Editor’s note: This is general educational information about how convertible bond pricing terms are regulated in Korea. It is not investment advice, and the rules, thresholds and dates below come from the regulatory documents listed at the end.
A convertible bond converts at a stated price. A refixing clause lets that price be reset downward when the share price falls, which sounds like an administrative detail and is in fact the term that decides how much of the company existing shareholders keep. Korea has spent several years narrowing who may reset the conversion price, by how much, and with whose approval, and the resulting floor is one of the more specific numbers in Asian securities regulation.
The Floor and the Exception That Swallowed It
Korean rules set the minimum level of refixing at 70 percent of the initial convertible price. A company could go below that floor only in exceptional cases, such as corporate restructuring, and only by securing a special resolution at a general shareholders’ meeting or by relying on its articles of incorporation.
That second route is what failed. The Financial Services Commission found that companies were using their articles of incorporation to bypass the minimum for reasons that were not exceptional, refixing conversion prices arbitrarily in ways that generated profits for particular shareholders and damaged shareholder value. On January 23, 2024, FSC Vice Chairman Kim Soyoung announced a plan to improve the soundness of the convertible bond market, naming three problems: a lack of transparency in the issuance and circulation of CBs, arbitrariness in the refixing of convertible prices, and potential misuse in unfair trading.
The fix removed the alternative. Under the proposed rule change put out for public comment from May 28 to June 11, 2024, a company may refix a convertible price below 70 percent of the initial convertible price only by securing a special resolution at a general shareholders’ meeting. The articles of incorporation stop being a substitute for a vote.
A Second Leak: Adjustments for Capital Actions
The floor governs refixing tied to a falling share price. A separate mechanism adjusts the conversion price when the capital structure itself changes, through a capital increase or a stock dividend, and that adjustment could be made by board decision alone. The FSC identified cases of excessive downward adjustment through this route, and the rule change makes clear that any downward adjustment following a change in capital status is allowed only above the value that reflects the event.
The distinction matters because the two adjustments have different justifications. Resetting after a rights issue or a stock dividend is arithmetic, restoring the bondholder to the economic position the terms promised. Resetting because the shares fell is a transfer, moving value from existing holders to the bondholder. Korean rules now treat the arithmetic one as bounded by the arithmetic and put the transfer to a shareholder vote when it goes past the floor.
The Call Option Is Part of the Same Structure
Refixing rarely travels alone. Korean CBs commonly carry a call option allowing the issuer, or an entity the issuer designates, to buy the bonds back, and who holds that option determines who benefits from a reset conversion price. From May 1, 2023 the FSC applied the same call option and refixing rules to redeemable convertible preference shares issued by listed companies, having completed the revision of the regulation on securities issuance and disclosure on March 29 of that year, as a follow-up to the plan announced the previous September.
Those rules do two things. They cap the exercise of call options by largest shareholders at the level of their initial shareholding proportion at the time of issuance, so a controlling holder cannot use the instrument to increase its stake beyond where it started. And for redeemable convertible preference shares issued through private offerings by listed companies, they make an upward adjustment of the convertible price mandatory if the share price recovers after a downward adjustment. A ratchet that only moves one way was the design being closed off.
Disclosure was tightened alongside. Companies had been disclosing the call option holder as the company or a company-designated entity, a formulation the FSC said left investors unable to identify who would actually exercise it. The proposed rule change requires a material information disclosure when an entity is designated to exercise the call option or when the right is transferred to a third party. A second requirement targets bonds acquired close to maturity, converted and resold to the largest shareholder, a practice the FSC described as similar in substance to issuing new CBs: acquiring CBs near maturity now triggers a material disclosure setting out the reason and the plan to write off or resell them.
Other markets attach the same kind of trigger to conversions themselves. Under the ASX Listing Rules an issue made as a consequence of the conversion of any convertible securities must be notified to the exchange within 5 business days of the issue under Listing Rule 3.10.3B, and an exercise of options is treated as a conversion for that purpose.
Enforcement Ran in Parallel
The FSC did not treat this only as a drafting problem. In the January 2024 announcement it reported that the FSC, the Financial Supervisory Service and the Korea Exchange had investigated 40 unfair trading cases involving convertible bonds in the previous year, that 14 of those cases were closed, and that a total of 33 individuals had been reported to the prosecution office.
Analysis: What the Floor Is Actually Protecting
The 70 percent floor is usually explained as a limit on dilution, and that is the effect rather than the mechanism. What the rule does is fix the point at which a decision stops being management’s to make. Above the floor, the conversion price can move on the terms written into the instrument. Below it, an identifiable group of shareholders has to vote in favour of their own dilution at a general meeting, with a special resolution rather than a simple majority.
Read that way, every element of the reform is about relocating a decision. The articles of incorporation route was closed because it converted a one-time constitutional provision into standing permission. The capital-status adjustment was bounded because that route allowed a downward adjustment by board decision alone, without the vote the floor requires below 70 percent. The call option cap exists because the option holder is the party who profits from a low conversion price, and the largest shareholder holding it turns a financing into a stake increase. The disclosure requirements exist because none of the above is checkable if the designated entity is described only as a company-designated entity.
What the framework does not do is make a refixing CB a safe instrument or a dangerous one. A bond that refixes to the 70 percent floor after a decline still dilutes, and the FSC’s rules only ensure that going below that point is visible and voted on. The elements a careful reader would look for in a Korean CB disclosure are therefore the initial conversion price, whether the terms allow refixing below 70 percent and on what authority, who is named as the call option holder and whether that name has since changed by material disclosure, whether an upward adjustment applies if the share price recovers, and whether the issuer has filed anything about acquiring its own bonds near maturity.
Those five items describe the instrument. The coupon, in most of these structures, describes very little.
