KSD Global Services in the Secondary Market
First, let us look into the provision of infrastructure for investors in the secondary market. After retail investors were allowed to invest in listed foreign currency securities in July 1994, Korean investment in foreign securities rose significantly as a new investment alternative. Accordingly, the need to establish a stable and safe cross-border settlement environment emerged, and it became legally mandated to centrally deposit domestic investors’ foreign securities in KSD accounts opened with global custodians. After a long period of close coordination with the government and related institutions, KSD now provides a low-cost, high-efficiency foreign currency securities deposit and settlement system.
To centrally deposit securities listed in several foreign markets, KSD appointed a number of global custodians and international central securities depositories (ICSDs), opening accounts under the name of KSD. This enables domestic investors to invest in foreign securities through a single channel (investor - domestic broker – KSD - global custodian - local custodian - local CSD) without appointing overseas custodians individually. Moreover, since KSD administers the custody of foreign securities for investors unable to open an account in overseas custodians because of relatively small investment volumes, this structure can protect domestic investors’ rights and save time and costs that may arise when transactions are individually processed. KSD currently supports investment in over 40 markets around the world and continues to expand its coverage.
To go deeper into details at the working-level, let’s walk through the foreign stock purchase process. It begins with a domestic investor placing a trade order with a domestic broker. Then, the order is conveyed to both KSD and the local broker by the domestic broker. At this time, the domestic broker should notify the local broker of the transaction details along with the fact that settlement is processed through KSD. This way, the local broker and KSD’s global custodian can complete the transactions through the local CSD and exchange. Then, how about rights exercising? Since KSD secures all the corporate actions-related information from foreign issuers through the global custodians as the nominee, the domestic investors can receive notification of corporate actions event in a timely manner and exercise their rights through KSD without dealing with any overseas institutions.
KSD also plays an essential role in foreign investors’ access to the Korean market. According to the Korean law, foreign investors who want to invest in the Korean market must enter into a custodian contract with a qualified institution in Korea and file an application for registration with the Governor of the Financial Supervisory Service. In this case, KSD can act as a custodian of securities acquired by foreign investors. Since it is common to sign a custodian contract with a standing proxy agreement, we also act on behalf of investors in handling investment registration, exercise of shareholder rights, settlement, and other relevant tasks as a proxy. As we are not just a local custodian, but also the CSD in Korea, our service stands out for its efficiency and expertise.
KSD Global Services in the Primary Market
Now, I will focus on our experience in cross-border securities issuance and listing in the primary market. The internationalization of the Korean capital market began in 1985 when domestic companies were allowed to issue overseas securities. Currently, securities issued by a substantial number of Korean companies and foreign companies have been listed and traded in each other’s countries. Let's see how KSD supports issuers seeking to be listed in overseas markets, both outbound and inbound.
For outbound offerings, DR issuance is the major form of overseas listing for Korean companies that have already listed their shares in the domestic market and wish to be listed again on an overseas exchange. By issuing and listing DR, companies can build visibility by maximizing overseas IR activities, and raise more capital by tapping into the global capital market and attracting investors from around the world.
The first step to issuing DR is for the issuer company to enter into an DR agreement with the depositary bank. Then, the depositary bank deposits the underlying shares represented by the DR at the custodian located in the issuers' country and issues DRs to overseas investors. In Korea, unlike the usual practice of local banks holding the underlying shares of DRs, KSD acts as a direct custodian for the ordinary shares under a custodial agreement with the depositary bank. This unique structure enhances the stability of asset management and enables prompt book-entry transfer. As a custodian, KSD handles the shares transfer following the conversion between ordinary shares and DRs. We also support all the corporate actions-related exercise of rights such as voting rights, dividends, etc. for the DR holders as a proxy of depositary bank.
In the opposite direction, when foreign companies wish to be listed in the Korean market, they have the option of directly listing shares or issuing Korean depository receipts (KDR). Firstly, to list shares in the Korean markets, foreign companies should go through an IPO process. In such cases, KSD acts as a CSD in charge of the registration and settlement of the shares, and also as a transfer agent providing securities administration services such as title transfer, issuing services, and dividend payment on behalf of the issuer. However, this method is not without a significant obstacle: the conflict in laws between the place of incorporation and the place of trading. There should be no restriction on transfer in the articles of incorporation and also, the method of issuing shares and exercising rights should not be in conflict with local laws and the relevant regulations of KSD.
An important criterion in deciding whether to issue KDRs or shares in Korea also lies on this point since KDR issuance can minimize legal conflict through elaborately constructed contracts. The structure and issuance procedure of KDR are the same as that of DRs described above. The only difference stands in that KSD is the KDR depositary, not a custodian. Pursuant to the Korean law, KSD is solely allowed to conduct operations as a KDR depositary bank. As a depositary bank, KSD appoints an overseas custodian by entering into a custodial agreement to deposit the underlying shares of the KDR in the country where the shares are issued.
KDR can be a great alternative for foreign corporations that are ineligible to issue stocks in Korea, but there are some conditions for issuing KDR. KSD's acquisition of ordinary shares should not be in violation of the law of the issuer’s home country, and there should be no restriction on the exercise of shareholder rights by KSD. After confirming that the securities are eligible for KDR issuance through a written opinion submitted by a lawyer of the country of incorporation, KSD issues KDRs and distributes them to investors through domestic brokers.
We have seen how KSD has expanded its business scope on a global scale based on its function as a CSD, and what roles KSD fills in each of those services. The full breadth of KSD’s services cannot be contained in this article, but we hope to share more information in the future through articles, workshops and conferences. Although the coronavirus has hindered many of our activities, it is no obstacle to our enthusiasm for interacting with each other and sharing our development experiences. We sincerely look forward to the next knowledge sharing opportunity and hope we will soon be able to meet face-to-face.