As a number of South Korean companies are amending their corporate provisions to allow more issuance of equity-linked notes to secure funds, concerns are rising over a possible decline in shareholders’ value due to stock dilution.

According to the country’s Financial Supervisory Service’s corporate disclosure website on Wednesday, Hanwha Galleria Timeworld Co., a retail unit under Hanwha Group, will be able to up the maximum amount in which it can issue convertible bonds (CBs) and bonds with warrants (BWs) from each 80 billion won ($68.64 million) to 100 billion won. At the company’s shareholders’ meeting on Friday, the company’s board will allow the company to issue equity-linked notes like CBs and BWs when necessary to raise funds to reach certain management goals like implementing new technology and improving overall financial structure. The move, meanwhile, comes after Hanwha Galleria Timeworld acquired the license to operate duty free stores last year, requiring it to aggressively secure funds to finance operations.

CBs and BWs are equity-linked notes that allow investors to receive shares of a company at a predetermined price after certain times. An official from a local company who asked to be unnamed said that one of the benefits of issuing equity-linked bonds from a corporate perspective is that the company can gather investors at lower interest rate than when issuing regular bonds.

The board of directors at Hanwha Corporation, the holding company of Hanwha Group, and Hanwha Chemical Corp. have also each approved to amend the provision to allow the respective company to issue convertible shares, redeemable shares and non-voting shares or a mix of these shares within the range of half of the total equity issued.

Pulmuone Co., a leading food company, also tripled the limit it can issue CBs and BWs from 50 billion won to 150 billion won. Hana Tour Service Inc. also expanded the limit for maximum CB issuance from 3 billion won to 200 billion won while for that of BWs to 200 billion won. Noroo Holdings Co., a subsidiary of Korea’s leading paint manufacturer, also amended its corporate provision to allow the company to issue registered class shares in addition to other types of shares.

There are concerns, however, that the value of existing shareholders will decline as a result of stock dilution. Although a company would benefit by issuing CBs and BWs as it will be able to raise funds at a lower cost, the overall number of outstanding shares will increase when bonds are converted into stocks, resulting to a decline in shareholders’ equity value. There are also concerns over transparency of where the funds will actually be spent on, considering that companies usually write down the purpose of issuing bonds comprehensively without specific details.

By Kim Je-lim

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]