Mandatory treasury-share cancellation… NH Securities: "Expected to help narrow the Korea discount"

Existing treasury shares to be cancelled within 18 months… companies with foreign ownership caps within 3 years

"Expectations for additional policy measures will be priced into stocks"

With the passage of the “third revision to the Commercial Act,” which mandates the cancellation of treasury shares, NH Investment & Securities projected that the Korea discount—undervaluation of the domestic stock market—will ease, citing expectations for improved corporate governance.

In a report released on the 26th, NH Investment & Securities analyst Na Jeong-hwan said, “Mandatory cancellation of treasury shares constrains the long-standing practice of holding them for extended periods as a means of strengthening control and enhances the credibility of shareholder returns,” adding that it is “a factor supporting a valuation premium.”

The third revision to the Commercial Act stipulates that when a company acquires treasury shares, in principle it must cancel them within one year (within 18 months for existing holdings), and that violations will be subject to administrative fines. The amendment also specifies that, for treasury shares, shareholder rights such as voting rights and subscription rights are excluded during the holding period.

Exceptions are provided for special cases such as business purposes or the operation of employee stock ownership plans. In such cases, the company must draw up a plan for holding and disposing of its own shares and obtain annual approval from the shareholders’ meeting. When a company disposes of its own shares, they must be acquired on an equal basis in proportion to each shareholder’s holdings. For companies subject to foreign ownership restrictions—such as in broadcasting and telecommunications—the shares must be disposed of within three years from the law’s effective date.

Na said, “There is a possibility that legislation to improve governance will continue,” adding that the “Stock Price Suppression Prevention Act” and “bills related to regulating duplicate listings” are being cited as priority tasks. He also noted that an expanded overhaul of the Stewardship Code and tighter rules on mandatory tender offers are also being discussed.

The Stock Price Suppression Prevention Act refers to a pending bill titled the “Partial Amendment to the Inheritance and Gift Tax Act,” introduced in May last year by Democratic Party lawmaker Lee So-young. The core is that when shareholders of listed companies with a price-to-book ratio (PBR) below 0.8x inherit or gift shares, the inherited stake would be taxed not based on the market price but under the valuation method used for unlisted companies (fair-value assessment). The aim is to prevent controlling shareholders from artificially suppressing share prices to reduce the tax burden when passing on a company.

Na added, “Expectations for additional revisions to the Commercial Act will be reflected in stock prices,” and said he sees room for the index to rise if sectors trading below 1x PBR—such as steel, retail and utilities—recover to just 1x.

He further said, “If an expansion in dividend payout ratios and a broader adoption of treasury-share cancellations spread, in tandem with incentives such as separate taxation of dividends, rerating is likely to persist for an extended period.”

Jin Young-gi, Hankyung.com reporter young71@hankyung.com