President Lee Jae-myung shared a news article on his Facebook page on June 8, writing, "Isn't this share price manipulation?" The article concerned a 13 billion won (about $8.56 million) privately placed exchangeable bond issued by Kosdaq-listed Intops in October last year to raise operating funds. Financial regulators have since launched a probe. [Yonhap]
President Lee Jae-myung shared a news article on his Facebook page on June 8, writing, "Isn't this share price manipulation?" The article concerned a 13 billion won (about $8.56 million) privately placed exchangeable bond issued by Kosdaq-listed Intops in October last year to raise operating funds. Financial regulators have since launched a probe. [Yonhap]

Treasury-share EB issuance hit 50 deals worth 1.4455 trillion won in Q3 last year

Current commercial law bans new treasury-share EBs, but pre-enforcement issues remain valid

The practice of issuing exchangeable bonds backed by treasury shares at small and mid-sized listed companies has come under fresh scrutiny after President Lee Jae-myung publicly called out the structure used by Kosdaq-listed Intops. A "treasury-share EB" is a financing method in which a company issues bonds exchangeable into its own shares held in treasury. The instrument was a legally recognized financial tool at the time of issuance, but critics say it conflicts with the spirit of the revised Commercial Act, which now mandates the cancellation of treasury shares.

President Lee shared a news article on social media on June 8 about Intops' EB structure, writing, "Isn't this share price manipulation?" The report described how Intops attached a call option to a 13 billion won EB it issued last year, allowing the company to redeem the bonds if the share price rose above a certain level — a structure critics said was designed to encourage short selling and suppress price gains.

The Intops EB carries a coupon rate and yield to maturity of 0%. The disputed element is the call option: if the company's share price exceeds 130 percent of the exchange price for 10 consecutive trading days, Intops can buy back the bonds from investors by paying just 0.1 percent interest. The structure effectively caps shareholders' potential gains when the stock rises sharply. Financial regulators have also stepped in. The Financial Services Commission, the Financial Supervisory Service and the Korea Exchange are reportedly examining whether disclosure at the time of issuance was appropriate and whether the bond's structure may have facilitated unfair trading.

Similar EB issuances spread rapidly across the small and mid-cap sector before the amended Commercial Act — which includes a mandatory treasury-share cancellation requirement — took effect in March. According to Financial Supervisory Service data, companies announced 50 decisions to issue treasury-share EBs in the third quarter of last year, totaling 1.4455 trillion won. That already surpassed the full-year 2024 total of 28 deals worth 986.3 billion won.

The rush continued into the fourth quarter of last year, with mid- and small-cap companies including Bionex (15.5 billion won), Daechang (12 billion won), Haesung Industries (17.2 billion won) and Seorin Bio (3.3 billion won) all issuing EBs. Even after the new year, Creverse (4 billion won), Bumhan Fuel Cell (7 billion won) and Rsupport (3 billion won) squeezed in last-minute issuances just before the law took effect.

Since the mandatory treasury-share cancellation rule came into force, new treasury-share EB issuances have fallen to zero. Bonds already issued before the law took effect, however, are subject to transitional provisions. For bonds issued before the law using treasury shares as the exchange or redemption asset, the cancellation obligation kicks in one year after the exchange or redemption period ends. EBs issued before the law can therefore effectively delay the cancellation of treasury shares until the bonds mature or the exchange period expires.

Most companies that issued treasury-share EBs cited purposes such as securing operating funds, investing in new projects or improving their financial structure. The instrument lets a company raise capital using existing treasury shares without issuing new stock, and setting both the coupon and maturity rates at 0 percent eliminates financing costs. If the share price rises above the exchange price, investors can convert to shares, reducing the company's cash repayment burden.

For existing shareholders, however, EB issuances are a disadvantage. Under the new law, treasury shares must be canceled within one year, which would reduce the total share count and increase the value of each remaining share. But if EB holders exercise their exchange rights, those treasury shares pass to the EB investors and are revived as voting shares — and the gains that would have accrued to existing shareholders through cancellation instead flow to the EB investors.

"Treasury-share EBs are a low- or zero-interest financing tool for the company, but from the shareholder's perspective they create a structure in which shares that should be canceled can end up in the hands of a third party," a financial investment industry official said. A capital markets expert said that while it would be difficult to treat all pre-enforcement issuances as problematic, "companies that locked up treasury shares in EBs after the mandatory cancellation requirement was already announced now face much greater accountability obligations."


hong@heraldcorp.com