[Editorial] Incentives for ‘value-up’ should come before the Stock Price Suppression Prevention Act

The Democratic Party of Korea has decided to pass the so-called “Stock Price Suppression Prevention Act” (an amendment to the Inheritance Tax and Gift Tax Act) during this year’s regular session of the National Assembly. As weakness in the stock market persists amid controversy over single-stock leveraged exchange-traded funds (ETFs), the party is moving to speed up legislation aimed at supporting share prices. But concerns have been voiced in business circles and even within the ruling party that the measure “could cause confusion in the market.”
The government, the ruling party and some market observers believe that certain companies preparing to pass on control deliberately depress their share prices. While serving as a lawmaker, Lee So-young, now Minister of SMEs and Startups, introduced a bill arguing that companies undergoing succession drive down their share prices through stock trades between affiliates, paid-in capital increases, mergers and spin-offs. The government has also cited dual listings and the issuance of exchangeable bonds (EBs) as practices that could undermine corporate value. Following three amendments to the Commercial Act and the introduction of separate taxation of dividend income, this bill is a key task for the Lee Jae-myung administration’s effort to resolve the “Korea discount.”
The government initially proposed screening listed companies whose price-to-book ratio (PBR) had remained in the bottom tier of their industries (the bottom 25% by industry on the KOSPI) for at least six of the past six and a half years, and raising their assessed share values by at least 30% for tax purposes. After criticism that too few companies would be covered, it began preparing a revised proposal that would also include companies that had been in the bottom tier for at least half of the past three years and raise the surcharge rate to 40%.
At the Democratic Party’s lawmakers’ caucus on the 10th, voices reportedly called for tougher taxation, saying the revised proposal would still struggle to escape criticism from investors. The bills proposed by Minister Lee and lawmaker Lee Hoon-ki, unlike the government’s proposal to select companies in the bottom tier of their industries, would apply to all companies with a PBR below 0.8. Analysts say the number covered could rise to around 1,300, about half of all listed companies, and inheritance tax bills could grow to two or three times their current levels or more.
There is no shortage of counterarguments. Business groups argue that it is impossible to artificially depress the share prices of large companies, which even foreign market manipulators would struggle to shake. Yoo Dong-soo, a fellow Democratic Party lawmaker, also pointed out that the large number of low-PBR companies is not due to major shareholders but rather to capital flowing into large-cap semiconductor stocks. Taxing shares at market value when prices are high, but using a set percentage of net asset value as a floor when prices are low, would put taxpayers at an excessive disadvantage; it would also be difficult to find a precedent for such a system overseas. If cash-strapped major shareholders sell shares to pay their taxes, or if shares paid in kind enter the market, this could instead drag down share prices.
Caution has also been voiced within the government. At a National Assembly forum last July, the Ministry of Economy and Finance warned that setting a floor at 80% of net asset value for the valuation of listed shares would run counter to the market-value principle and could negatively affect the country’s standing overseas. It also pointed out that calculating net asset value itself is difficult for large companies with investment structures intertwined through holding companies, subsidiaries and sub-subsidiaries.
Of course, practices by some companies seeking to reduce inheritance taxes by depressing their share prices must be corrected. But expanding the scope this widely and seeking to drive up share prices through taxation is an unreasonable idea. The market-value assessment principle should be maintained, while individual reviews should be conducted as under the government’s proposal and industry-specific characteristics should also be taken into account. To prevent a flood of shares hitting the market, payment of taxes in kind with listed shares should also be allowed. Fundamentally, the premium on controlling shareholders should be abolished and the top tax rate lowered to ease the inheritance tax burden, which reaches 60% when the premium is included—among the highest in the OECD. The shift to an heir-based inheritance tax should also be expedited. Creating conditions for companies to take their own steps to enhance corporate value is the real solution.