Korea intensifies rules on CB conversion price adjustment

South Korea will strengthen regulations on the conversion prices of convertible bonds (CBs) to protect stakeholders from excessive share dilution, the Financial Services Commission (FSC) said on Monday.

The revised rules are focused on CBs’ refix clause, which allows bond issuers to cut conversion prices if the company’s share price has dropped. In Korea, the cut is generally limited to a maximum 30% of the initial conversion price.

But CB issuers can slash conversion prices by more than 30% of initial prices under special resolution at shareholders meetings or through the company’s articles of incorporation to respond to critical management issues, such as corporate restructuring.

The FSC has seen many companies misuse the refix clause, cutting conversion prices by more than 30% not for critical issues but for major shareholders’ advantage. This has significantly increased the number of outstanding stocks, causing share dilution and hurting stock value, the financial watchdog said.

The regulatory body posted notice of regulatory changes in the issuance and disclosure of securities on May 27. “We expect the amendments of the regulations to restore CB investor confidence and develop robust sources of financing for companies,” the FSC said on Monday.

The revised regulations will be implemented in the third quarter after approvals from the FSC’s Financial Regulatory Reform Committee and Securities and Futures Commission.

The revision intensifies restriction on the refix clause for a CB’s conversion price. Cutting the price by more than 30% requires a shareholders meeting’s special resolution, which needs the consent of at least two-thirds of the voting rights present at the meeting and at least one-third of the outstanding shares.

Also, the conversion price should be or above the price that reflects the effect of share dilution if there is a capital increase or dividend payout.   

The revision also strengthens rules on disclosure of CB issuance to help investors learn about CB holders who will exercise a call option.

Under the current regulations, companies are allowed to disclose the call option holders only as “the company or a person designated by the company,” not giving investors enough information on the holders.

The revision requires the company to disclose the designated person and whether there is a call option transfer to a third party.

Write to Ik-Hwan Kim at lovepen@hankyung.com


Jihyun Kim edited this article.