Korean stocks that surged this year are targeting “chaebol interests.” The next step in reform: “cancel” treasury shares to eliminate the “kimchi discount.”

To eliminate the long-standing “Korea discount” troubling the market, the Korean government is preparing to unveil a major reform — the mandatory cancellation of treasury shares held by companies.

Recently, Park Hong Bae, a lawmaker from the ruling Democratic Party in Korea, told Bloomberg that the National Assembly is highly likely to pass a key bill by the end of this year, which will require listed companies to cancel the treasury shares they hold.

He emphasized that this legislation is the party’s “number one priority and cannot be delayed.” Details of the bill will be finalized before it is submitted to the parliamentary standing committee in November, and a final vote is expected at the plenary session in December.

This anticipated reform has become a major driver pushing up the Korean stock market. Today, the Korea Composite Stock Price Index (Kospi) rose as much as 1%, bringing its year-to-date gains to 44%, the best performance among major global stock indices.

The Korean government’s ambitious goal of “Kospi 5000” means the index will need to rise another 45% from its current level, and cancelling treasury shares is seen as a crucial step toward achieving that target.

The reform targets “sleeping” assets

Treasury shares, which are shares a company buys from the open market and holds itself, are typically considered a temporary tool in many markets and are eventually cancelled to enhance shareholder return. But in Korea, they are often held indefinitely.

“The consensus among investors is that Korea’s treasury share system makes no sense,” said ruling party lawmaker Park Hong Bae in an interview. These shares carry no voting rights and no entitlement to dividends, yet their existence increases total share capital, directly reducing key valuation metrics such as earnings per share (EPS).

According to Lee Kyung-yeon, an analyst at Daishin Securities, currently, the total value of treasury shares in Kospi-listed companies accounts for about 3.1% of the index’s market capitalization. She estimates that if these shares were forcibly cancelled, average EPS for listed companies could rise by 3.2%.

Chaebols in the spotlight

Korea’s business conglomerates (chaebols) are the biggest holders of treasury shares. At critical moments, these shares can be used as tools to strengthen control by the founding families.

For example, when facing external takeover threats or proxy wars, companies can sell treasury shares to friendly parties, quickly boosting their side’s voting power.

Data show that some chaebol-affiliated companies hold astonishingly high proportions of treasury shares. Reports indicate that Lotte Group’s treasury shares account for 32.5% of its total share capital, while SK Group’s ratio is as high as 24.8%.

Although such practices comply with the current rules, they have long drawn criticism from global investors, who say they sacrifice the interests of minority shareholders and are a key factor behind the “Korea discount.”

Market reactions divided, both opportunity and risk remain

With the impending regulatory storm, the Korean market’s response is polarized.

Some companies have chosen to proactively embrace the reform trend. For example, LG Group promised in August to cancel all its treasury shares sometime next year, a move that won positive feedback from investors.

However, not all companies welcome it. Reports indicate some firms have already voiced objections, arguing that this legislation would severely weaken their ability to fend off hostile takeovers, exposing them to greater risk in the capital market.

Professional analysts also see both sides. Jongmin Shim, an analyst at CLSA Securities Korea Ltd., said if the bill passes, “it will greatly boost investor sentiment and help reduce the ‘Korea discount.’”

But he also cautioned that hasty enforcement could bring unforeseen negative consequences. If companies feel their defensive capability is weakened, they may seek other ways to prevent takeovers, such as complicated cross-shareholding structures or issuing exchangeable bonds, which could likewise damage shareholder value.

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