Proposal for a COUNCIL REGULATION imposing a definitive countervailing duty and collecting definitively the provisional duty imposed on imports of certain electronic microcircuits known as DRAMs (dynamic random access memories) originating in the Republic of Korea

(presented by the Commission)

EXPLANATORY MEMORANDUM

On 25 July 2002, the Commission initiated an anti-subsidy investigation with regard to imports into the Community of certain electronic microcircuits known as DRAMs (dynamic random access memories) originating in the Republic of Korea.

The investigation revealed the existence of injurious subsidisation, and consequently the Commission, by Regulation (EC) No 708/2003, imposed a provisional countervailing duty on imports from the Republic of Korea.

The attached proposal for a Council Regulation is based on the definitive findings on subsidy, injury, causation and Community interest which confirmed or modified the provisional findings.

It is therefore proposed that the Council adopt the attached proposal for a Regulation which should be published in the Official Journal of the European Union no later than 24 August 2003.

Proposal for a COUNCIL REGULATION imposing a definitive countervailing duty and collecting definitively the provisional duty imposed on imports of certain electronic microcircuits known as DRAMs (dynamic random access memories) originating in the Republic of Korea

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 2026/97 of 6 October 1997 on protection against subsidised imports from countries not members of the European Community [1], as amended by Regulation (EC) No 1973/2002 [2], and in particular Article 15 thereof,

[1] OJ L 288, 21.10.1997, p. 1.

[2] OJ L 305, 7.11.2002, p.4.

Having regard to the proposal submitted by the Commission after consulting the Advisory Committee [3],

[3] OJ C [...], [...), p. [...]

Whereas:

A. PROVISIONAL MEASURES

(1) By Commission Regulation (EC) No 708/2003 [4], (hereinafter referred to as 'the provisional Regulation'), a provisional countervailing duty was imposed on imports into the Community of certain electronic microcircuits known as DRAMs (dynamic random access memories) originating in the Republic of Korea.

[4] OJ L 102, 24.4.2003, p.7.

(2) It is recalled that the investigation of subsidisation and injury covered the period from 1 January 2001 to 31 December 2001 ('IP'). The examination of trends relevant for the assessment of injury covered the period from 1 January 1998 to the end of the IP ('period under consideration').

B. SUBSEQUENT PROCEDURE

(3) Subsequent to the disclosure of the essential facts and considerations on the basis of which it was decided to impose provisional measures, several interested parties submitted comments in writing. In accordance with the provisions of Article 11(5) of Council Regulation (EC) No 2026/97 (hereinafter referred to as the 'basic Regulation'), all interested parties who requested a hearing were granted an opportunity to be heard by the Commission.

(4) The Commission continued to seek and verify all information deemed necessary for the definitive findings.

(5) All parties were informed of the essential facts and considerations on the basis of which it was intended to recommend the imposition of a definitive countervailing duty and the definitive collection of amounts secured by way of the provisional duty. They were also granted a period within which they could make representations subsequent to this disclosure.

(6) The oral and written arguments submitted by the parties were considered, and, where appropriate, the provisional findings have been modified accordingly.

C. Product under consideration and like product

(7) As no comments were received following disclosure of the provisional findings regarding the definition of the product concerned and the like product, the conclusions as set out in recitals (8) to (11) of the provisional Regulation are confirmed.

d. subsidies

(8) Following the publication of the Regulation imposing the provisional countervailing duty, the Community producers, Samsung Electronics Co., Ltd. ('Samsung'), Hynix Semiconductor Inc. ('Hynix'), the government of Korea ('GOK'), Korea Exchange Bank ('KEB'), Korea Development Bank ('KDB'), Citibank Seoul, Woori Bank, National Agricultural Cooperative Federation ('NACF') and Shinhan Bank submitted comments concerning the Commission's findings as regards subsidies. The measures commented are the syndicated loan of KRW 800 billion, KEIC guarantee for export credits in the amount of USD 600 million, KDB Debenture Programme, purchase by the creditor banks of KRW 1 trillion worth convertible bonds in May 2001 and the October 2001 restructuring package. Since some general issues are important for the assessment of all measures investigated, these issues are set out in an introductory chapter below.

1. Introduction

(i) Financial contribution by a government

(9) The issue of what constitutes a "financial contribution by a government" is central to this investigation, and it is worth restating some guiding principles on the matter. According to Article 2 of the basic Regulation, for a subsidy to exist there is a need to establish as a first step that there is a financial contribution by a government. Article 1(3) of the basic Regulation defines 'government' as a government or any public body within the territory of the country of origin of exports. According to Article 2(1)(a)(iv) of the basic Regulation, a financial contribution by a government shall be deemed to exist also when a government entrusts or directs a private body to carry out measures which would constitute a contribution by a government pursuant to points (i), (ii) and (iii) of the same Article.

(10) A financial contribution by a government or public body is a subsidy per se if it confers a benefit. If an entity is not determined to be a public body, it is by default a private body, and government direction must be shown under Article 2(1)(a)(iv) of the basic Regulation for there to be a subsidy.

(11) Government ownership, even 100% ownership, does not in itself mean that a company concerned is considered to be a public body. Nor does government ownership, at whatever level, create a "rebuttable presumption" of a public body. However, the level of government ownership is an important, in some cases the most important, component of a determination of whether a public body exists. The higher the government's share, the more likely a finding of a public body.

(12) Where companies are 100% private and where the government is not the main shareholder, it will normally be difficult to establish that a company is a public body, unless convincing evidence to the contrary exists. In both of these cases, the company would be considered to be a private body, and 'direction' from the government to provide financial contributions would have to be shown under Article 2(1)(a)(iv) of the basic Regulation.

(13) Conversely, if the government is the largest, and especially the majority shareholder in a company, the company in question may well be considered to be public body if other relevant criteria are fulfilled. These criteria take account of the notion, implicit in dictionary definitions, that a public body is an institution authorised to act on behalf of a community as a government entity, as distinct from a private body which is presumed to act in the interests of its owners.

(14) The relevant criteria which can be taken into account in determining whether a given company does indeed qualify as a public body include:

a) The pursuance of public policy objectives which go beyond the normal remit of a private organisation and include, for instance, a requirement to take account of national or regional economic interests, promotion of social objectives etc. These criteria may be non-commercial, in the sense that they compromise the normal objective of profit maximisation.

b) Government control going beyond ownership. The higher the government ownership, the more likely it is that control exists. This can be demonstrated by government influence in appointments, the right of the government to review results and to determine objectives, and the extent to which the government has to be involved in individual investment or business decisions.

(15) With regard to the notion of direction in Article 2(1)(a)(iv), this exists where the government requires a private body to carry out functions normally vested in the government and the practice does not differ from practices normally followed by governments. It is not sufficient to show that a government merely encouraged or facilitated such actions, although such encouragement or facilitation may be a factor to be considered.

(ii) Non-cooperation

(16) When determining the existence of a public body or of government direction, the investigating authority bears the burden of proof when making a positive finding. Such findings must be made on the basis of positive evidence, taking account of the totality of the facts on the record and available to the authority, and weighing these facts in accordance with the considerations above. In appreciating the facts in question, due account must be taken, in accordance with Article 28 of the basic Regulation, of the failure of certain parties to cooperate fully with the investigation, which has in some cases necessitated the use of information from other sources. In this particular case, it has become apparent that the GOK failed to provide a number of requested documents on meetings relating to the future of Hynix. The GOK also failed to inform the Commission that such meetings took place, in spite of clear requests being made to this end in the questionnaire and at the on-spot verification. The GOK has been made aware of the consequences of non-cooperation in accordance with Article 28 (1) and (6) of the basic Regulation. In view of this lack of cooperation, it has been necessary, in addition to taking account of relevant GOK documents submitted by other parties, to use information from secondary sources, including from the Korean press. Such information has been viewed with special circumspection, the GOK and Hynix given the opportunity to comment on it, and, where practicable has been cross-checked with other independent sources.

(17) In its comments on the final disclosure GOK objected to the conclusions made that it had withheld important information in relation to certain documents and meetings and had not fully co-operated with the investigation. GOK claimed that the Commission had posed imprecise questions and that the documents and meetings were not covered by the Commission's requests. It is noted that the questions posed in the questionnaires as regards each individual measure investigated as well as during the verification visits, were clear and unambiguous and referred specifically to any GOK involvement in any meetings concerning the measures under investigation. Thus the assertion of GOK that they did not consider this information to be covered by the questions asked is not found to be convincing.

(18) It is also recalled that a number of Korean banks failed to co-operate with the Commission in the investigation. In particular, KorAm Bank and Citibank failed to respond to deficiency letters concerning their response to the questionnaire and, therefore, to provide necessary information. Kookmin Bank, Korea First Bank and Shinhan Bank refused to accept on-spot verification of their responses to the questionnaire. All banks were informed that their non-co-operation may have adverse effects on the outcome of the investigation with regard to their client Hynix and that any findings may be made on the basis of the facts available in accordance with Article 28 of the basic Regulation. They were also given an opportunity to comment and the consequences of the non-cooperation were made known to them. Similarly, Hynix has to be considered as a partial non-cooperator in this investigation. Its failure to allow its financial advisor to cooperate, seriously impeded the investigation.

(iii) Financial situation of Hynix

(19) As a general remark it is recalled that the financial situation of Hynix was critical during recent years including the investigation period. The company was loss making even during 2000, a year generally considered to have been very good for the DRAMs industry. It is noted that at the end of 2000, Hynix had accumulated more than USD 9,46 billion of liabilities. This was almost twice its net worth and more than four times the value of the market capitalisation of the company. [5] Moreover, the majority of these liabilities were maturing throughout 2001 when the company was facing serious liquidity problems. Even GOK recognised already in November 2000 "the cash crunch of Hyundai Electronics". At the beginning of 2001, investment analysts like Morgan Stanley and UBS Warburg predicted that the company would not be able to generate cash from internal cash flow or asset disposals to pay off its maturing liabilities. In October 2001, when the bailout measures subject to this investigation where decided upon, Hynix's debts were six times its equity.

