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FTC turns spotlight on holding companies

July 04,2018
The country’s antitrust watchdog on Tuesday once again voiced suspicions that family-owned conglomerates in Korea are exploiting the system for the benefit of owner-family members. This time around, it’s the profit structure of some holding companies that is in the spotlight.

The Fair Trade Commission (FTC) said on Tuesday that the holding companies of Korean conglomerates get excessive amounts of profit from internal trading with subsidiaries. The FTC’s findings showed that about 43.4 percent of the profit that holding companies earned as of December last year came from “non-dividend income,” such as brand fees, real estate rental fees and management consulting fees paid by their subsidiaries.

These holding companies didn’t need the approval of their board of directors or shareholders for these “non-dividend” transactions because the amount of each transaction didn’t meet the regulatory criteria, the FTC said.

The 18 holding companies subject to inspection this time around were those whose assets took up more than 50 percent of the total assets of the entire group, according to the FTC.

For four of the companies investigated - Celltrion Holdings, Hankook Tire Worldwide, Hansol Holdings and Kolon - more than 70 percent of their earnings came from these “non-dividend income” sources, according to the watchdog.

“Our investigation showed that the lower the share of the subsidiaries owned by the group’s holding companies, the higher the non-dividend income’s proportion in their total earnings was,” said Shin Bong-sam, director general at the business group bureau of the FTC during a press briefing on Tuesday at the Sejong government complex. “Because earnings from these sources were high, these holding companies didn’t need to increase their shares in their subsidiaries.”

The FTC’s investigation result showed that the total amount of intra-group trading among the holding companies of groups and their subsidiaries in 2017 stood at 2.4 trillion won ($2.14 billion).

While the holding company structure was banned in 1986, the government began allowing some companies to adopt the system in the wake of the Asian financial crisis in 1997. Over the past 20 years, the number of holding companies in the country expanded substantially from 19 in 2003 to 193 as of September last year.

In addition to the profit structure that the FTC deemed as questionable, owner-family members expanded their grip over groups by increasing the number of so-called second- and third-tier subsidiaries in the group, rather than expanding their ownership in top-tier subsidiaries by investing more money.

“When holding companies take control over first and second-tier subsidiaries with a small amount of shares, it causes problems for minor shareholders,” said Shin. “This is because Korean corporate culture lacks a check-and-balance system.”

The findings announced on Tuesday are the third in a series of investigations conducted by the FTC since December last year to review the business structure of chaebol groups.

Kim Sang-jo, the chairman of the watchdog, said during a meeting with the chief executives of Korean conglomerates last November that the FTC would look into the holding company structure.

Shin of the FTC said the government will roll out measures to improve the transparency of the structures of Korean conglomerates later this month based on their findings.


BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]