Issue Papers
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Based on timely analysis on topics related to current issues that are of importance to economics and finance, our Survey Paper puts forward the implications as well as policy alternatives.
- Current State of Overseas CVC and its Implications for Holding Company CVCs [22-24]
- Senior Research Fellow Park, Yong Rin / Dec. 12, 2022
- The 2021 amendment to the Monopoly Regulation and Fair Trade Act has permitted Korea’s non-financial holding companies to establish Corporate Venture Capital (CVC). CVC firms established by non-financial holding companies are expected to contribute to the sound development and qualitative advancement of Korea’s startup ecosystem which has already achieved quantitative growth, as is the case with other economies. Notably, non-financial holding company CVC is subject to stricter regulations, considering Korea’s unique economic structure where economic power is heavily concentrated in large companies. Against this backdrop, the purpose and investment activities of CVC should be fully understood to ensure that CVC firms created by holding companies overcome the limitations of existing CVC created by non-holding companies and catalyze the development of Korea’s startup ecosystem.
Overseas CVC firms have been established for various purposes and have become major players in the startup ecosystem through collaboration with independent venture capital (VC), which are key factors behind their success. A quantitative analysis has found that in terms of the size of funding and investment, CVC is larger than independent VC. It also tends to engage in overseas investment and joint investment projects more frequently and exhibit better exit performance. In addition, overseas CVC has diversified into internal or external financing strategies and the selection of initial fundraising strategy depends on overall capital market conditions at the time of establishment.
Among regulations on non-financial holding company CVC, the duty of creating a wholly-owned subsidiary and the ban on the operation of non-investment financial businesses seem not to run counter to practices of overseas CVC. But there is room for easing external financing regulation to the extent that current regulation allowed as an exception to the separation of financial and industrial capital is enforced. Above all, the 40% ceiling on external financing by each fund, applicable to non-financial holding company CVC, should be revised to 40% of CVC’s total investment in funds with the aim of increasing autonomy in the composition of fund investors. What is needed over the medium term is thorough monitoring for developments in the startup investment ecosystem with regard to non-financial holding company CVC. In addition, competent authorities should gradually alleviate regulations by taking into account how the market reacts to such developments.
- Taxation of Virtual Asset Income in Korea: Problems and Solutions [22-23]
- Senior Research Fellow Kim, Kab Lae / Nov. 30, 2022
- The 2022 amendment to the Income Tax Act aimed at delaying virtual asset taxation until January 1, 2025 is currently pending in the National Assembly. The Korean government has set forth the principle of “establishing legal system before levying a tax” as the ground for deferring virtual asset taxation. The principle gives priority to making a fair and reasonable virtual asset taxation system as well as setting rules and regulations on the crypto market. This article has found that in terms of virtual asset taxation reform, Korea is outstripped by major global economies. Against this backdrop, this article intends to examine legislative challenges regarding the tax treatment and classification of gains from virtual asset transactions as other income category and the virtual asset-specific tax regime, and to present desirable policy responses.
As for taxation on income generated from transactions of virtual assets under the Income Tax Act, a convenient tax system is needed for taxpayers to budget and plan. What is also needed is to encourage long-term investments in high-quality virtual assets and adhere to the principle of levying a tax on the “net” income. To this end, investors should be allowed to offset capital gains and losses of virtual assets and investment properties and to carry forward the net loss for subsequent years. Specific rules on crypto taxation and authoritative interpretations regarding what constitutes income from crypto lending are almost nonexistent. For taxation on income from crypto lending and DeFi, the tax authority should conduct policy research. They also need to notify market participants of a specific tax policy before specific rules on virtual asset taxation comes into force.
For the advancement of Korea’s virtual asset tax regime, it is desirable to establish an efficient virtual asset taxation system and launch an internationally competitive tax service platform for virtual assets. To achieve this goal, Korea’s tax authority should have sufficient discussions to present comprehensive and detailed guidelines for virtual asset taxation.
