The conversion price of a Korean convertible bond (CB) never falls below 70% of its original level, no matter how far the stock drops. The Financial Services Commission's Regulation on Securities Issuance and Disclosure caps downward refixing at 70% of the initial conversion price. That 70% works less as protection for the bondholder than as a ceiling on how much dilution existing shareholders must absorb. Cut the conversion price by 30% and the share count from the same issue size rises not by 30% but by 43%. The asymmetry is the whole point of the floor.
The 70% floor, and the only remaining exception
Refixing is a clause that lowers a CB's conversion price on a preset schedule when the share price falls after issuance. If the stock trades below the conversion price, there is no reason to convert, so the price is reset downward and the same money buys more shares. For the bondholder it is downside protection; for existing holders it is share count that grows without notice.
The rule has two layers. First, downward adjustment tied to market price stops at 70% of the initial conversion price. Second, going below that requires an exception — and since 1 December 2024 that door has narrowed. Previously a clause in the articles of incorporation was enough; the amended regulation deletes that route and requires a special shareholder resolution for each individual issue. Even a restructuring situation follows the same procedure.
The same amendment allows downward adjustment for rights issues and stock dividends only down to a price that reflects the dilution effect, and fixes the reference date for privately placed CBs at the actual payment date. That closes a gap in which the interval between subscription and payment was used to lock in a low reference price. Call options must now name the specific exerciser rather than the vague "the company or a party designated by it."
How many shares does a 30% cut create?
The scale only becomes visible in numbers. Take a company with 10 million shares outstanding that issues a 10 billion won CB at an initial conversion price of 10,000 won. Convertible shares grow as issue size ÷ conversion price, and a holder who owned 10% (1 million shares) sees their stake fall to 1,000,000 ÷ (10,000,000 + converted shares).
| Conversion price (KRW) | vs. initial | Converted shares | Total shares after | Stake of a 10% holder (%) |
|---|---|---|---|---|
| 10,000 | 100% | 1,000,000 | 11,000,000 | 9.09 |
| 9,000 | 90% | 1,111,111 | 11,111,111 | 9.00 |
| 8,000 | 80% | 1,250,000 | 11,250,000 | 8.89 |
| 7,000 | 70% (floor) | 1,428,571 | 11,428,571 | 8.75 |
| 5,000 | 50% (with special resolution) | 2,000,000 | 12,000,000 | 8.33 |
As the conversion price falls 30% from 10,000 to 7,000 won, convertible shares rise from 1,000,000 to 1,428,571 — an increase of 42.9%. The two percentages diverge because share count is proportional to the inverse of the conversion price: 1 ÷ 0.7 = 1.4286. The stake itself slips only 0.34 percentage points, from 9.09% to 8.75%, which looks mild. But that reflects a single CB. When a company issues several tranches and each refixes to its floor, the reductions stack.
A 30% cut in conversion price is a 43% increase in shares — the cost of refixing always shows up on the share count side, never on the price side.
Earnings per share runs through the same denominator. With net income fixed at 10 billion won, EPS is 1,000 won before conversion and 875 won once a floor-level refixing converts in full — a 12.5% cut. Unlike a rights issue, where the discount is set once at the offering price, refixing gets another chance every time the stock weakens. Comparing it with the discount and dilution math of a third-party allocation rights issue makes the difference in mechanism clear.
When the stock recovers, the conversion price rises too
One-way refixing ended on 1 December 2021. Privately placed CBs eligible for downward adjustment must now adjust the conversion price back up, within the original conversion price, when the share price recovers. Article 5-23(3) requires the adjusted-up price to sit at or above the downward reference price and no higher than the price set at issuance.
Two practical consequences follow. First, in a sharp drop-and-recovery cycle, refixing disclosures appear in both directions; reading only the downward notice and pinning dilution at its maximum will be wrong. Second, because the upward cap is the original conversion price, a stock that climbs above its issuance level does not drag the conversion price with it. That upside stays with the bondholder.
Announcing its January 2024 package on private CB market integrity, the FSC said it had 40 unfair-trading investigations open on private CBs, of which 14 were closed with 33 referrals to prosecutors. The requirement to file a material-events report one week before payment on a private CB issue dates from the same package. The direction of every amendment has been consistent: disclose the terms earlier, and in specifics.
What to watch in the filings
For a stock with CBs attached, the order of inspection matters more than the fact of issuance. The terms are the information.
- Current conversion price against the initial one — near 70% means the room for further market-driven cuts is essentially spent.
- Unconverted balance ÷ current conversion price — the ceiling on new shares still to come. Divide by shares outstanding for the potential dilution rate.
- Whether a special resolution granted a sub-70% exception — for issues after December 2024 the articles of incorporation no longer suffice, so it appears in the meeting notice and agenda.
- Call option holder and exercisable quantity — the amended rules require naming the exerciser, the consideration and the disposal plan.
- Any upward adjustment notice — a recovery-phase adjustment changes the potential share count estimate.
- First conversion date and lock-up expiry — when the shares can actually reach the market.
All six are free to check in the public filing system. Working the potential share count out by hand once means that when a refixing notice appears, it is immediately clear whether the number is already priced in or newly added. The same arithmetic frame underlies how buybacks and cancellations split EPS outcomes.