Hahm Yong-il, senior deputy governor of the Financial Supervisory Service (FSS), speaks during a media briefing at the FSS headquarters in Seoul, Thursday. Yonhap

The Financial Supervisory Service (FSS) is set to put the brakes on Korea Zinc's plan for a large-scale capital increase through the issuance of new shares.

The country's financial watchdog stated on Thursday that there is a potential for unfair trading in relation to the zinc smelter's sudden announcement of the capital increase, and promised to respond strictly, including actively referring the case to investigative agencies if any illegalities are confirmed.

The FSS is conducting an inspection into Mirae Asset Securities, the underwriter of Korea Zinc's tender offer for the treasury share buyback as well as the paid-in capital increase.

The watchdog is also considering rejecting the securities registration statement submitted by the zinc smelter for its capital increase, demanding corrections.

"Regarding the inspection into the securities firm, we will promptly review and address any legal violations in the process of conducting the tender offer and rights offering simultaneously," Hahm Yong-il, FSS senior deputy governor in charge of capital markets and accounting, said during a media briefing.

"Regarding Korea Zinc's plan to issue new shares, we plan to examine the completeness of the securities registration statement and coordinate it with the ongoing investigation into unfair trading practices."

Hahm vowed to conduct a thorough review to ensure that the purpose of the capital increase, its impact on the company and existing shareholders, its alignment with the enhancement of shareholder value as disclosed during the tender offer and the transparency of the decision-making process are clearly documented, to allow investors to make informed decisions.

"If Korea Zinc's board of directors was aware of the plan to repurchase and retire treasury shares through borrowing, followed by repayment through a capital increase, and sequentially proceeded with these steps, it suggests that critical information was omitted from the original tender offer report, indicating significant potential for unfair trading," he said.

"If any indications of fraudulent or illegal activity are identified, we will hold not only the company but also the involved securities firm strictly accountable."

Seen in this photo is a screen at the lobby of Korea Zinc headquarters in central Seoul, where an emergency board meeting took place, Wednesday. Yonhap

The move came a day after the world's largest zinc smelter announced a plan to issue new shares to counter the alliance between private equity firm MBK Partners and Young Poong regarding the smelter's management rights dispute.

Currently, the MBK side owns the largest share of Korea Zinc, holding a 38.47 percent stake following its tender offer, while Korea Zinc Chairman Choi Yun-beom, his family and allies collectively hold 35.4 percent after the treasury share buyback.

In its stepped-up efforts to fend off the takeover attempt, the smelting firm plans to issue 3,732,650 shares, equivalent to about 18 percent of its outstanding shares, to raise 2.5 trillion won ($1.8 billion), with the subscriptions scheduled for Dec. 3 and 4.

Korea Zinc's stock price plummeted to the lower limit immediately after the announcement of the capital increase, plunging by the daily limit of 30 percent to 1,081,000 won, far underperforming the broader KOSPI's 0.9 percent loss. On Thursday, it again dropped 7.68 percent to 998,000 won, with the stock market index down 1.45 percent.

The financial watchdog believes that the disclosure by the world's largest zinc smelter regarding the capital increase was insufficient and is considering a plan to request the submission of an amended securities registration statement.

Previously, the FSS requested amended registration statements twice regarding a merger plan between Doosan Group subsidiaries — Doosan Bobcat and Doosan Robotics — which ultimately led to the withdrawal of the plan.

Meanwhile, the National Pension Service (NPS) appears to have sold 71,766 shares in Korea Zinc during the third quarter.

In a securities filing on Wednesday, Korea Zinc disclosed that the NPS currently holds 1,548,609, or 7.48 percent, of the company's shares as of Sept. 30.

Considering that the NPS held 1,620,375 shares, or 7.83 percent, as of June 30, it indicates that the agency sold 71,766 shares during the third quarter.

The NPS is cited as a casting voter in case both the Korea Zinc and MBK sides enter the next shareholders' meeting without securing a majority stake.

Industry watchers noted it is likely that the NPS sold shares in late September to realize profits, given that the smelter's stock price, which had hovered around the 500,000 won range in July and August, began rising above 600,000 won on Sept. 13 when MBK's tender offer commenced.

There is also a possibility that the NPS has continued selling additional shares this month, given that Korea Zinc's launch of a counter-tender offer in early October further pushed the stock price up.

As intense competition between the two sides was expected to continue even after their respective tender offers concluded, the stock price soared to over 1.5 million won on Tuesday.

The NPS currently holds Korea Zinc shares for "simple investment" purposes.