[5] Hynix business plan for 2001 filed with the FSC, 21 March 2002.

(20) The financial ratios of Hynix according to so called Altman Z-score model, designed specifically to predict the likely failure of Korean companies, were in 1999-2001 far worse than other Korean companies that actually did fail. The Hynix scores were 700% higher than the threshold level of a company in severe financial distress. [6] Hynix's current and quick ratios were indicative of a company with totally inadequate liquidity to cover obligations [7]. Hynix's net profit margin, return on assets, and return on equity were negative in nearly every year since 1997, with net margins reaching negative 24,3% in 2000 and a negative 93,83% in 2001. In every year from 1997 to 1999, the company's cash flow from operations was not enough to cover even one sixth of its debt or total liabilities. Hynix would have required additional cash flows of KRW 2 trillion in 2000 and KRW 4,5 trillion in 2001 merely to meet its debt repayment schedule during that period. In January 2001 in a UBS Warburg report, the firm reported that bankruptcy concerns had depressed Hynix shares and that investors were concerned that Hynix would have insufficient cash flow to repay maturing debt and be faced with potential bankruptcy should it not be able to refinance its debt.

[6] Expert Report of Professor Antihony Saunders in the Matter of the Countervailing Duty Petition on behalf of Petitioner: Micron Technology, 10 March 2003, ('Saunders Report'), 30-35.

[7] Saunders Report, 20-21.

(21) The 2001 financial accounts also discounted the possibility of future financial success for Hynix, stating that the "entire normalisation of the company's operation requires the continuous support from creditor banks until the selling price of semiconductor products sufficiently recovers". These facts indicate that both the history and the future of Hynix was characterised with its dependency on financial assistance from its creditors. Hynix had during the IP reached a point where it was unable to finance its operations by the returns generated by its activities.

(22) The deteriorating situation of Hynix in 2001 was also reflected in its credit rating. At the beginning of January 2001 the rating of Hynix was investment grade BBB- according to the Korean rating agencies and a speculative grade B by Standard and Poor's. The Korean agencies downgraded Hynix to speculative BB+ grade on 22 January 2001. The Standard and Poor's rating was downgraded to B- in March 2001, CCC+ in August 2001 and "selective default" ('SD') in October 2001.

(23) The highest rating assigned by Standard and Poor's is AAA. This indicates an extremely strong capacity to meet financial commitments. AA rating indicates that this capacity is very strong. A is more susceptible to the adverse effects of changes in circumstances and economic conditions, but the capacity to meet financial commitments is still strong. BBB indicates that adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to meet the financial commitments. Ratings BB, B, CCC, CC and C are regarded as having significant speculative characteristics. A BB rated company already faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the company's inadequate capacity to meet its financial commitments. As regards B, adverse business, financial, or economic conditions will likely impair the company's capacity to meet its financial commitments. CCC is currently vulnerable to non-payment and dependent on favourable business, financial and economic conditions to meet its commitments. CC means that the company thus rated is currently highly vulnerable to non-payment. The rating C may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken but payments on this obligation are being continued. SD or D indicates a failure to pay a financial obligation. SD is assigned to a company which can be expected to default selectively, namely continue to pay certain classes of obligations while not paying others. The worst rating is D, which is normally used only where a default has actually occurred. It is not prospective as are the other ratings. The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. The four highest categories, AAA, AA, A and BBB are generally recognised as being investment grade. Debt rated BB or below generally is referred to as speculative grade. The term "junk bond" is merely a more irreverent expression for this category of more risky debt [8].

[8] Standard and Poor's, Corporate Ratings Criteria, www standardandpoors.com.

(iv) Public interest considerations

(24) The financial difficulties of Hynix considerably increased following the acquisition and subsequent merger with LG Semicon Co., Ltd in 1999. The information on the record indicates that the 1999 acquisition and subsequent merger between LG Semicon and Hynix was not based on market principles, but was forced upon them by the GOK as a part of the so called "big deal" policy. GOK felt that three semiconductor companies would be too many in a weakening market situation, and wanted to reduce them to two to consolidate and streamline the core competencies of the companies. As a result of the forced acquisition and merger Hynix had to take over LG debt and pay to it a considerable amount as an acquisition price, which almost doubled its own liabilities. The GOK itself could be said to have contributed to the ever-worsening financial situation of Hynix. As Hynix situation worsened further after the merger, it was widely perceived that GOK felt compelled to protect Hynix from failure since it had a responsibility to take care of the "big deal" companies. [9]

[9] Private Financial experts Verification report, meeting 6 at 14.

(25) The information on the record also indicates that GOK considered Hynix far too important for the Korean economy to be left to fail. Hynix accounted for 4% of the Korean exports in 2001. It employed 24.000 people and a far greater number in upstream and downstream industries. Semiconductors was nominated as one of the strategic export oriented industries of Korea, which also was the reason of the forced merger following the GOK "big deal" policy.

(26) In November 2002, Korea's Grand National Party ('GNP') completed a study regarding GOK mismanagement of funds in recent years. It included an extensive section on the bailout of Hynix and other Hyundai companies. [10] The GNP declared the bailout of Hynix and other Hyundai companies as a major setback to its efforts to bring about market-based reform. The GNP observed that if market principles were to be kept, the Hyundai group's subsidiaries including Hynix should have been bound by the same market principles as other troubled businesses. Nevertheless, the administration forced financial institutions to extend loans to the Hyundai Group and mobilised GOK-invested banks and other GOK-funded or invested institutions to extend considerable amounts to the Hyundai group. With respect to Hynix in particular, the GNP determined that the GOK had steered some KRW 13,7 trillion (USD 10,3 billion) in public funds to Hynix. The GNP also attributed the GOK forced merger of Hynix and LG Semicon to Hynix's later difficulties, an action, which according to it was undertaken, with total disregard for market principles. In defending the GOK measures to finance Hynix, a GOK official stated that the GOK was only doing what was necessary to save companies that were strategically important to Korea.

[10] Public Fund Mismanagement Report, Special Committee on Parliamentary Inspection of Public Fund Administration, Grand National Party, November 2002.

2. Tax reserves, tax exemption and tax credit

(27) Following the imposition of provisional measures no comments which could alter the findings set out in recitals (17) to (25) of the provisional Regulation were made. Therefore, these findings are hereby confirmed. Since any subsidy found for Samsung was de minimis, no definitive countervailing measures should be imposed on this company.

3. Syndicated loan of KRW 800 billion (January 2001)

(28) As set out in the provisional Regulation, it was provisionally concluded that there was insufficient evidence to make a positive finding of a subsidy and it was therefore decided not to countervail this programme. Some interested parties disagreed with this conclusion and have asked for the provisional finding to be reviewed. They argue that under normal market conditions, a company in a comparable financial situation to Hynix would not have obtained financing from commercial sources.

(29) One interested party argued that Hynix was not creditworthy at the time of the measure and therefore the GOK direction is the only possible explanation for the creditors' decision to extend new lending to Hynix. Hence, they argued, the loan conferred a benefit to Hynix and should be countervailed in full. Furthermore that interested party argued, the syndicated loan also conferred a benefit to Hynix because the loan itself could not have been granted without the Financial Supervisory Commission's [11] ('FSC') selective waiver of legal lending limits. GOK directed FSC to raise the legal lending limits of certain banks to ensure the existence of enough participants to raise the KRW 800 billion loan.

[11] FSC was established under the Act on Establishment of Financial Supervisory Agencies in 1996. It supervises financial institutions and also enacts or amends separate supervisory regulations for different financial sectors. It is funded by GOK. It is considered as a public body in the meaning of Article 1(3) of the basic Regulation.

(30) Since the publication of the provisional Regulation, new information of the GOK directing FCS to raise the legal lending limits of some banks participating in the syndicated loan has been obtained. The Commission's provisional findings as regards this measure should therefore be reassessed in the light of the new information. The interested parties, Hynix and GOK, were specifically invited to comment on the new information and their comments have been taken into account in the reassessment of this measure.

(31) According to Article 35 of the Banking Act of Korea, "no financial institution shall extend credits exceeding 25/100 of the relevant financial institution's equity capital to the same individual, corporation and person, or 20/100 to the same individual or corporation" [12]. FSC can, however, approve exceeding these ceilings on the basis of Article 20(3) of the Enforcement Decree of the Banking Act, which lists specific cases in which such approval can be granted. Without FSC approval, banks cannot exceed the legal lending limits laid down in the Banking Act.

[12] English Translation of the Korean text.

(32) On 28 November 2000, a letter from the Ministry of Finance and Economy, signed by the Minister of Finance and Economy, was sent to the President of the Korea Export Insurance Corporation ('KEIC') and the President of the KEB. The letter transmits the results of the discussion on "alleviating the cash crunch of Hyundai Electronics [13]", which was on the agenda of the Economic Ministers' meeting held on the same day (November 28). The letter orders the recipients to make sure that themeasures decided would be "carried out perfectly". The letter also states that the measures to help Hynix were initiated by the Financial Supervisory Service. The letter orders KEB to request an extension of the credit ceilings on behalf of the creditor financial institutions, which according to the results of the Economic Ministers' discussions would be subject to special approval by the FSC. The Minister thereby imposed on KEB an obligation to apply for the extension and on FSC to approve such an application.

[13] The name of Hyundai Electronics was changed to Hynix Semiconductor on 29 March 2001.

