• Bank Ownership
• Bank Ownership of Non-Financial Entity
• Reporting of above-4 Percent Share Ownership
• Restrictions on Large Shareholders
• Restrictions on Acquisition of Shares Issued by Large Shareholders

Ownership of financial services companies is regulated in accordance with the principle of the separation of banking and commerce to prevent financial services companies from operating under the undue influence of a select few individuals, companies, or business groups. On the other hand, non-depository financial services companies such as financial investment services providers and specialized credit finance companies are not subject to any material ownership restrictions. Small-scale depositary institutions such as mutual savings banks and credit unions that are not particularly susceptible to abuse by the controlling shareholders are also subject to less stringent ownership regulations.

Bank Ownership

Restrictions on bank share ownership were first instituted in the Banking Act in December 1982 following a series of bank privatization initiatives as safeguards against large shareholders that may seek to profit from influencing the bank's credit decisions. The key safeguard provision in the Banking Act is article 15(1) that expressly prohibits a "same party" from holding more than 10 percent of the outstanding voting shares of a national bank. (The limit is 15 percent for a regional bank.) Shares held by a shareholder means shares that a person owns both legally and beneficially.

The Banking Act provides that the "same party" includes not only a shareholder of a bank, but also persons that are tied or connected to the shareholder by a special relationship ("related persons") such as the shareholder's family members or relatives. In addition, a company is deemed a related person to a shareholder of a bank if the shareholder's family members or relatives hold more than 30 percent of the total shares of the company or effectively controls the company as its largest shareholders.

Exceptions to the 10 Percent Limit

The Banking Act provides several exceptions to the 10 percent limit on bank share ownership. Shares that are held by a government authority or the Korea Deposit Insurance Corporation are not subject to any share ownership restriction. Similarly, bank holding companies are excluded from any bank share ownership restrictions. The maximum share ownership permitted for the same party of a regional bank is 15 percent.

Disposition of Excess Shares

Where the number of shares held by the same party exceeds the 10 percent limit, the voting rights of the excess shares (the above-10 percent shares) are suspended, and full disposition of the excess shares must take place promptly. When the shareholder fails to fully dispose of the excess shares, the FSC/FSS may issue a disposition order for any remaining excess shares within a period of less than six months. Failure to comply with a disposition order by the FSC/FSS may result in a daily fine equivalent to 0.03% of the book value of the remaining excess shares.

Approval for Excess Shares

A same party seeking to acquire shares in excess of 10 percent must satisfy the excess share acquisition criteria as set forth in the Banking Act and in the subordinate regulations and obtain approval from the FSC/FSS. Approval must be obtained each time the aggregate number of shares held by the same party exceeds 10 percent (15 percent for a regional bank), 25 percent, and 33 percent of the outstanding voting shares of a national bank. The FSC/FSS has the authority under the law to approve excess share acquisition with a specific limit on its own discretion; any additional share acquisition thereafter must be approved again. The FSC conducts a review of bank shareholders' compliance with the excess share acquisition requirements on a semiannual basis and on an ad hoc basis as needed.

Although the Banking Act and the subordinate regulations give exceptions to the 10 percent limit for the same party, they also require evaluation of the following considerations before additional share acquisition can be permitted:

• (a) Risks the shareholder poses on the soundness of the bank;
• (b) Shareholder's asset size and financial soundness;
• (c) Amount of credit, if any, that the bank has extended to the shareholder, and
• (d) Shareholder's capacity to contribute to the bank's safety and soundness.

Bank Ownership of Non-Financial Entity

For a non-financial entity (NFE), the limit for share ownership in a national bank is 4 percent (15 percent in a regional bank). The primary rationale for share ownership restrictions on an NFE is to prevent non-banking enterprisesㅡmostly business groups that control companies engaging industrial enterprisesㅡfrom unduly influencing the operation and management of a bank under the principle of the separation of banking and commerce.

Definition of an NFE

An NFE is defined in the Banking Act as:

NFE Share Acquisition above 4 Percent

An NFE that seeks to acquire more than 4 percent of the outstanding voting shares of a national bank with the intent to become the bank's largest shareholder or participate in the management of the bank (by influencing the appointment of the bank's directors or officers) must obtain approval from the FSC/FSS.

