No longer an economic island , South Korea has opened to global trade and investment. Chaebols (conglomerates) have transformed Hyundai, Daewoo, Samsung and Luck Gold Star into international brand leaders. Korea is embracing privatization and facilitating access to foreign capital.

In the decade ending 1995, South Korea's growth of 7.8% per annum was second only to Thailand (8.2%) - far outpacing the 1.8% averaged by established industrial companies. Since the Seoul bourse was opened to foreigners in January 1992, the net inflow of equity investment has reached USD 12.4 billion. Foreign investors have gained access by slow degrees over the past 15 years, as shown below.

High interest rates and corruption scandals buffeted the stock market triggering a 15% drop in 1995 - despite 35% growth in earnings per share. However, authorities hope that strong macroeconomic fundamentals and market reforms will restore investor confidence. Economists project 7.5% growth in 1996, while country analysts rank South Korea among the safest emerging markets (4th out of 25) - despite military threats north of the 38th parallel and uneasy relations with China.

Economic liberalization is accelerating, fueled by South Korea's drive to qualify for membership in the Organization for Economic Cooperation and Development (OECD). Fifty-eight state-owned firms are to be privatized by 1998. So far, however, only 15 small companies have been sold outright. Prime holdings , such as the government's one-third share of POSCO (Pohang Iron and Steel) , have yet to be auctioned off.

Not withstanding recent reforms, South Korea remains one of Asia's most heavily regulated markets. The Ministry of Finance attempts to curb sudden market swings through direct intervention with KRW 5 trillion (USD 6.4 billion) Stock Market Stabilization Fund. Bureaucrats also restrict foreign capital with rigid market entry rules, investment limits and exchange controls.

Market Entry Requirements

Before investing, a foreign investor must appoint a standing proxy and apply for an Investment Registration Card (IRC). Royal Trust can assist you in this documentation process.

• Limited power of attorney from the investor (1) appointing Korea Exchange Bank , Royal Trust's subcustodian, as standing proxy and (2) authorizing Korea Exchange Bank to apply for an Investor Registration Card (IRC) on the investor's behalf.

• Application form providing detailed information on the investor.

• Certificate of incorporation or authorizing letter from a recognized tax authority.

• Statement identifying shareholdings acquired under the Foreign Capital Inducement Act of the Foreign Exchange Control Regulation.

Note: Once an IRC for equities has been granted, the investor can apply for a bond IRC without filing additional supporting documentation.

Investment Restrictions

Ownership limits have frustrated some non-resident investors. In theory, once thresholds are reached, non-residents can continue trading over-the-counter (OTC) with other foreigners through local brokers. However, these OTC shares typically sell at a premium . Even worse, since pricing varies by broker, valuation can be unreliable. Some relief is in sight as the Ministry of Finance relaxes restrictions.

Currency Controls

Korea's won (KRW) is not freely convertible. Foreigners must open separate non-resident currency accounts with designated foreign exchange banks. Moreover, each KRW currency trade must be linked to a specific securities transaction approved by authorities. Overdrafts on KRW accounts are strictly forbidden.

Infrastructure

South Korea satisfies all but two of the Group of thirty guidelines ( ISIN numbering and securities lending). The Korea Depository Corporation was founded in 1974, followed two years later by the Securities Exchange Commission and its executive body, the Securities Supervisory Board.

Beginning with just 13 equities in 1956, the Korea Stock Exchange (KSE) now boasts over 700 listings and an electronic trading system, SMATS. Investors are protected against broker default by the KSE's Joint Compensation Fund.

Settlement Procedures

KSE and over-the-counter trades are settled on T+2 via book-entry transfer. The short settlement cycle means that Royal Trust must receive trade instructions no later than T+1 at 9:00 (UK time). Trades not settled by T+4 are subject to sell-outs and buy-ins. When a trade fails, the security must be sold at the lowest price on the second day after the failed transaction. This means, in effect, investors assume the risk of price and currency fluctuations for four days (T+4).

Taxes

Effective April 1, 1996, the total tax on exchange-traded securities was reduced to .30% (from .50%). The charge on over-the-counter trades remains .50%.

A treaty with Canada reduces the normal 27.5% tax rate on interest and dividend income to 16.5% (including a 1.5% "residence tax") for eligible investors. The treaty rate is withheld at the source, so investors benefit from tax relief without delay.

Royal Trust's Subcustodian

Royal Trust was among the first global custodians to establish a subcustodial relationship in South Korea. Our current subcustodian, Korea Exchange Bank, is a well-established local provider with an intimate knowledge of Korea's complex regulatory landscape.

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