(33) In December 2000, KEB filed the request for approval of this extended credit limit for Hynix financing and submitted similar requests for Korea First Bank ('KFB') and KDB. In the FSC decision it was explained that these banks intended to grant a syndicated loan and a D/A facility (documents against acceptance backed loans) to Hynix. FSC approved these requests on the basis of Article 20(3)1.3. of the Enforcement Decree. This provision allows FSC to extend the ceilings "when it recognises that it is inevitable for the industrial development... or the stability of the national life." This provision is a public interest provision and shows that from the GOK point of view, the granting of the extra credit was a public interest issue.

(34) It is noted that according to the minutes of the relevant FSC meeting, the FSC Commissioners approved the increase in the credit ceiling for Hynix financing because Hynix was too big and too important to fail. In the minutes the following is explained: "The semiconductor industry is a strategic industry; after Hynix's merger with LG Semicon in 1999, the company accounted for 20% of the world semiconductor market and 4% of the Korean exports. Hynix employs 24.000 employees in the industry, and other involved companies exceed 2.500 with over 150.000 employees. To support the syndicated loan and D/A financing would improve Korea's international competitiveness. Therefore, for the promotion of the electronics industry policy, the FSC finds it in the best interest to increase the ceiling." [14]

[14] GOK Verification Report, at 16-17.

(35) It is noted that without the extension of the credit ceilings it would have been impossible for the three above-mentioned banks to participate in the syndicated loan. They would have breached their obligations under the Banking Act. The GOK, by directing FSC to approve the extension and by directing KEB to apply for such extension, had effectively directed the banks to extend the loans in a way that they would not otherwise have been able to do under Korean banking laws. It was evident that the credit limits needed to be lifted in order to provide the financing to Hynix. Indeed, when GOK and Hynix were invited specifically to comment on the new information indicating the GOK direction as regards the lifting of the credit limits, neither of them indicated in their comments that there would have been another source of funding available to Hynix at the time of the measures. Moreover, neither party invoked any such probability at any other stage of the investigation.

(36) In accordance with the findings set out in recitals (55) to (59) of the provisional Regulation which are hereby confirmed, KDB is considered to be a public body within the meaning of Article 1(3) of the basic Regulation. As regards KEB and KFB, their participation in the syndicated loan for an amount of KRW 100 billion each is considered to be directed by GOK in pursuing the public policy goal of alleviating the difficult financial situation of Hynix for reasons of industrial development. Therefore, they are in this case considered to be directed by the GOK to carry out a function normally vested in the GOK. The fact that the particular provision of the Enforcement Decree was evoked, also demonstrates that lifting the credit limits was considered as a question of public interest. Moreover, the GOK intervention shows that the granting of the extra credit was a question of public interest, which falls within the practices normally followed by governments. Therefore, the participation of the banks in the syndicated loan fulfils the criteria explained in recital (15) above. Consequently, these measures constitute a financial contribution by government within the meaning of the basic Regulation in Article 2(1)(a)(i) for KDB and Article 2(1)(a)(iv) for KEB and KFB.

(37) According to Article 5 of the basic Regulation, the amount of countervailable subsidy shall be calculated in terms of the benefit conferred to the recipient. The participation of the three banks in the syndicated loan confers a benefit to Hynix to the amount by which the legal lending limits have been exceeded, since this is the amount that Hynix was able to receive only due to the lifting of the limits. Without the lifting of the limits these amounts would not have been granted to Hynix by the banks in question. There was no indication that any other source of similar financing was available to Hynix at the time of the measures. The amounts exceeding the credit limits are therefore considered as subsidies. Since these subsidies are ad hoc measures granted to only one company, they are specific pursuant to Article 3 of the basic Regulation and therefore countervailable. It is noted, however, that the shares of KDB and KEB of the syndicated loan are already countervailed as part of the October 2001 measures. Therefore, in order to avoid double counting, these measures are not countervailed in the context of the January 2001 syndicated loan. As regards the KFB share of the loan exceeding the legal lending limit, the information on the record indicates that any benefit resulting from the lifting of the loan limits would be negligible. Therefore, it is not countervailed in this context.

4. KEIC guarantee for export credits in the amount of USD 600 million (January 2001)

(38) As set out in the provisional Regulation, it was provisionally concluded that there was insufficient evidence to make a positive finding of a subsidy and it was therefore decided not to countervail this measure. Some interested parties disagreed with this conclusion and asked for the provisional finding to be reviewed.

(39) One interested party argued that the countervailable benefit of the measure should not be based on the premiums charged to Hynix, as was done in the provisional Regulation. Instead the party argued that the benefit should be based on the fact that the increase of the credit limit would not have been obtained by Hynix on the market. It was only able to obtain an increase in its credit limit because GOK instructed KEIC (Korea Export Insurance Corporation) to guarantee the increase.

(40) It is noted that according to the information on the record, the banks extended the D/A (documents against acceptance) ceiling only because this extension was guaranteed by KEIC. The additional credit was dependent on the guarantee. In the provisional Regulation the premium paid by Hynix for the guarantee was examined but no subsidy was found on this basis. At the time of the provisional measures, there was no convincing evidence on the record indicating that the GOK had directed the KEIC to issue the guarantee in question. In the questionnaires GOK had been requested to give details of the involvement of GOK or public officials in the process of providing the guarantee to Hynix, including details of relevant meetings. An explanation was in particular requested on the role of the Financial Supervisory Service [15] ('FSS') in the process. The same questions were put to the GOK, FSC/FSS and the KEIC during the verification visit. In their replies these parties explained that neither GOK nor FSC/FSS were allowed to interfere in the decision making process on underwriting the Hynix guarantee.

[15] FSS is a public agency whose main task is to carry out financial supervision under the FSC's guidance. It is considered as a public body in the meaning of Article 1(3) of the basic Regulation.

(41) However, since the publication of the provisional Regulation, new information concerning the GOK's role in directing KEIC to provide the guarantee for the extension of the D/A facility by USD 600 million has been obtained. The provisional findings as regards this measure should therefore be reassessed in the light of the new information. The interested parties, Hynix and GOK, were specifically invited to comment on the new information and their comments have been taken into account in the reassessment of this measure.

(42) In accordance with the findings set out in recital (32) of the provisional Regulation which are hereby confirmed, KEIC is considered to be a public body. Furthermore, as described above under recital (32), the Minister of Finance and Economy sent a letter to the President of the KEIC and the President of the KEB. The second item in the letter reads as follows: "As for the provision of D/A backed loans, the KEIC will temporarily resume the insurance for the balance of the non-negotiated D/A". A similar letter requesting KEIC to "take actions accordingly" was sent to the CEO of KEIC on 30 November 2000 by the Minister of Commerce, Industry and Energy.

(43) A further letter was sent to the same persons, the President of the KEIC and the President of the KEB, on 10 January 2001. This letter was signed by three Korean Ministers: the Minister of Finance and Economy, the Minister of Commerce, Industry and Energy and the Minister of Planning and Budget. The letter submitted the results of the discussions on the acquisition of Hynix D/A at the Economic Ministers' Meeting held on 9 January 2001. The results were the following: "(1) Have the KEIC insure the Hynix D/A acquired by creditor banks by 30 June 2001, up to a total of USD 600 million. (2) As for the shortage of reserve payment capacity of the KEIC fund that might occur in relation to this matter, support will be provided from a separate source of funding". GOK thereby committed itself to compensate KEIC in case it needed to pay out the guarantee and could not do so out of its own risk reserves.

(44) Information on the record indicates that the KEIC position at the time was that Hynix was in a state of a technical insolvency. However, a high-level executive of the KEIC stated at the 1 December 2000 board meeting that "we came to support this transaction at the direction of the Minister of Industry and Resources" [16]. Consequently, several Ministers ordered KEIC to ensure the D/A extension. In recital (35) above the public policy reasons of this decision are explained, as expressed by FSC in the meeting where the measures were discussed. KEIC supported these measures only due to the GOK direction. Since the banks who extended the ceiling only did so on the condition that the extension was guaranteed, the guarantee was an essential precondition for the loan. Therefore, the loan was given as a result of the guarantee.

[16] The Korea Economic Daily, 28.8.2001, following the disclosure of official correspondence by Members of the National Assembly of Korea.

(45) Thus the guarantee was given by KEIC due to specific GOK direction in pursuing the public policy goal of alleviating the difficult financial situation of Hynix for reasons of industrial development. Therefore, KEIC, despite being a public body, was specifically directed by the GOK to carry out a function and follow practices normally vested in the GOK. Consequently, the guarantee is a financial contribution by government within the meaning of Articles 2(1)(a)(iv) and (i) of the basic Regulation. This guarantee conferred a benefit to Hynix, since without the guarantee Hynix was not able to receive the D/A extension of USD 600 million. At the same time, the GOK's assurance that KEIC would be compensated in case of default showed that the premium paid by Hynix could not cover the risk undertaken by KEIC to guarantee the D/A extension and, therefore constituted a non-commercial act. The GOK effectively underwrote the risk of failure of payment by Hynix without asking for any compensation for it. According to the information on the record, the banks would not have granted the D/A facility without the guarantee. Moreover, there is no information that Hynix could have obtained comparable financing from other sources. This coverage of the guarantee, without any adequate premium being paid, is therefore considered to have conferred a benefit to Hynix within the meaning of Article 2(2) of the basic Regulation. In view of the provisions of Article 6(c) of the basic Regulation, since no comparable commercial loan could have been obtained without the guarantee, the coverage of the D/A extension is effectively a grant. The benefit to Hynix and thereby the amount of the subsidy is the amount of the D/A extension, USD 600 million.