Where an NFE must obtain an ex-post approval for shares acquired in excess of 4 percent under exceptional circumstancesㅡsuch as share disposition by other shareholders or a capital write-downㅡthe NFE must report the acquisition to the FSC/FSS within 5 business days from the date of the acquisition. The NFE must then either obtain approval from the FSC within six months from the date of the acquisition or dispose of the excess shares. Should the NFE fail to comply with the 4 percent limit within six months, the voting rights of the excess shares are suspended, and the FSC may issue a share disposition order for the excess above-4 percent shares.

The 4 percent share acquisition restriction

As a rule, no NFE may hold more than 4 percent of the voting shares of a national bank (15 percent for a regional bank). The restriction may be raised up to 10 percent with approval from the FSC, provided that the NFE relinquishes the voting rights of the above-4 percent shares and meets the applicable financial soundness criteria.

Share acquisition above 4 percent

An NFE may hold more than 4 percent of the voting shares of a national bank (and more than 10 percent with approval from the FSC) where:

• (a) The NFE delivers to the FSC an intent to become a non-NFE within two years and obtains preliminary approval for the planned conversion to a non-NFE;
• (b) The proportion of shares held by the NFE is not greater than the proportion of shares held by foreign investors as a group; this rule is applicable to a single bank only, and the voting rights become restricted, and the FSC may issue a share disposition order within one year for any excess holdings; or
• (c) A fund created under article 5 of the National Finance Act or an entity managing such funds obtains approval from the FSC/FSS as an NFE.

Reporting of above-4 Percent Share Ownership

A report on share ownership must be filed with the FSC/FSS within 5 business days as provided for under article 15 of the Banking Act when:

• (a) A same party comes to hold more than 4 percent of the voting shares of a national bank;
• (b) A same party falling under subparagraph a) above becomes the largest shareholder of the national bank;
• (c) The aggregate equity of a same party falling under subparagraph a) above increases or decreases by more than 1 percent;
• (d) A change of a partner (either the general partner or a limited partner) of a PEF that holds more than 4 percent of the voting shares of a national bank occurs; or
• (e) A change of a shareholder or a partner (either the general partner or a limited partner) of an SPC that holds more than 4 percent of the voting shares of a national bank occurs.

Restrictions on Large Shareholders

A shareholder of a bank classified as a large shareholder under the Banking Act is subject to certain share ownership restrictions. Article 2-1(10) of the Banking Act defines a large shareholder of a bank as:

• (a) A shareholder that holds more than 10 percent of the voting shares of a national bank (15 percent for a regional bank); or
• (b) A shareholder that holds more than 4 percent of the voting shares of a national bank and is either the largest shareholder of the bank or a shareholder that (i) effectively exerts influence on the bank's management decisions through such means as appointing the bank's directors or officers, or (ii) is an NFE that actively participates in the management of the bank through such means as appointing the bank's directors or officers.

The maximum amount of credit that may be extended to a single large shareholder is the lower of either (i) an amount equivalent to 25 percent of the bank's shareholders' equity, or (ii) an amount equivalent to the proportion of the shareholder's claim in the bank's shareholders' equity.

Where the amount of credit to be extended to a large shareholder exceeds the lower of either (i) 0.1 percent of the bank's shareholders' equity, or (ii) KRW5 billion, the bank must act to ensure that:

• (a) A unanimous decision is reached from every member of the board of directors;
• (b) The FSC/FSS is duly notified of the credit extension decision in advance; and
• (c) Disclosure of the credit extension is made to the general public.

Credit extension to large shareholders is restricted to 25 percent of the bank's shareholders' equity. Cross-lending involving a borrower from another bank, which is intended to circumvent the existing credit extension restrictions on large shareholders, is not permitted. (In a cross-lending scheme, Borrower 1 obtains the maximum credit allowed from Bank A, and Borrower 2 does the same from Bank B. Borrower 1 then obtains additional credit from Bank B and Borrower 2 from Bank A. The secondary credit extensions are then switched between the two borrowers.)

Restrictions on Acquisition of Shares Issued by Large Shareholders

Bank acquisition of shares issued by a large shareholder is limited to 1 percent of the bank's shareholders' equity. For unlisted shares, the maximum is 0.5 percent. In addition, share acquisition above the lower of either (i) 0.1 percent of the bank's shareholders' equity, or (ii) KRW5 billion requires a unanimous consent of the board of directors of the bank, reporting to the FSC, and a public disclosure.