Recently, with the 'mandatory buyback of treasury stocks' discussed in the political arena, funds are pouring into securities stocks with a high proportion of treasury stocks. The expectation is that buying back treasury stocks will reduce the number of shares in circulation, leading to an increase in stock prices and expansion of dividends.
According to the financial investment industry on the 10th, the Democratic Party of Korea proposed a bill that mandates the incineration of treasury stocks within one year after acquisition. The crux is that treasury stock holding will not be recognized except for special reasons such as stock options.
If the bill passes the National Assembly, some securities firms with a large proportion of treasury stocks could face a complex predicament. This is because completely incinerating treasury stocks could make it difficult to defend management rights.
Treasury stocks do not have voting rights, but if sold to a third party, the voting rights are restored. There have been many cases where treasury stocks were used to transfer ownership to friendly forces or affiliates to stably maintain management rights.
The Council of Listed Companies noted, "In our country, major management defense measures such as differential voting rights and poison pills have not been introduced, and alternatives are insufficient other than treasury stocks," and stated, "If only treasury stock holding is restricted under such circumstances, domestic corporations could be exposed to serious discrimination."
Incinerating treasury stocks will reduce the total number of stocks, thereby increasing the maximum shareholder's equity ratio, but it could also reduce their dominance compared to existing levels.
In the case of Shinyoung Securities, the maximum shareholder's equity ratio, including related parties, is about 21% as of the end of March this year. If all treasury stocks, which account for 53%, are incinerated, the maximum shareholder's equity ratio will rise to 44%. However, considering that treasury stocks have been classified as friendly equity, actual control is expected to decrease from 74% to 44% according to simple calculations.
Shinyoung Securities acknowledged concerns regarding the incineration of treasury stocks but said, "It's difficult to provide a precise plan at this time."
However, academic circles have responded that opposing the incineration of treasury stocks on the grounds of defending management rights is absurd.
Professor Seong Min-seop from Sogang University noted, "There is no need to equate ownership and management in corporate management," and added, "If the performance of management is excellent, there is no need to replace them even if activist funds come in. Whether it's the second or third generation of owners, the core issue is management capability."
Professor Seo Ji-yong from Sangmyung University also stated, "The claim that it would be difficult to defend management rights if treasury stocks cannot be utilized as friendly equity is a result of corporations misusing the original purpose of treasury stocks," and said, "Treasury stocks are essentially a financial event that increases earnings per share (EPS) and are for shareholder returns." He also pointed out, "Management rights should be naturally safeguarded through sound corporate management that enhances corporate value and shareholder returns."
As discussions around the mandatory buyback of treasury stocks intensified, the stock prices of major securities stocks surged. This surge is due to expectations that the buyback of treasury stocks will increase dividends per share (DPS) and earnings per share (EPS), thereby maximizing shareholder return effects.
On the previous day, among securities stocks with a high proportion of treasury stocks, Shinyoung Securities (treasury stock ratio 53.1%), Bookook Securities (42.7%), and Daishin Securities (25.1%) all recorded their highest prices of the year.
Not only Shinyoung Securities but also Bookook Securities and Daishin Securities have more treasury stocks than their maximum shareholder's equity, and if mandatory incineration is institutionalized, significant changes in governance structures are expected. Bookook Securities has a treasury stock ratio (42.7%) that is over 10% higher than the dominant shareholder's equity ratio (30%), and Daishin Securities also has more treasury stocks (25%) than the dominant shareholder's equity ratio (16%).