- Outsourced Chief Investment Officer Market: Growth Potential and Need for Full Discretion [22-22]
- Research Fellow Nam, Chaewoo / Nov. 08, 2022
- Korea’s Outsourced Chief Investment Officer (OCIO) market has grown on the back of public funds and is now diversifying its client base into private companies and foundations. As a way to enter the oligopolistic OCIO market, some financial services firms have tried to open up a new niche market, leading to such diversification. This article has estimated the accurate market size based on data provided by OCIO service providers. As a result, Korea’s OCIO market is projected at KRW 132 trillion as of end-August 2022. In the OCIO market, 85% of assets under management are still concentrated in public funds (KRW 112 trillion) but the proportion of private companies and public organizations has increased noticeably to 6% and 5%, respectively. The segmented OCIO market defined as a target market is expected to continue expanding into public institutions including public enterprises, rather than into private companies or mutual aid associations. What gains the most attention is the segmented OCIO market for retirement pension funds, which has particularly prompted securities firms to advance into the OCIO sector. But the market still amounts to no more than KRW 2 trillion. In this respect, institutional reform is required to encourage DB contributions to flow into the OCIO market.
Despite this quantitative growth, Korea’s OCIO scheme (K-OCIO) has structural limitations in that its role is confined to the execution of funds, which inhibits the OCIO model from providing a comprehensive asset management solution to OCIO service users. This can be attributable to the partial discretion scheme adopted by the K-OCIO. The full discretion model should be widely adopted to fully serve the OCIO’s goal of using external experts and stimulate healthy competition between trustees. To this end, this article recommends the use of the referent portfolio, selected by the Seoul National University Development Fund. The reference portfolio scheme, extensively used by Korea’s National Pension Fund and foreign public pension funds, is an effective tool to implement the full discretion OCIO model aimed at entrusting independent financial institutions with the top-level strategic decision-making process including the Strategic Asset Allocation (SAA). Full discretion can be implemented based on a trustor’s confidence in a trustee’s investment capability. It is notable that the OCIO scheme designed for supervision, instead of management, would end up delivering low operational efficiency.
- Bonus Issues Turning into Thematic Stocks and Role of Informed Traders [22-21]
- Senior Research Fellow Nam, Gilnam / Nov. 01, 2022
- Since 2020, newly listed and loss-making companies in the pharmaceutical and biotech sectors have issued bonus shares in the name of the shareholder return policy. The prices of bonus shares have soared immediately after disclosure, which has overheated the bonus share market as is the case with the politically themed stocks. More recently, some listed companies that mainly contribute to turning bonus shares into thematic stocks have increased the number of new shares allocated to each shareholder to an unprecedented level in order to grab the attention of retail investors. As a result, the price of bonus shares and the turnover ratio tend to surge immediately after the disclosure and on the ex-rights date. However, this is a short-lived phenomenon that cannot enhance shareholder returns.
The response to bonus issues is sharply divided by type of investors, suggesting that retail investors and informed traders recognize the value of information regarding bonus issues differently. Retail investors show a massive net buying trend after bonus issues are disclosed, while institutional investors who act as informed traders consistently continue the net selling of bonus shares. Foreign investors tend to change their position over the course of stock trading to actively create more investing opportunities. In some cases, corporate insiders and early investors took advantage of bonus issue disclosure to sell their holdings. In the meantime, how informed traders react to bonus issue disclosure has been affected by regulatory changes in short selling. As the role of informed traders is limited by short-selling regulation, bonus shares show a larger price increase for a prolonged period.
If a company disguises a bonus issue as its shareholder return policy to attract retail investors, it could be tantamount to abusing the bonus issue system. Accordingly, specifying the purpose of bonus issues should be mandatory when a bonus issue is disclosed. If informed traders take on a greater role, the themed stock phenomenon where a share price keeps surging regardless of its intrinsic value could be curbed in the early stages. Hence, it is necessary not to excessively limit the role of informed traders when regulatory measures are devised.