(46) In its comments on the final disclosure GOK and Hynix argued that KEIC did not provide funds to Hynix, only insurance, and that Hynix paid market interest rates to banks for the D/A financing. Therefore, the benefit conferred on Hynix by the measure should have been the difference in costs between what Hynix paid for the D/A financing and what it would have paid without the KEIC guarantee. It is noted that the benefit to Hynix is the whole amount of the loans which would have not been granted in whole or in part without the KEIC guarantee which was underwritten by GOK. There was no indication that an alternative financing without guarantee was available to Hynix at the time, and Hynix never raised such a possibility. Therefore there is no benchmark for the cost comparison requested by the parties. In addition, Hynix paid no extra premium for the complete underwriting of the full amount of the loans by GOK. Under these circumstances, the benefit for Hynix is considered to be the full amount of the guarantee underwritten by GOK.

(47) Since the D/A facility is an export credit facility, and is therefore contingent upon export performance, the subsidy of USD 600 million is specific in the meaning of Article 3(4)(a) of the basic Regulation and therefore countervailable. Since the subsidy is an export subsidy, its amount should be allocated over the export turnover in accordance to section F(b)(i) of the Community Guidelines for the Calculation of the amount of Subsidy in Countervailing Duty Investigations ('the Guidelines') [17]. Using the same calculation method as that explained in recitals (67) and (108) of the provisional Regulation, but allocating the subsidy over the export turnover instead of the total turnover since the subsidy in question is an export subsidy, the subsidy amounts to 5,1%.

[17] OJ C 394 of 17.12.1998, p.6.

5. KDB Debenture Programme (January 2001)

(48) Following the publication of the Regulation imposing the provisional countervailing duty, Hynix, GOK and KDB submitted comments concerning the Commission's findings as regards the KDB Debenture programme.

(a) Benefit conferred by the measure

(49) Firstly, Hynix, GOK and KDB argued that the KDB programme was aimed at temporarily providing a measure with a view to normalising the bond market and did not confer a benefit to Hynix. They argued that there was no benefit, since the programme was extended to Hynix on prevailing market terms and interest rates. Hynix also argued that since it obtained the syndicated loan in January 2001 and new capital via GDR (global depository receipt) issuance in May 2001, it cannot be claimed that it could not refinance its bonds via the market.

(50) As regards the argument that the KDB Programme did not confer any benefit to Hynix since the programme was allegedly undertaken at prevailing market rates, it is noted that according to the information submitted by KDB in its questionnaire replies, the interest rate after conversion to new bonds issued under the KDB Programme was substantially lower than the original interest rate. In case of the bonds issued in January 2001 the difference was around 50% lower, representing 10 percentage points. This was despite the fact that under normal market conditions, bonds which are refinanced due to anticipated failure of the company to pay them out have higher interest rates than the original bonds, reflecting the higher anticipated risk of the issuing company concerned to honour them. [18] Consequently, the evidence on the record indicates that the interest rates applied for the KDB Programme were not in conformity with market rates.

[18] The Kyunghyang Shinmun Daily, 9 January 2001; The Joong'ang Daily, 7 January 2001.

(51) As regards the argument that Hynix could refinance its bonds via the market, in particular via the syndicated loan and the GDR issuance of May, it is noted that bonds and loans are very different instruments and cannot be directly compared. The Korean bond market applied extremely strict conditions in 2001 and companies with moderate credit ratings were not able to refinance their bonds in the market. As explained in recital (61) of the provisional Regulation, GOK itself acknowledged this in its questionnaire reply. This fact is also evidenced by other documents on the record [19]. From July 2000 onwards financing conditions in the bond market tightened considerably. This reflected the greater investor sensitivity to corporate credit risk in the face of the sharp downturn in economic growth and the overhang of bonds issued in 1998 or earlier approaching maturity. This resulted in a widespread 'fight for quality' in the local bond market [20]. GOK also stated in its questionnaire reply that the very reason for setting up the KDB Programme was to help some companies with moderate credit ratings to refinance their maturing bonds, since this would not have been possible for them in the market. In addition, it is noted that the rating of Hynix was downgraded from the investment grade BBB- to the speculative grade BB+ on 22 January 2001, which made its position even more difficult in this respect.

[19] DOC GOK Verification report, p.14.

[20] Structural Change in the Corporate Bond Market After the Currency Crisis, BIS Papers No. 11, Sungmin Kim and Jae Hwan Park, June-July 2002.

(52) The question as to whether Hynix could have refinanced its bonds in a foreign bond market also has to be addressed. However, there is no information on the record indicating that this would have been possible. During the investigation, Hynix has not raised such a possibility nor has it ever suggested that it tried to refinance its bonds in a foreign bond market. It is noted that the speculative rating B given to Hynix by the international rating agency Standard and Poor's in January 2001 does not support such a possibility either.

(53) Hynix had more than KRW 3 trillion worth of bonds maturing in 2001 [21]. It received a syndicated loan of KRW 800 billion from its creditor banks in January 2001. However, it is noted that it had requested a loan of KRW 1 trillion, but the banks were only willing to grant it KRW 800 billion. Part of this amount, KRW 300 billion, as explained above under recitals (30) to (37), was given under GOK direction whereby it ordered FSC to raise the legal lending limits of some banks who were not allowed to lend money to Hynix without this GOK intervention. The same applies to these banks also after the syndicated loan was granted: they were prohibited from lending money to Hynix, unless their lending limits would have been lifted again for a specific transaction. It is noted that among these three banks were the two major creditors of Hynix, KEB and KDB. This illustrates that Hynix had reached the limit of its possibilities for receiving bank loans. There is no indication that Hynix would have been able to borrow additional funds given the very considerable amount it would have needed to pay its maturing bonds. Indeed, during the investigation Hynix has never raised the possibility of obtaining or even having tried to obtain the needed financing in the form of a loan from other banks in the market at the time of the measures.

[21] It is interesting to note that the investigated measures KRW 800 billion syndicate loan, KRW 1,2 trillion refinanced by KDB Programme and KRW 1 trillion CB purchase by creditor banks in June 2001 result in KRW 3 trillion.

(54) As regards the participation of the banks in the KDB Programme, it is noted that the information on the record indicates that on 4 January 2001 FSC granted a collective waiver of the lending limits to all banks participating in the KDB Programme. The FCS stated that the January 2001 waiver given for participation in the KDB Fast Track Programme was different from other waivers in that the FSC gave pre-approval for all banks based on a blanket application filed by KDB, a GOK entity. [22] The banks' participation in the KDB programme was thereby only possible because of the waiver, which in this particular case was granted by using great flexibility in interpreting the text of the Enforcement Decree which enabled the FSC to waive the lending limits under certain conditions.

[22] GOK Verification Report, at 16-17.

(55) Information available also indicates that the banks did not participate on the KDB Programme on the basis of commercial considerations, but were directed to do so by GOK who was concerned at the macroeconomic consequences of a possible bankruptcy of Hynix [23]. This can be shown at the example of KFB: KFB, 51% owned by US Newbridge Capital, rejected the GOK's call for participation in the KDB Programme on 4 January 2001. KFB assessed that increased credit to Hynix was not commercially warranted. KFB's CEO stated that their decision was based on strict principles of profit making. The purchase of the bonds of insolvent firms would push the bank into further managerial hardship [24]. The FSS stated that it would ask KFB to undertake Huyndai's bonds one more time. If the bank was to reject again and this led to the collapse of related companies, FSS would hold the bank responsible [25]. When KFB continued to resist, FSS warned that by not complying KFB might be putting itself at risk of losing its clients. [26] The next day after KFB rejected the GOK demand, the GOK agency pulled USD 77 million from the KFB account [27]. According to Bloomberg, GOK even threatened to demand that KFB's main corporate customers cease doing the business with the bank [28]. Finally KFB gave in to the GOK demands and participated in the measures. It is recalled that KFB has not cooperated with the investigation by not allowing on-spot verification of its replies to the questionnaire (see recital (18) above).

[23] In January 2001 a GOK official has been recorded as having stated the following: "Hyundai is different from Daewoo. Its semiconductor and constructions are Korea's backbone industries. These firms hold large market shares of their industries and these businesses are deeply linked with other domestic companies. Thus, these firms should not be sold off just to follow market principles."

[24] Korea Times, January 29 2001.

[25] Korea Economic Daily, 6 January 20o1.

[26] Wall Street Journal, 29 January 2001.

[27] Business Week Online, 9 April 2001.

[28] Bloomberg, 31 January 2001.

(56) As regards the GDR issuance, it is accepted that Hynix raised money in the capital market through this instrument in June 2001. However, by that time 80% of its bonds financed via KDB Programme had already matured and they had been taken over by KDB before that date. The GDR issuance was therefore not helpful as regards these bonds and another way had to be found for their financing, already as from January 2001. As such, the GDR issuance is not, therefore, an indication that Hynix would have had access to the capital markets in January 2001. Furthermore, without the KDB Programme Hynix would already have been bankrupt due to failure to pay these bonds by the time of the GDR issuance. It is also noted that as explained under recitals (73) to (76) of the provisional Regulation, the Hynix stock price collapsed almost immediately after the issuance in June 2001 and the investors who bought Hynix stocks suffered considerable losses. Therefore its possibilities to raise money such a way were ruled out, in particular considering that its total liabilities still reached KRW 7,2 trillion in July 2001.

(57) Indeed, the timing of the measures is an important factor. It needs to be stressed that the decision of the investors to buy Hynix GDR in June might have been influenced by the very fact that most of Hynix's maturing liabilities were abolished by the GOK inspired KDB Programme between January and June 2001. The KDB programme was well known and attracted a great deal of public comment. The Hynix GDR offering memorandum also refers to the "KRW 2,9 trillion anticipated continued availability under the KDB Programme to provide refinancing for maturing bonds in 2001". Consequently, the investors' decision to invest in Hynix in June 2001 might well have been influenced by the belief that the GOK would continue making sure that Hynix did not fail [29]. This point is referred to also in recital (44) of the provisional Regulation. Therefore, the information on the record indicates that the KDB Programme might have influenced the decisions of the investors to invest in Hynix in June 2001.

