Share buybacks increase by 50% in six months thanks to value-up strategies

In January this year, the Financial Services Commission (FSC) announced a plan to improve the share buyback system for listed companies, laying the foundation for significant changes in companies’ financial strategies. On June 4, a revision of the Enforcement Regulation to the Capital Market Law was also announced for public comment, with comments being received until July 16. The aim of this revision is to prevent the abuse of share buybacks to expand the control of large shareholders.

The Korea Exchange announced on July 10 that the scale of share buybacks increased by 190.5 percent, from 2.4 trillion won (about $1.6 billion) in the first half of last year to 7 trillion won in the first half of this year.

According to data from the financial investment industry on July 17, the scale of share repurchases by listed companies has increased this year. Hanwha Investment & Securities analyzed the scale of share repurchases (including planned repurchases) over a period of about half a year up to July 15 and found that 93 companies had announced their intention to repurchase shares worth about 7.8 trillion won. This is a significant increase from last year, when 96 companies announced share repurchases totaling about 5.2 trillion won.

The number of companies making share buyback announcements is already similar to last year, increasing by about 50%. This increase in share buyback announcements by listed companies this year is closely related to policy guidelines, especially the government-led stock market stimulus program and the corporate value enhancement program. These initiatives promote corporate value creation and shareholder returns and provide investment incentives for listed companies.

Companies are now in an environment where they must pay more attention to shareholder returns to be included in the Korea Value-Up Index, which is scheduled to be announced in the third quarter. The essence of the revision to the Capital Market Law Enforcement Decree is to prevent the so-called “share buyback magic,” in which share buybacks are used to expand the control of major shareholders. Currently, almost all shareholder rights such as voting rights, dividend rights and subscription rights for treasury shares are suspended. However, due to unclear laws and precedents regarding spin-offs, new shares have been allocated to treasury shares. Therefore, the revision restricts the allocation of new shares in spin-offs.

Despite these efforts, some argue that even after the enforcement decree is revised, there is still a possibility that share buybacks could be used in a way that does not increase shareholder value. Hwang Hyun-young and Jung Soo-min, research fellows at the Capital Market Research Institute, said in a report, “Even if the enforcement decree is revised, there are no regulations on large-scale share swaps or transfers, so there is still room for the use of treasury shares in organizational restructuring.” They added, “Unless it is explicitly stipulated that treasury shares have no rights, cases of new shares being allocated to treasury shares in organizational restructuring or major shareholders using treasury shares to squeeze out minority shareholders are likely to continue to occur.”

Meanwhile, there are cautious voices in the market regarding the recent perception that share buybacks and value-added policies are synonymous with shareholder returns. Seo Jung-yeon, head of the industry analysis team at Shin Young Securities Research Center, said, “Value-added is about normalizing corporate value, not unconditionally returning assets to shareholders,” adding, “Forcing unconditional dividend increases, share buybacks and stock cancellations is likely short-term profit maximization aimed at immediate gains.”