Legislative reforms that reshape the features of the Korean stock market and enhance its sustainability

The South Korean stock market has recently witnessed remarkable transformations as the government seeks to address the valuation gap known as the “Korea Discount”(Korea Discount), as local companies trade at lower levels than their global counterparts despite similar industrial performance and profitability. This difference is due to factors related to the concentration of control in the hands of families that manage large companies, in addition to the limited influence of small investors in management decisions, which was reflected in investor confidence and risk pricing.

In this context, the South Korean Parliament approved an amendment to the Companies Law requiring listed companies to cancel newly purchased treasury shares within a period not exceeding one year, with administrative fines imposed in the event of non-compliance, in a step aimed at strengthening institutional discipline and raising market attractiveness.

Closing the treasury stock gap in the stock market

The amendment focuses on treasury shares, which are shares that companies buy back from the market and hold. According to the new law, any new treasury shares must be canceled within a year from the date of their purchase, while existing shares were given a transitional period of six months. This measure limits the use of these shares as a tool to redistribute voting power or enhance management control, which had raised concerns among investors about the balance of interests within listed companies.

This move comes within the framework of broader reforms aimed at raising governance standards within the Korean stock market, as prolonged holding of treasury shares was seen as one of the factors that reduce transparency. As this practice is reduced, the market is moving towards clearer rules, which contributes to improving the image of the investment environment.

“Korea Discounts” and Risk Repricing

What is meant by the phenomenon of“Korea discount“ is the gap between the valuation of Korean companies on the stock exchange and their global counterparts, as the shares of many local companies trade at lower profitability multiples despite similar levels of performance and revenues. This discount reflects a cautious assessment by investors, linked to institutional factors such as the concentration of management in the hands of family conglomerates, the complexity of ownership structures, and the limited influence of small investors in strategic decisions, in addition to geopolitical considerations related to tension with North Korea.

This reality pushes investors to what is known as “risk pricing,” that is, taking into account an additional level of uncertainty when determining the fair price of a stock. When corporate risk rises, the investor demands a higher return in exchange for bearing it, which practically translates into buying the stock at a lower price. With this mechanism, a gap is formed between the company’s market value and its potential value in the event of a low level of risk.

Hence, the reform of the legal framework represents a signal that the Korean stock market is moving towards a more transparent and disciplined environment. The more governance rules improve and the mechanisms for protecting shareholders become clearer, the lower the risk premium that investors add to their accounts, and the greater the possibility of revaluing stocks at levels closer to their global counterparts, which is reflected in reforming market performance in general.

Implications of reform on market performance

The adoption of the amendment coincided with a noticeable improvement in the performance of the main indexKOSPI, which is the broader index that measures the performance of the largest companies listed on the Korean stock market and is a measure of market trends as a whole. The index exceeded the level of 6,000 points for the first time, after it had exceeded 5,000 points in January, indicating a strong rising wave that reflects increased investor confidence in the reform path.

However, the importance of this development extends to the nature of the money flowing into the market. Strengthening institutional discipline within the Korean stock market contributes to attracting long-term investments, such as pension funds and major investment institutions, that are looking for a stable environment and clear regulatory rules. Improved governance also reduces market fluctuations associated with uncertainty, and reduces the cost of capital for companies, which supports their ability to expand and invest sustainably.

In this sense, reforms are turning from a limited legislative measure into an influential element in consolidating market sustainability in the medium and long term. However, this reform path did not enjoy complete consensus within the business community, as reservations emerged from some major industrial blocs regarding the scope of these amendments and their impact on management flexibility.

Between the blocs’ reservations and enhancing confidence

The amendments did not pass without opposition, as some industrial blocs expressed reservations about obliging companies to cancel treasury shares, considering that this may reduce management’s flexibility in managing capital. On the other hand, reform supporters believe that improving business rules within the Korean stock market represents a necessary step to raise the level of transparency and enhance the balance between management and shareholders.

In summary, the amendment to the Companies Law reflects a trend towards addressing the roots of the imbalances rather than being satisfied with circumstantial measures. Resetting regulatory rules aims to build a more disciplined and stable investment environment. If this path continues, it may contribute to reducing the valuation gap and strengthening the position of the Korean stock market among the most attractive global markets in the long term.

TheFoundationEarth Guards indicates that institutional reforms in financial markets represent an essential pillar for achieving sustainable economic development, as enhancing confidence in the Korean stock market is linked to supporting long-term economic growth (Goal 8), and building effective and transparent institutions (Goal 16), to As well as encouraging responsible investment in the productive sectors and infrastructure (Goal 9). The more established the rules of governance and discipline, the less unjustified volatility will be, and the greater the market’s ability to direct capital towards more sustainable and stable activities.