National Assembly bills seek to mandate improvement plans for low-PBR companies

Three pending bills in the National Assembly would require listed companies with a price-to-book ratio below 1 for at least two consecutive years to submit corporate value improvement plans or face fines of up to 100 million won.

As the Korea Exchange prepares to release its first list of listed companies with low price-to-book ratios (PBR) on November 2, the National Assembly of the Republic of Korea is pursuing legislation to mandate the disclosure of corporate value improvement plans for undervalued companies. Unlike the Korea Exchange's approach, which aims to induce voluntary improvements by disclosing a list of companies whose stock prices have been undervalued for long periods, the bills proposed in the National Assembly would require companies meeting certain criteria to submit improvement plans.

According to the National Assembly Bill Information System on the 29th, three versions of the "Partial Amendment to the Financial Investment Services and Capital Markets Act," which would mandate the submission of corporate value improvement plans by low-PBR listed companies, are currently pending. The bills were each introduced by Democratic Party of Korea lawmakers Kim Hyun-jung, Ahn Do-geol, and Lee Hoon-gi.

Mandating disclosure for companies with PBR below 1... Differences in application criteria and improvement plans

The three bills share the commonality of mandating the submission of corporate value improvement plans for listed companies that have maintained a PBR of less than 1 for at least two consecutive business years. The intent is to increase corporate value by having companies analyze the causes of their undervaluation and disclose improvement measures to investors. The regulations also include provisions to impose fines of up to 100 million won on companies that fail to submit a plan.

PBR is an indicator calculated by dividing a company's market capitalization by its net assets; a ratio of less than 1 means the market value is lower than the book value of its net assets. However, some point out that because PBR can be low depending on a company's profitability and industry characteristics, it is difficult to judge whether a low PBR is an artificial inducement of a stock price decline.

The bill proposed by Lee Hoon-gi focuses on having companies diagnose the causes of their own undervaluation. It requires companies with a PBR of less than 1 for two or more consecutive business years to submit a corporate value improvement plan that analyzes capital structure and the efficiency of financing costs. This would involve examining not only individual shareholder return methods, such as dividends or share buybacks, but also the company's capital management structure.

The bill proposed by Kim Hyun-jung emphasizes shareholder returns and business structure improvements. It requires such companies to include plans for the disposal of distributable profits, the acquisition and cancellation of treasury shares, and business structure improvement measures in their corporate value improvement plans. The proposal demands that companies whose stock prices are valued lower than their net asset value for long periods present specific improvement measures.

The bill proposed by Ahn Do-geol narrows the scope of companies subject to the disclosure mandate. In addition to the requirement of a PBR below 1 for two consecutive business years, it adds a condition that the average return on equity (ROE) for the most recent three business years must be less than 8%. ROE is an indicator showing how much profit a company generates using its equity. This differs from the other two bills in that companies with a certain level of profitability may be excluded from the disclosure mandate even if their stock prices are low.

Ahn's bill also stipulates that companies must submit implementation status reports along with the corporate value improvement plans. The plans are to include shareholder return measures, such as dividends and the acquisition and cancellation of treasury shares, as well as business structure improvement plans and target ROE.

Korea Exchange to first disclose low-PBR companies

Separate from the legislative movement in the National Assembly, the Korea Exchange is also inducing voluntary corporate value improvements for undervalued listed companies. The Korea Exchange will disclose the list of companies whose stock prices have been undervalued for long periods for the first time starting November 2.

In principle, the disclosure targets are companies whose PBR for the most recent six consecutive half-year periods falls within the bottom 25% for the KOSPI and the bottom 10% for the KOSDAQ by industry. The Korea Exchange plans to disclose the list of these companies on the first trading day of May and November each year and will also display the relevant information on securities companies' mobile trading systems (MTS).

A special exception applies to companies that disclose a corporate value improvement plan, which in principle exempts them from being included in the list for one year. However, companies that have remained in a low-PBR state for a cumulative period of six years or more are excluded from this exemption even if they submit an improvement plan.

Listed companies have also been submitting improvement plans ahead of the first list disclosure. According to the Korea Exchange, a total of 62 companies, including 34 KOSPI companies and 28 KOSDAQ companies, disclosed PBR improvement plans as of the 22nd. Notably, 46 of these companies submitted their plans on the 22nd, the submission deadline.

As the causes of undervaluation and management conditions vary by company, the contents of the improvement plans are also diverse. Following the Korea Exchange's first list disclosure, the key will be how well companies implement the shareholder return expansions and profitability improvement targets they have presented, and whether they can link these to actual improvements in corporate value.

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