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[Editorial] Full disclosure

Oversight should precede incentives for participants

South Korea has introduced the English disclosure system, through which investors can access corporate regulatory filings both in Korean and English. This is a major development in the stock market, which was opened to foreign investors in 1992.

The collective market capitalization of publicly traded companies on the main and secondary bourses is the 13th-biggest in the world with about 1.2 quadrillion won ($1.03 trillion). Considering the scale and policy aims of Korea‘s globalized investment environment, the system should have been adopted far earlier.

Though the system, which started Monday, is not currently mandatory, it is welcome to see policymakers reflecting the demands of foreign investors. Foreign investors have constantly pointed out their discomfort about being unable to immediately access key Korean financial information in English, in contrast to disclosure systems of Hong Kong and Singapore.

The first group, designated by the Korea Exchange, consists of 175 major firms listed on the main bourse which include Samsung Electronics and Hyundai Motor.

As it accounts for only 23 percent of the 769 firms on the main bourse, it would be more desirable for KRX to gradually expand the dual disclosure list to the remaining 594 firms and those registered on the secondary KOSDAQ market.

However, a key concern is that contents of their regulatory filings in English might be lax or inaccurate compared to those in Korean. There is also the possibility that some companies could choose to publicize information in English on a selective basis, as it is not an obligation.

An ambiguity or inconsistency in nuance between disclosures in Korean and English on the same issue could mislead investors. This may backfire and undermine the credibility of the overall market.

To prevent adverse effects, the KRX should secure adequate manpower to effectively monitor the quality of English reports issued by the 175 firms.

There is also a possibility that some may exploit the dual language system as the KRX has promised a package of incentives. The exchange operator has clarified that companies regularly disclosing their information in English will be offered a grace period of up to three years during which they will not be severely punished for filing wrong or misleading financial information.

KRX officials said the introduction comes as part of the efforts to get the Korean stock market classified as an “advanced market” in the Morgan Stanley Capital Investment’s global stock indices.

If the English content is inferior and the number of insincere disclosures in Korean increases as an exploitation, a change of MSCI status would be of little use.

The KRX and listed companies should be alert to the situation that misleading investors by public misinformation could invite litigation such as class action suits. So incentives like grace periods should at least be given on condition of regular supervision.