[29] Reuters English News Service, 13 June 2001.

(58) As regards the Hynix argument that its bonds were resold into the CBO/CLO programme on the same terms as other participating companies' bonds, it is noted that the terms of the existing CBO/CLO [30] programme were very different, and were not available to Hynix.

[30] "Collateralised bond obligations" and "collateralised loan obligations".

(59) The CBO programme was created in order to increase the bond financing going to relatively small firms with lower credit ratings. The programme could not have been available to Hynix because of its size. In addition, Hynix could not have sold the same amount of bonds to the programme because of the concentration limits, which only allowed a maximum of 10% of the pool of bonds backing any CBO/CLO to be from any one company. It is also noted that KDB bought all Hynix bonds, even those allegedly intended for the CBO programme. Even after the KDB Programme ended, KDB still held Hynix bonds designated for sale to CBO funds. KDB also delayed the sale of the bonds into CBO funds and retained control over the bonds in the KDB Programme even after they were placed in CBO funds, and directed their roll-over into new long term bonds when Hynix was unable to pay them upon maturity. The Korea Credit Guarantee Fund ('KCGF') [31] also increased the guarantee level on CBOs from 34% to 53% to account for the inclusion of the KDB Programme. Consequently, it cannot be claimed that the normal terms and conditions of the programme were applied to Hynix bonds. Indeed they were treated very differently.

[31] KCGF is a special institution owned by GOK.

(60) The way the KDB Programme was carried out is also very different from the way comparable transactions would have been carried out in the market. According to the KDB Programme, KDB bought all the maturing bonds, converted them to much lower interest rates than that held by the original bonds, placed 20% of them to creditor banks and 70% to CBOs/CLOs. Moreover, the conditions applied differed significantly from those of the CBO/CLO programme, including the application of increased State guarantees. The bonds were not sold by public offering but through private placement to existing creditors. This does not correspond to refinancing of bonds under market terms.

(61) KDB also argued that the KDB Programme is not a subsidy since KDB makes its decisions on funding and fund utilisation on a commercial basis and is engaged in profit-earning business focused on corporate finance.

(62) As regards the KDB argument that the KDB Programme is not a subsidy due to the nature of the activities of KDB, it is noted that recitals (55) to (59) of the provisional Regulation set out the reasons why the financing provided by KDB constitutes a financial contribution by a Government within the meaning of Article 2(1)(a)(i) of the basic Regulation. Since KDB has not provided any new evidence in its comments that would alter the assessment made in the provisional Regulation, the conclusions set out in recitals (55) to (59) of the provisional Regulation are hereby confirmed.

(63) Considering the explanations in recitals (50) to (62) above, the KDB Programme can be seen to have conferred a benefit to Hynix also bearing in mind that no comparable financing was available to it in the market. Hynix was not able to finance its maturing bonds through bank loans, since it had exhausted its possibilities of receiving loans due to its already high exposure in its creditor banks and its weak financial situation which did not allow further credit to be granted to it by any other bank. Refinancing of the bonds in the bond market was not possible due to its weak credit rating which did not allow the market to accept its maturing bonds, as admitted by the GOK in its questionnaire response. For these reasons, the conclusions on the point of existence of benefit, and thereby the existence of a subsidy, in recital (61) of the provisional Regulation are hereby confirmed.

(b) Specificity

(64) Secondly, Hynix, GOK and KDB argued that the KDB Programme was not specific. According to Hynix, the Commission had not explained by means of analysis of the terms and conditions of the programme, why it considered that the mere fact that several Hyundai companies participated in the programme can be considered evidence of specificity as regards Hynix. Hynix also argued that the KDB Programme was not specific since Hynix bonds were resold into the CBO/CLO programme on the same terms as other participating companies' bonds.

(65) As explained under recitals (62) to (64) of the provisional Regulation, it was concluded that, whilst the KDB Programme was not specific in law under Article 3(2)(a) of the basic Regulation, it was nevertheless de facto specific under Article 3(2)(c) of the basic Regulation, since three of the four criteria of that provision were fulfilled: the use of the programme by a limited number of companies, predominant use by certain companies and the granting of disproportionately large amounts of subsidy to certain companies. Since specificity in law was not claimed, further analysis of the terms and conditions of the programme is not relevant. However, the number of firms potentially eligible under such criteria is relevant. Regarding de facto specificity, it is concluded that the programme was only used by six companies, four of which belonged to Hyundai Group, and that Hynix used 41% of the funds of the programme. It is noted that the information on the record indicates that more than 200 companies in Korea would have fulfilled the selection criteria of the programme. Against the background of this group of potential recipients, the large proportion of Hyundai Group of companies in the participants, and the predominant use by Hynix of the total funding of the programme, clearly fulfils the specificity criteria under Article 3(2)(c) of the basic Regulation.

(66) GOK and KDB also argued that the selection of participating companies was conducted in a transparent and objective manner and the large number of Hyundai companies participating in the programme was merely coincidental.

(67) In the questionnaires both GOK and KDB were requested to submit the minutes of the meetings in which the selection of the companies to the programme were discussed and the copy of the decision by which Hynix was selected, stating the reasons for selecting it. Both GOK and KDB stated that no such documents were ever prepared and that therefore they were not available [32]. Therefore it was not possible to verify how the selection process was conducted and how the selection body, Creditor Financial Institutions Council [33] ('CFIC') used its discretion when selecting the participants.

[32] The document "Summary of the meeting of 4 January 2001 to discuss the KDB Fast Track Programme describes the functioning of the programme. It does not explain how the selection of participants was carried out and on what basis the companies were selected.

[33] The Council consists of the representatives of KDB, The Korea Credit Guarantee Fund and the creditor banks.

(68) In fact the information on the record indicates that GOK discretion was openly used to pre-select Hynix as a beneficiary and to concentrate the benefit on Hyundai companies. It is noted that KDB announced in a press release that it would buy Hynix's maturing bonds both in January and in the coming months even before Hynix was officially selected to participate in the programme [34]. In addition, according to the information given by KDB, a decision which bonds to refinance is taken separately every month by the CFIC. It is remarkable that KDB could announce already at the beginning of January that it would refinance Hynix bonds in the coming months.

[34] KDB to acquire Huyndai Electronics bonds, KDB press release, 3 January 2001.

(69) After the participants to the programme were announced, a lot of criticism was voiced concerning the lack of transparency and absence of review of eligibility as regards the selection process [35]. Other companies, for example subsidiaries of the Hanwha and Hanjin group and Dongkuk Steel, were in a similar situation to Hynix as regards credit ratings (BBB) and the number of bonds maturing at the same time, but they were not selected for the programme. No explanation or justification for this was given by the selecting authorities.

[35] Chosun Daily, 7 January 2001; The Kyunghyang Shinmun Daily, 9 January 2001.

(70) For the reasons explained above, it is concluded that in addition to the criteria of Article 3(2)(c) of the basic Regulation fulfilled in the present case as concluded by the Commission under recitals (63) and (64) of the provisional Regulation, the KDB Programme is also concluded to be de facto specific on the basis of an additional criterion of Article 3(2)(c), namely the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy.

(c) Withdrawal of a subsidy

(71) Thirdly, Hynix claims that since the KDB programme only lasted for one year, this constitutes a withdrawal of the programme and hence the programme cannot give rise to the imposition of countervailing duties pursuant to Article 15(1) of the basic Regulation.

(72) It is noted that the KDB Programme constitutes a one time, non-recurring subsidy which benefits the company as such. Hence there cannot be a question about withdrawal as such in this context. In the case PET Chips from India [36], invoked by Hynix as a relevant precedent, the subsidy was a recurring subsidy tied to the export of the product under investigation. When the export subsidy programme was terminated, the exported product did not benefit from the subsidy any longer. The nature of the subsidy is therefore very different and the PET Chips case is not relevant for the assessment of the KDB Programme.

[36] Council Regulation 2603/2000 of 27 November 2000, OJ (2000) L 301 /1.

(73) For the above reasons, given that the benefit conferred under the KDB Programme is a non-recurring subsidy allocated over the period of five years, the subsidy is not withdrawn in the meaning of Article 15(1) of the basic Regulation by the programme being terminated, because it had already been granted and this grant will continue to confer a benefit during the allocation period.

(d) Calculation of the subsidy

(74) As regards the calculation of the subsidy, both Hynix and GOK argued that the Commission should have compared the interest rates of the programme with the market rates and not treated loans as grants. Secondly, Hynix argued that KDB only assumed 10% of the refinanced bonds and only those bonds should be considered as subsidy. In addition, since the KDB bonds were later restructured in October 2001, these should not be counted twice in the subsidy amount.

(75) As regards the first submission concerning the comparison of interest rates, the Commission explained under recital (66) of the provisional Regulation the reasons for its conclusion not to use the interest rate comparison for determining the amount of the subsidy. According to Article 5 of the basic Regulation, the subsidy is determined on the basis of the benefit conferred on the recipient. As explained above under recitals (50) to (63), the benefit received by Hynix was not conferred by the interest rates applied by the KDB Programme, but the fact that without the KDB Programme it would have been forced to pay back its bonds and since it had no liquidity to do so, it would have gone bankrupt. There was no other source of funding available to Hynix, and according to the information on the record, this appears to be the reason for setting up the KDB Programme in the first place. The benefit to Hynix was conferred by KDB buying its maturing bonds in its place when no market operator was willing to provide Hynix the means to finance this operation. For these reasons the amount of KDB financing for purchasing Hynix bonds is determined to constitute the subsidy.

