South Korean government policymakers and businessmen are locked in a heated debate over how to revamp the governance structure of family-controlled South Korea apartment conglomerates, known here as "chaebol." At the heart of the controversy is a government move to change the current restrictions on chaebol subsidiaries' equity investments in one another or nonaffiliated companies, which expire at the end of this year.

South Korean law bans subsidiaries of 59 large business groups with assets of 2 trillion won (US$2.11 billion) or more from making equity investments in one another. Companies belonging to the 14 largest business groups with assets exceeding 6 trillion won are prohibited from purchasing stakes in their affiliates or other firms in excess of 25 percent of their net worth.

The Fair Trade Commission (FTC), the nation's corporate watchdog, has proposed banning the so-called circular intra-group shareholding system and barring key affiliates within a conglomerate that has assets exceeding 2 trillion from purchasing stakes in other firms that exceed a quarter of their overall worth.

It said this "toned-down" investment ceiling rule will affect 27 affiliates belonging to seven large chaebol groups, with total assets exceeding 10 trillion won.

The FTC insists on such a change to rein in the power of conglomerates, but the business community calls for the scrapping of all investment and shareholding restrictions. The finance and commerce ministries are opposed to the FTC proposal, saying it may affect the overall business climate and adversely affect investment and job creation.

Circular shareholding involves a complex and interconnected ownership structure that allows owner families of chaebol to control affiliates with only small direct stakes. In the system, one company that the owner family holds stakes in acquires shares in another, which in turn buys stakes in a separate business.

On average, South Korea's largest conglomerates are controlled by shareholders that own less that 5 percent of outstanding stock, but exert influence on 44 percent of shares through the circular ownership structure.

The stock ownership structure has been blamed for allowing a handful of people with small stakes in companies to control the decision-making process of all subsidiaries.