BS Industrial faces Fair Trade Commission sanctions over below-market share sale to founder's son's firm

BS Industrial, a comprehensive real estate developer, faces sanctions proceedings by the Korea Fair Trade Commission over allegations that it sold unlisted shares in development project vehicles to a company owned by the conglomerate founder's eldest son at below-market prices, enabling the firm to collect tens of billions of won in dividend income.

The Fair Trade Commission said Wednesday it had submitted an examiner's report on suspected unlawful support involving BS Group affiliates BS Industrial and Korea D&I to the commission and sent copies to the respondents.

An examiner's report is a document in which the examiner sets out findings on legal violations and recommended sanctions based on the investigation. Formal sanction proceedings begin once the report is sent to the respondents.

The commission's examiner found that BS Industrial applied below-market prices when transferring unlisted shares in two project financing vehicles, or PFVs, to Korea D&I in June 2020.

A PFV is a company established to carry out large-scale development projects; after completing a project, it distributes profits to shareholders as dividends and is then dissolved. BS Industrial set up two PFVs to pursue public housing development projects — one at Block 21 of Busan Eco Delta City and the other at Blocks C1 and C3 of the Gosan district in Uijeongbu, Gyeonggi Province.

According to the examiner, BS Industrial sold its PFV stakes to Korea D&I — a company in which the founder's eldest son and his family hold a 100 percent stake — at a price below the par value of 5,000 won per share, even though the development projects were expected to generate substantial profits.

Korea D&I became a shareholder in both PFVs through the transaction just about four months after its incorporation and subsequently collected about 37 billion won ($27.2 million) in dividend income, according to the investigation. The examiner calculated the scale of the unlawful support at about 7 billion won, based on the difference between the assessed market price and the actual transaction price of the PFV shares.

Choe Jang-gwan, director of the Fair Trade Commission's conglomerate monitoring bureau, said the transaction price used by the respondents was "in the late 2,000 won to 3,000 won range per share," adding that the commission's own valuation, which factored in future profits, showed a considerable gap. He said the specific figures could not be disclosed as they would be contested at the hearing.

The examiner concluded that the transaction constituted a gravely serious violation of the Fair Trade Act and recommended that a corrective order and a penalty surcharge be imposed.

The commission will next accept written submissions from the respondents and carry out procedures including review of evidence and oral statements. It will then hold a full commission hearing to determine whether the law was violated and decide on the final level of sanctions.