(76) As regards the treatment of loans as grants, the situation has to be assessed from the point of view of the granting authority at the time of the measures. Section E(b)(v) of the Guidelines stipulates that if at the time of the granting of a loan it is already evident to the granting authority that it will not recover its money, the loan should be considered as a grant. In the present case, although the KDB financing under the Programme is not entirely the same as a "loan", it is a very similar transaction so that the same principles should apply. The question is whether KDB had a reason to believe that it would recover its financing or not. The information on the record shows that at the time KDB assumed the Hynix debt, it was evident that KDB would not recover the money it had spent on buying the Hynix bonds. In fact the information on the record indicates that KDB did not even foresee a recovery of its expenditure. Indeed, the amount budgeted for the KDB total Programme was originally KRW 6,2 trillion, of which KDB had already allocated nearly half, KRW 2,9 trillion, for the purchase of Hynix bonds. The programme was not established on the basis of earning profit or even breaking even, but there was just a considerable amount of money set aside to be spent on the purchasing of maturing bonds of the selected companies. Moreover, even if KDB would have expected to recover its expenditure, it was evident at the time the financing was granted that Hynix would not be able to repay the amounts to KDB. Hynix had already huge debts and the reason why KDB had to interfere was that Hynix had no money to pay its maturing bonds and had no possibility to raise such amount in the market at the time when the maturity was due. It also needs to be noted that the amount foreseen to be spent on Hynix bonds from the start was considerable in comparison to Hynix's turnover; KRW 2,9 trillion was more than 70% of the Hynix 2001 turnover.

(77) That Hynix was not going to be able to repay this new financing, became evident during the course of the programme, as its position was reviewed monthly in the context of decisions by the banks on which bonds should be purchased each month. Hynix's rating was already downgraded on 22 January 2001, immediately after it was accepted to the programme and again in March, during the running of the programme. The speculative grade given to Hynix at the end of January should have already been taken into account when the January decision on purchasing bonds was taken. In March 2001, Hynix was downgraded to B- which in fact should have disqualified it from the KDB Programme according to the criteria of the Programme. However, in both these months Hynix bonds were financed by KDB regardless of the deteriorating situation of the company reflected in the decrease of its rating. Moreover, the record contains no evidence indicating that KDB had in fact recovered more than those amounts that Hynix was supposed to pay under the conditions of the programme [37]. In the provisional findings these amounts were taken into account and deducted, as explained under recital (65) of the provisional Regulation.

[37] The participating company had to repurchase 3%/5% of any CBO/CLO issued under the programme. See recital (48) of the provisional Regulation.

(78) In respect of the second argument submitted, Hynix argued that KDB only held 10% of the refinanced bonds and only those bonds should be considered as a subsidy. It is recalled that subsidy is a financial contribution from a government which confers a benefit on the recipient. As already indicated under recital (48) of the provisional Regulation, the first step in the programme is that KDB buys all the matured bonds falling under the programme directly [38]. The benefit conferred to Hynix by this financial contribution is bestowed in the fact that KDB buys these bonds for Hynix: the financial contribution of KDB should, under a normal market transaction, be assumed by Hynix. The amount of the benefit determines the amount of the subsidy. The fact that according to the terms of the programme KDB itself is supposed to eventually hold only 10% of the bonds, cannot change this conclusion, since KDB provided a much greater amount up-front and in doing so, assumed the risks and liabilities connected with the buying of all the refinanced bonds.

[38] Bonds falling under the programme are 80% of the bonds maturing under certain period. Hynix pays the 20% of its maturing bonds under the conditions of the programme.

(79) Hynix thirdly argued that since the KDB bonds were later restructured in October 2001, these should not be counted twice in the subsidy amount. It is noted that verification of the information on the record indicated that KRW 59,4 billion of the bonds falling under the programme were indeed included in the debt to equity swap. This amount was deducted from the total amount of the October 2001 [39]measures as explained below in recital (166). Hynix also argued that part of the KDB bonds held by banks were included in the CBs purchased by the banks in June 2001. The amount of KDB bonds should therefore be deducted from the CB amount in order to avoid double-counting. It is noted that the total amount of CBs purchased in June 2001 was swapped for equity in October 2001 and that the whole amount of the CBs, inclusive of the KDB bonds, is therefore deducted from it, as explained below in recital (166).

[39] The information on the record also indicates that in June 2002 KDB still held KRW 82,4 billion of bonds falling under the KDB Programme.

(80) For the reasons explained in recitals (50) to (79) above, it is concluded that the KDB Programme conferred a benefit on Hynix since a comparable financing was not available to it in the market. Hynix was not able to finance its maturing bonds through bank loans, since it had exhausted its possibilities for receiving bank loans and refinancing of the bonds in the bond market was not possible due to its weak credit rating. The financing provided through the KDB programme therefore constitutes a subsidy within the meaning of Article 2 of the basic Regulation. The subsidy is found to be de facto specific to Hynix, and therefore countervailable pursuant to Article 3(2)(c) of the basic Regulation. Pursuant to Article 5 of the basic Regulation the amount of the subsidy is the amount of the benefit, which is the amount of the financing provided under the programme. Therefore, the conclusions and the subsidy amount of 4,9% laid down in recital (67) of the provisional Regulation as regards the KDB Programme are hereby confirmed.

6. Bond purchase by creditor banks in the amount of KRW 1 trillion and the first roll-over of debt (May 2001)

(81) In the provisional Regulation, it was provisionally concluded that there was insufficient evidence to make a positive finding of a subsidy and it was therefore decided not to countervail this programme. Some interested parties disagreed with this preliminary finding and asked for it to be reviewed. One interested party argued that the conditions applied to Hynix were not in conformity with its financial situation at the time and were therefore not market based. According to it, GOK also influenced the creditor banks and the success of the measures.

(82) Another interested party argued that Hynix would not have obtained the May 2001 bailout without GOK intervention due to its weak financial condition and that GOK specifically directed Hynix's creditors to participate in the bond purchase. In support of this claim, this party referred to a meeting convened by GOK on 10 March 2001 between GOK officials, presidents of the Hyundai creditor banks, officials of FSC and the President of Hynix.

(83) In the questionnaires sent to GOK, it was asked whether GOK or any other public body was involved in the decision process of the banks to undertake the May 2001 measures. The same was asked in the questionnaires sent to the banks. The minutes of any meetings attended by the GOK or other public officials were also requested. All parties replied that GOK was not in any way involved in the May restructuring process. Therefore, information relating to any such contacts was not available and could neither be addressed during the investigation before the provisional findings nor verified during the verification visits.

(84) After the publication of the provisional findings, information from secondary sources, including press articles, indicating that such contacts indeed had taken place were submitted by interested parties. This information referred to meetings that had taken place on particular dates and to contacts between the banks and the FSS/FSC officials. The interested parties, Hynix and the GOK were particularly invited to review this information and comment on it. The parties failed to rebut this new information. In fact, both of them admitted expressly that the FSS representatives were indeed present in the meeting of 10 March 2001 and had had contacts with banks in the context of these measures, as indicated by the new information.

(85) It is noted that the new information, and the confirmation of its accuracy by the interested parties, contradicted the statements given by GOK, officials of FSC and FSS and the banks involved at the earlier stages of the investigation. GOK and the banks have consistently argued that neither GOK nor other public officials were in any way involved in the May 2001 measures and that FSC and FSS only carry out supervisory functions as regards financial institutions and did not intervene in the daily business operations of the banks. Such withholding of information is considered to have impeded the investigation within the meaning of Article 28 of the basic Regulation, which prescribes that in such circumstances findings may be based on best information available. The parties in question were informed of the consequences of their non-cooperation. It is also noted that the financial advisor of Hynix at the time, Citibank Seoul, failed to fully cooperate with the investigation. Citibank has explained that this non-cooperation was due to the intervention of Hynix. Citibank, being the financial advisor of Hynix at the time of the measures, possessed important information both on the financial condition of Hynix and the measures under investigation. By not allowing Citibank to cooperate, thereby preventing the investigation to examine the information in Citibank's possession, Hynix itself is considered as having seriously impeded the investigation. Given the non-cooperation of the parties as regards providing information on the May 2001 measures and the new information obtained after the provisional measures, not rebutted by them, it is appropriate to reassess the provisional findings in light of the new information and on the basis of best facts available.

(86) The totality of the facts indicates that as from November 2000 GOK had been directing banks and other institutions to take measures in order to alleviate the liquidity problems of Hynix and to promote the electronics industry policy. This has been confirmed as regards all measures dealt with above in the previous chapters of this Regulation. It is also noted that the further the year progressed, the worse became the financial situation of Hynix despite of the measures taken. In March 2001 its rating had declined to B-. Therefore, there is no reason to assume that GOK would under these deteriorating circumstances suddenly stop its support to Hynix. On the contrary, it is reasonable to believe that it continued to support Hynix, in particular since its worsening financial situation ensured that alternative market based sources of financing were not available.

(87) As explained already above in the context of the assessment of the three previous investigated measures, Hynix had exhausted its possibilities of receiving bank loans as early as in January 2001 due to its high exposure to its major creditor banks and its weak credit rating. By March 2001 its rating had been downgraded further and its exposure increased due to the GOK directed lifting of the prudential credit limits as regards some banks. It had not serviced its syndicated loan granted in January 2001 and its liabilities kept cumulating further, despite all the measures taken in order to alleviate its situation. Under these circumstances, there is no indication that Hynix would have been able to get a loan from the market. Hynix did not raise such a possibility during the procedure, neither did it indicate that it even tried to get further loans either from the Korean or foreign markets.

