen of the Korean market. "We have overweighted our investment in the Korean stock market. We're buying a lot of Korean stocks." Head of Asia marketing for the Hong Kong-based stockbroker and investment management company, and dealing with institutional and retail investors in Japan, Taiwan, Singapore and even Europe, Mr. Yuen said Jardine Fleming had been buying Korean stocks for the last six to eight months on account of the "recovery of the Korean economy, the general economic situation and the companies themselves."
Net Inflows Foreign portfolio investors registered with the KSE have grown by more than one-third from 6,514 at the end of 1997 to 8,822 at the end of April 1999. Over the same period, shareholdings by foreign investors on the KSE have grown from 14.59 percent in the crisis year of 1997, to 19.30 by end of April 1999. The net inflow of foreign portfolio investment capital which tumbled in 1997 to $1.081 billion from 1996's $4.566 billion, bounced back in 1998 to $4.782 billion. As of the end of April this year, the inflow amounted to $3.085 billion, set to challenge the $5.699 billion achieved in 1993.
"I feel the stock market is very bullish now, there's been a lot of foreign buying" said Kim, Han-suk, a broker for Hyundai Securities in Seoul who has a foreign clientele composed of institutional clients throughout the Asia-Pacific region. "Over the last three months, foreign activity was quite strong. In fact the market was led on some days by foreign investors who were followed by domestic investors." Where are the major investors located and what kind of stocks are they buying? Information from the Financial Supervisory Service (FSS) for the April indicates that the greatest amount of trading activity came from the United States which accounted for 1,367.6 billion won worth of purchases, and 992.3 billion worth of sales for a net amount of purchases equaling 375.3 billion won during April 1999. Investors in the United Kingdom ranked second, accounting for 652.9 billion won worth of purchases in April, 523.6 billion won worth of sales, for net purchases of 129.3 billion. Other significant investors were located in Luxemburg, Malaysia, Ireland, Japan, and the Netherlands. Going for the Major Caps
Other major net buys were stock of Samsung Heavy Industries, Housing and Commercial Bank and Korea Export Bank. Topping the net sell list with 15.21 million shares disposed off was Cho Hung Bank, followed by Commercial Bank with 27 million shares disposed of. Other major net sells included the shares of Korean Airlines and Hyundai Electronics. Given the preference by international investors for blue chip Korean stocks, it is worthy of note that a $2.5 billion Korea Telecom ADR (American Depository Receipt) issue that went on sale in late May was oversubscribed to by U.S. investors four-fold. "Because of long-term considerations, institutional investors are focussing on the top ten capitalized stocks," said Mr. Kim. He also noted that large institutional clients prefer the major capitalized stocks "because they want to chase the index, to follow it." He said while small to medium management funds will look for individual companies with good potential, the strategy of the larger companies is different. "They can't follow individual stocks, but if they buy the large caps, they can chase the KOSPI. If the index moves up, that's what they'll buy." The resurgence of investor interest both foreign and domestic in the Korean market has prompted overseas investment of another sort in this sector of the economy: a wave of acquisitions in the local securities industry. Last year, international investor George Soros bought Seoul Securities, a move which was followed by Good Morning Securities, formerly Ssangyong Investment Securities, coming under the complete control of foreign shareholders which included H&QAP, California Pension Fund and Singapore Investment Agency.
by Charles Duerden 
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Foreign direct investment into Korea topped $811 million in April, the fourth straight month in 1999 during which the volume of inbound capital has exceeded its counterpart in the year previous. The FDI tally for April represents a 11.8 percent increase over the $727 million recorded in March, and a 43.3 percent increase over the $566 million induced in April of 1998. Furthermore, April's totals bring the total FDI for the year to $2,815, a 147 percent increase over the $1,138 million achieved from January to the end of April 1998. Major foreign direct investments in April include Commerzbank of Germany's $217 million increase in capital participation in Korea Exchange Bank; the $86 million increase in capital participation by Air Liquide International of France in its subsidiary, Air Liquide Service Korea; the $60 million worth of new investment by ITW Holdings Inc. of the United States in IW Special Film; and the $20 million capital increase participation by QE International of Malaysia in Seoul Securities. April's FDI involved 142 "committed" cases, i.e. foreign investor's notification to the government to invest. The figure represents a 32.7 percent increase over the number of such cases so notified in April 1998, but a 0.7 decrease in comparison to March 1999's 143 cases. January to April, there were 533 committed cases, a 28.4 percent increase over the 415 recorded in the same period last year.