(88) The information on the record indicates that the banks did not appear to have had any commercial grounds to purchase KRW 1 trillion worth of convertible bonds ('CBs') of Hynix in June 2001. The evidence on the record indicates that the bonds were purchased in order to provide Hynix with cash to cover its existing liabilities. The banks acknowledged the inability of Hynix to service its debts already at the beginning of May 2001. In the Creditor Financial Institutions Council Resolution of 7 May 2001, it is stated that Hynix could not fulfil its obligations as regards the syndicated loan for the first quarter of 2001 and that it was highly likely that it would not be able to do so also for the second quarter. This was stated to be a default under Article 12 of the loan agreement. However, in order to prevent related problems like cross default, Article 11 of the loan agreement was not applied for the first and second quarter of 2001. The banks thus effectively exempted Hynix from the consequences of the default under its loan agreement. Nevertheless, they still granted new financing by purchasing the CBs in June 2001.

(89) Several Hynix creditor banks also increased their loan loss provisions with respect to the Hynix debt. [40] Prior to participation in June 2001 CB purchase, KorAm Bank, Hana Bank, Shinhan Bank and Kookmin Bank increased their loan loss reserves for Hynix by 25%. By the third quarter of 2001, these banks had classified 60% or more of their loans to Hynix as non-performing. It is recalled that three of these banks failed to cooperate with the investigation (see recital (18) above).

[40] Shinhan Bank, ING Barings, 24 April 2001; KorAm Bank, ING Barings, 26 September 2001; Hana Bank, Morgan Stanley, Dean Witter, 30 October 2001; Kookmin Bank, Morgan Stanley, Dean Witter, 24 October 2001.

(90) The banks purchased the CBs on 20 June 2001. It is noted that between mid-June and the 20 of June 2001, the Hynix stock price had sunk considerably. Despite this, the banks purchased the CBs even though it must have been evident to them at that time that they would not recover their money [41]. Within one month the banks had incurred huge losses on the bonds. The Hynix stock price had declined sharply and the banks directed certain portions of the acceptance price of Hynix CBs as losses in settling their accounts at the end of June 2001.

[41] It is noted that the CBs purchased in May 2001 were swapped into equity or written off by the banks only a couple of months later in the context of the October 2001 restructuring measures.

(91) The information received after the publication of the provisional measures and not rebutted by the parties indicates that contacts between the creditor banks and public officials took place in March - May 2001. According to this information, the 10 March 2001 meeting referred to above in recital (82) was convened in order to get the banks to support the Hyundai Group of companies [42]. When some banks indicated reluctance in providing support to Hynix since they were concerned about the downgrading of external credibility and violation of credit limits, the GOK financial officials still persuaded the banks to do it. [43] On 24 April 2001 it was reported that Hyundai Creditors' Association decided not to purchase KRW 1 trillion convertible bonds ('CBs') requested by Hynix. Hynix had no liquidity to pay off its maturing liabilities and the proceeds of the CB issuance, KRW 1 trillion, were to be used for servicing its existing debt. The presidents of the creditor banks, including KEB, KDB and Chohung Bank had a meeting on 23 April 2001 in which most participants were opposed to accepting CBs in the amount of KRW 1 trillion. [44] On the same day, the CEO of Citibank, Citibank being the financial advisor of Hynix at the time and the organiser of the May measures, formally requested financial support for Hynix from the GOK, and the FSC Chairman expressed a positive position on it. Against this background, it was reported that financial support to Hynix, including acceptance of CBs, had become more likely. [45] It is recalled that Citibank has also failed to cooperate with the investigation (see recital (18) above).

[42] The Naeoe Economic Daily, 10.3.2001.

[43] The Maeil Economic Daily, 11.3.2001.

[44] Korea Times, 24.4.2001.

[45] Maeil Economic, 24.4.2001.

(92) It was reported that KorAm Bank, one of the non-cooperating with the investigation banks, refused to take over its share of the KRW 1 trillion of CBs on the basis that Hynix failed to deliver a memorandum pledging to make its best effort to reduce its debts. It is observed that there were reports indicating that as a response to this, the FSS stated that it would not forgive the bank if it would not participate, adding that it will take stern measures against the bank, such as disapproving new financial instruments and subjecting the bank to a tighter audit. Following this warning, KorAm reversed its decision and participated in the purchase of CBs. [46]

[46] Korea Times, 21.6.2001; Dow Jones International News, 20.6.2001.

(93) Considering that in the absence of cooperation by the parties the final conclusions need to be based on best facts available, further information, even if extracted from secondary sources, should be observed in this context. It is noted that one of the measures originally investigated was an alleged SGICO (Seoul Guarantee Insurance Corporation) guarantee for KRW 600 billion of Hynix CBs to be purchased by investment trust companies. It was confirmed during the investigation that this bond purchase never took place and therefore no guarantee was provided [47]. The reasons for the failed transaction, however, were not explained. It is observed that there are reports indicating that the banks at the time required that in order for them to purchase the CBs, the investment trust companies also needed to do so since the banks did not want to bear all the financial burden themselves. The investment trust companies refused to buy Hynix bonds since they claimed it was common knowledge that the bonds were insolvent bonds and that they were not able to sell them at the time when they were struggling to recover the confidence of the market. According to the reports, the investment trust companies stated that they would not be able to avoid criticism that they were investing their customers' money in an insolvent company, which could lead to lawsuits against them. If the investment trusts were forced by the financial authorities to accept the new corporate bonds in the amount of several billions of won under these circumstances, the whole investment trust circle may become insolvent [48]. On the basis of the above it appears that the banks were participating in all the discussions on the May 2001 measures since early March 2001 and that they were well aware of the arguments of the investment trusts and the reasons these refused to subscribe the bonds. The banks themselves had also decided not to accept the CB purchase some weeks earlier and had acknowledged the inability of Hynix to service its existing debt.

[47] Recital (39) of the provisional Regulation.

[48] Donga daily, 4.5.2001; Korea Economic Daily, 3.5.2001; Maeil Economic, 7.5.2001.

(94) Following the disclosure of this information to the interested parties, the parties admitted that an FSS official was present in one meeting and that subsequent contacts between FSC/FSS and the banks took place. It was explained that the FSS official was only present as an observer to act as a witness for the creditors' prior commitments of funding, and not to influence the creditor banks or their decision to extend further credits to Hyundai companies. It was also explained that the "follow up phone calls" with the FSS/FSC officials and the creditor banks were only conducted in the exercise of the normal prudential supervisory role of FSC/FSS. However, considering that the parties have been withholding important information until confronted with it and impeding the investigation by instructing other parties not to cooperate, it is difficult to find these explanations fully convincing. In addition, information on the record indicates that the official attending the meeting of 10 March 2001 was the FSC Vice Chairman, i.e. a high ranking official. In these circumstances, pursuant to Article 28 of the basic Regulation which allows the conclusions to be based on best facts available in cases of non-cooperation by the parties, it is concluded that the banks were not freely and independently deciding on the issue of the CB purchase on the basis of commercial considerations, but were directed to buy the bonds by the GOK. The information from the secondary sources referred to above supports this conclusion.

(95) In its comments on the final disclosure GOK argued that account should be taken of the fact that private investors had bought Hynix GDRs worth USD 1,25 billion in June 2001 and that therefore the banks' decision to buy Hynix CBs was in line with commercial considerations. It is noted that these investors must have been influenced by the anticipated continuous availability of the GOK directed KDB Programme to refinance Hynix's maturing liabilities. Moreover, these investors did not have the same insight in the situation of Hynix as the creditor banks. Therefore, it is not unreasonable to conclude that the decision of the banks to invest should have been different from that of the GDR investors.

(96) On the basis of the best facts available it is therefore concluded that the decision of the banks to purchase KRW 1 trillion of Hynix CBs was not taken on the basis of commercial considerations, but was taken due to direction by GOK pursuing public policy goals. The amount of the CBs purchased is therefore a financial contribution by a government within the meaning of Articles 2(1)(a)(iv) and (i) of the basic Regulation. This purchase conferred a benefit to Hynix in the amount of KRW 1 trillion, the purchase price of the bonds, since comparable funds were not available to it in the market. Hynix's situation had deteriorated further from January 2001 and it had no possibility to receive an equivalent loan from the market. For these reasons, the amount of the CB purchase of KRW 1 trillion is considered as a subsidy in the meaning of Article 2 of the basic Regulation. Since this is an ad hoc subsidy provided to only one company, it is specific pursuant to Article 3 of the basic Regulation and therefore countervailable.

(97) According to Article 5 of the basic Regulation, the amount of countervailable subsidies shall be calculated in terms of the benefit conferred on the recipient. The CBs purchased by the creditor banks had an interest rate and were to be paid back at their maturity by Hynix. They are therefore comparable to a loan. According to Article 6(b) of the basic Regulation the first point to examine is whether a comparable commercial loan was available in the market and if so, the benefit would be the difference between the interest rates applied. As explained above in recital (87) there were no comparable loans available to Hynix in May 2001. For this reason, the benefit conferred by the bond purchase needs to be determined on another basis.

(98) According to Section E(b)(v) of the Guidelines the amount of the loan forgiven or defaulted on, will be treated as a grant. This means that if at the time of the granting of a loan it is already evident for the granting authority that it will not recover its money, the loan should be considered as a grant. In the present case, as explained above under recitals (88) to (90), it was obvious for the banks at the time of the purchasing of the bonds that they would not recover the money they had spent on purchasing the Hynix's CBs. Therefore the benefit to Hynix and the amount of countervailable subsidy is the purchase price of the bonds, KRW 1 trillion. Using the calculation method explained in recitals (67) and (108) of the provisional Regulation, the subsidy amounts to 5,4%.

7. The October 2001 rescue package, consisting of debt to equity swap, the second roll-over of debt and the provision of a new loan of KRW 658 billion

(99) Following the publication of the provisional Regulation, Hynix, GOK, KEB, Woori Bank, Chohung Bank ('CHB'), Citibank Seoul and National Agricultural Cooperation Federation ('NACF') submitted comments concerning the provisional findings as regards the October 2001 rescue package.

(100) The comments of the parties are listed and assessed below. However, since the calculation of the amount of the countervailable subsidy is an important question as regards the October 2001 measures, it is considered useful to explain how and following which principles the assessment of the amount of subsidy is conducted, in particular considering that the October 2001 measures were granted to a company in financial difficulties.

(a) Introduction

(101) In the provisional Regulation, the October 2001 measures, namely the debt-to-equity swap, the new loan of KRW 658 billion and the extension of maturities and roll-over of debt, were considered as grants. This was based on Section E(b)(v) of the Guidelines, which provides that a loan will be considered as a grant if it is forgiven or defaulted on. Recitals (104) to (107) of the provisional Regulation provisionally concluded that due to the financial situation of Hynix, no corresponding financing was available to it in the market and that the banks knew at the time of the October 2001 measures that they would not recover their money invested/lent to Hynix.

(102) The first point to examine when assessing the calculation of the subsidy in cases of provision of financing to a company in difficulty, is the credit rating of the company at the time of the measures. The rating is indicative of the financial situation of the company and its ability to attract investments or receive financing at the given time since the potential investors/lenders base their decisions above all on the rating given to the company by an independent international rating agency.

(103) It is noted that the rating given to Hynix in October 2001 by Standard & Poor's was SD - "selective default". This is the second worse rating possible, the worst being "default", which according to Standard & Poor's criteria is not prospective, as the other ratings, but used only when the default has actually occurred. SD is assigned when an issuer can be expected to default selectively, that is, continue to pay certain issues or classes of obligations while not paying others. Consequently, the rating of Hynix at the time of the measures was very alarming to any investor/lender and did not support a decision to grant further financing to it under commercial considerations.

(104) The second point to examine would be the history of the company in servicing its existing debts and the rating given to it by the lenders concerned. If a company with even a moderate rating continued to service its existing debt to some of its lenders, it would not be completely unreasonable for these lenders to take this into account in their internal rating of the company concerned and also consider this fact positively when assessing whether further lending to the company concerned could be considered. In the present case, however, it is noted that Hynix had not serviced its existing debts in 2001, and had even defaulted on the interest payments of the syndicated loan granted in January 2001. As explained above in recital (88), the banks announced the default already in May 2001, but decided not to take the appropriate measures to address the situation. Several banks raised their loan-loss provisions as regards Hynix already in May 2001 and again in October 2001 before the measures, indicating that the further financing was already considered a loss. The internal ratings of the banks concerned reflected this assessment. The six banks concerned by the October 2001 measures rated Hynix internally from "precautionary" to "doubtful". Such situation does not support a decision to grant further financing to a company concerned.

(105) The third point to examine would be the general financial situation of the company concerned. If the company is experiencing temporary liquidity problems but has healthy fundamentals, it is justified for potential lenders to take this into account when taking their credit decisions.

(106) It is noted that the overall financial situation of Hynix had been critical for a long period. At the end of 2000, Hynix had accumulated more than USD 9,46 billion of liabilities. This was almost twice its net worth and more than four times the value of market capitalisation of the company. [49] In October 2001, Hynix's debts were six times its equity. This situation was also well known by the banks concerned. As explained above in recital (44), KEIC already stated in November 2000 that Hynix was in a state of technical insolvency. Similar statements can be found in the internal reports of the banks concerned which refer to Hynix having negative capital and excessive lending.

[49] Hynix business plan for 2001 filed with the FSC, 21 March 2002.

(107) The financial ratios of Hynix according to so called Altman Z-score model, designed specifically to predict the likely failure of Korean companies, were in 1999-2001 far worse than other Korean companies that actually did fail. The Hynix scores were 700% higher than the threshold level of a company in severe financial distress. [50] Hynix's current and quick ratios were indicative of a company with totally inadequate liquidity to cover obligations [51]. Hynix's net profit margin, return on assets, and return on equity were negative in nearly every year since 1997, with net margins reaching minus 24,3% in 2000 and a minus 93,83% in 2001. In any year from 1997 to 1999, the company's cash flow from operations was not enough to cover even one sixth of its debt or total liabilities.

[50] Saunders Report, 30-35.

[51] Saunders Report, 20-21.

(108) The 2001 financial accounts also discounted the possibility of future financial success of Hynix, stating that the entire normalisation of the company's operation required the continuous support from creditor banks until the selling price of semiconductor products sufficiently recovered. These facts indicate that both the history and the future of Hynix was characterised with its dependency of financial assistance from its creditors. Hynix had reached a point where it was unable to finance its operations by the returns generated by its activities.

(109) The next point in the assessment of the basis of calculation of the subsidy would be to see whether other loans from commercial sources had been granted to the company concerned, and if so, under which conditions. If such loans were granted, the terms and conditions of such loans could serve as a benchmark for measuring the benefit conferred to Hynix by the measures concerned, and thereby also the amount of subsidy.

(110) In the present case, it is noted that Hynix could not obtain any commercial loans at any time in 2000 and 2001. Hynix's borrowing was exclusively concentrated on GOK-provided, GOK-directed and GOK-guaranteed loans. The largest creditor of Hynix at the time of the measures was KDB, which held 44% of the total of Hynix loans in December 2001. [52]

[52] Hynix business plan for 2001 filed with the FSC, 21 March 2002.

(111) Prior to 1998, Hynix had received loans from French and Japanese banks, including the Bank of Tokyo, Societe Generale and Credit Lyonnaise. Since then, however, none of these banks has participated in the restructuring of Hynix. The outstanding loans from foreign banks, including those from Citibank Seoul, accounted for only 5% of the total Hynix loans in 2000-2001 [53]. It is noted that the assessment of the role of Citibank is explained in recitals (130) to (133) below.

[53] Hynix business plan for 2001 filed with the FSC, 21 March 2002.

(112) The lack of participation of foreign banks suggests that further investment in Hynix was not considered to be rational and economically justified. It is noted that the outstanding amount of KRW 37,5 billion of the syndicated loan from foreign borrowers granted in 1996 and led by Societe Generale, was declared for default and cross default in 2001.

(b) Financial contribution by government

(i) Comments of the parties

(113) Hynix and GOK both argued that the October 2001 package did not constitute a subsidy since the financing provided was not granted by the GOK. Hynix argued that as regards Citibank and KEB, no evidence was provided showing that GOK had used its influence to force the banks to accept the October 2001 measures. As regards Woori Bank, CHB and NACF, Hynix argued that the GOK shareholding should not be confused with government control of credit decisions. It was further argued that the credit decisions were based on commercial considerations by each of the banks concerned.

(114) KEB argued that GOK had played no role in the restructuring programmes in relation to KEB's commercial decisions. It argued that GOK has no special right either contractually or under Korean law that would allow it to either block or influence KEB's commercial decisions. According to KEB, the same applies also to FSS. In relation to FSS's management recommendations for the KEB business operations it was argued that these actions fall within the scope of its ordinary activities pursuant to the Banking Act and the banking Regulations and were not to be understood as meaning any kind of interference or involvement on the part of FSS or any other financial supervisory authority.

(115) Woori Bank argued that, despite its position as the largest shareholder, GOK was prohibited from exercising any influence over the Woori bank's decision making process.

(116) CHB argued that GOK has no direct or indirect influence on its management activities. Even if Korea Deposit Insurance Corporation ('KDIC') has a substantial shareholding in CHB, CHB allegedly remained a commercial bank and its decisions were taken on the basis of purely commercial considerations. It argued that the Memorandum of Understanding ('MOU') referred to in the provisional Regulation only concerned the various restructuring measures imposed by the GOK in response to the 1997 financial crisis.

(117) Hynix and CHB also argued that other banks (Industrial Bank of Korea ('IBK'), Seoul Bank, Kwangju Bank and Kyongam Bank) where GOK also had a substantial shareholding did not participate in the October 2001 package, and this demonstrated that GOK had not interfered in the business activities of any of the banks involved.

(118) NACF argued that it was formed for the purpose of improving economical, social and cultural status of farmers and quality of their lives. KDIC as a preferred investor was not allowed by law to participate in decision making of NACF. As such, it mandate did not include implementation of public policy goals.

(119) Citibank Seoul denied being in any way affiliated with GOK and explained that it participated in the investigated measures solely in pursuit of its commercial interests.

(ii) Assessment of the Comments

(120) It is noted that it has been provisionally concluded on the basis of the principles set out in recitals (10) to (14) above that KDB is a public body. As regards the other banks, these were not found to be public bodies but were found to be directed by the GOK to carry out the measures in question.

(121) In terms of demonstrating direction, the fact that GOK was the only or the major shareholder in some of the banks, is an important point that needs to be taken into account in the assessment of the situation. The amount of a shareholding by GOK, or other shareholders, determines the extent to which they can influence the decision making process set out in company law and the articles of association of the company concerned. In this respect it is important to refer to the Korean Prime Ministerial Decree No. 408 adopted in November 2001, which addresses management responsibilities in companies where the government has a shareholding. Though Article 6 of the Decree emphasises the importance of allowing such companies to manage themselves, it crucially allows the state to fulfil its full rights as a shareholder.

(122) The information on the record also indicates that the state as a majority shareholder can appoint directors of financial institutions. As such, GOK regularly nominates or carries influence in the selection of a CEO and other members of a bank's management. [54] Through its voting power, the GOK is therefore in a position to influence the operations of the KEB, Woori and the CHB, where it is the lar