Of particular note in the nature of January/April FDI is the increased amount from corporations based in the countries of the European Union. Total EU-based investment for the period amounted to $1,199 million, a 331.3 percent increase over the $278 million recorded in 1998. Investments from Belgian and German corporations have especially increased, amounting to $437 million and $321 million for the period, respectively. Investment from the United States also grew significantly January/April, increasing to $858 million from $484 million in 1998. Japanese investment, on the other hand, fell 28.1 percent to $184 million from $256 million. The January/April figures point to another change in the composition of FDI in Korea: the declining importance of merger and acquisition as a form of investment. Some $472 million, or 16.8 percent, of the $2,815 million period total was accounted for the acquisition of outstanding stocks. This compares with $494 million, or 43.4 percent of the total FDI recorded from January to April in 1998. The Ministry of Finance and Economy has cited the reason for this development as the improved economy enabling domestic corporations to invite the participation of foreign investors through new or increased investments rather than just selling off the company. A Q&A on the Company Establishment |
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How can a foreign bank establish a branch office in Korea? A branch office of a foreign bank has to be authorized by the Minister of Finance and Economy upon recommendation from the Financial Supervisory Service.
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What is the procedure for the dissolution of a corporation and establishment of a new corporation?
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What is the procedure for establishing a corporation after liquidating the branch office? First, the existing branch office has to be shut down before
going through the liquidation procedure. In general, an accounting
firm will handle the matter. Liquidation procedure refers to the
procedure of deducting taxes, etc. after the asset evaluation and
summarizing the value of the remaining assets. The liquidation period for the existing branch office may vary according to the scale and type of business of the branch office. In order to reduce the amount of time required in the liquidation process, the alternative is to establish a new, separate corporation and take over the assets that remain from the liquidation. |
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What is the difference between establishing a branch office and a corporation? The establishment of a corporation reprents a direct investment on the part of foreigners. KISC will act as the agency and assist in all administrative procedures starting from the notification of investment to the registration of the corporation. Upon request from the foreign investor, KISC can also recommend a competent judicial agent. A branch office is basically a part of the foreign corporation whereas an invested corporation is classified as a domestic corporation. As a result, the accounting and settlement of accounts for a branch office is handled in conjunction with the head office. Accounting and settlement of accounts for an invested company is handled separately from the parent company since it is regarded as a domestic corporation. |
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In establishing a corporation, is a certificate bearing a seal impression issued in Japan valid? In establishing a corporation, a certificate bearing the impression of a seal issued in Japan may be used in drawing up the minutes of the inaugural general assembly, minutes for the board of directors meeting and acceptance letter of inauguration and other matters that require a seal. There is no need to register the seal separately in Korea. |
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What are the expenses required for the establishment of a corporation and notification of investment? Taxes to be paid in establishment of
a corporation: Notification of investment and capital
Increase Expense required for terminating the
original corporation |
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The market, however, continued to tumble
in first half of 1998 as non-performing loans and corporate
bankruptcies soared. After a brief rally, the weak Japanese yen,
the threat of the devaluation of the Chinese yuan, sluggish
markets, and the Russian economic crisis undermined investor
confidence, pushing the KOSPI to an 11-year low of 280 in June 1998.
The index began to rise as U.S. interests rates eased, the yen became
stronger, and investors responded to the government's efforts
to revitalize the economy. 
The story with regard to the bond market
is more dramatic. The value of foreign accumulated purchases leapt
from 74.7 billion won in 1996, to 209.4 billion won in 1997. Under
the tight monetary policy demanded by the IMF, the government needed
to raise a great deal of money for its corporate and financial restructuring
program. Accordingly, the total amount of government bonds
issued increased by 122 percent in 1998 to 17.1 trillion won or
$12.2 billion, compared to 1997. Foreign bond purchases surged
to 968.2 billion won in 1998, and by the end of April this year,
stood at 3,918 billion won. Net purchases soared to 2,975.5 billion
won in 1998 in response to historically high interest rates, compared
to 198.9 billion won in 1997, the year controls were lifted, and
the 20 billion won in 1996. Bond purchases by foreigners this year
to the end of April amounted to 431 billion won, high by historical
standards but evidence that investors have pulled back
as interests rates have fallen to the 6 percent to 8 percent level,
redirecting attention on equities.
FSS information for 1998 reveals an overwhelming
preference by foreign investors for the securities of the towering
giants of Korean business and industry. Heading the list with net
buys of 58.78 million shares is the stock of KEPCO,
the national power generating company, followed by major semiconductor
producer, Samsung Electronics, with 50.53 million net share purchases,
and Daewoo Heavy Industries with 11.79 million net purchases. 
In April, Daewoo Securities announced the
sale of more than 50 percent of the equity of its investment management
advisory unit to Scudder Kemp Investments of the United States.
In June this year, British investment institution Regent
Pacific Group announced its intention to increase its holdings
in Daeyu Regent Securities to 55 percent by buying out the
22 percent stake of Daeyu Trading, effectively gaining management
control of the company. On a recent visit to Korea, Regent
Pacific chairman James Mellon unveiled a plan to invest $1 billion
in the local establishment of a integrated financial service
group by March 2000. Observers of the Korean economy have often
cited the KSE as an underperforming market, a victim of eroded
corporate profits as captains of industry have preferred capital
formation and market share to profitability. "I'm
hopeful the crisis and the IMF control will break this pattern;
it's like a cloud with a silver lining," said Mr.
Park. "We now have a chance to get out whereas before it was
impossible."
