Hyundai Motor and Kia Motors have been ordered to sell a combined 6.6 percent stake worth 440 billion won ($375.61 million) in steelmaking affiliate Hyundai Steel by Thursday to comply with ownership regulations.
Shares in Hyundai Steel tumbled as much as 6 percent in morning trade on Wednesday on news of the regulator's decision.
South Korea's Fair Trade Commission curbs cross-shareholdings involving affiliates of conglomerates, a common practice which has helped controlling families wield enormous influence despite holding tiny stakes in group companies.
The "circular shareholding" structure has been criticised for undermining corporate governance at South Korea's family-owned conglomerates, which form the backbone of Asia's fourth-biggest economy.
Samsung Group, the country's top conglomerate, said on Sunday that its battery-making arm Samsung SDI would sell $622 million worth of shares in sister firm Samsung C&T Corp to comply with the regulations.
Hyundai Motor and Kia Motors must reduce their holdings by Dec. 31 in Hyundai Steel, which increased after the steel producer's merger with another steelmaking affiliate, Hyundai Hysco, on July 1, the Fair Trade Commission said in a statement.
Alternatively, Hyundai Motor Group could eliminate two of the cross-shareholding chains that the FTC said had strengthened in the merger. But this second option was "not unrealistic", Center for Good Corporate Governance analyst Chae Yi Bai said, given that Hyundai Motor Group controlled its sprawling empire through the cross-shareholding structure.
Hyundai Motor must offload a 4.3 percent stake in Hyundai Steel, which was worth 287 billion won at Wednesday's closing price. Kia must sell a 2.3 percent stake worth 153 billion won.
Should the companies fail to comply with the regulations, the automakers could face fines of up to 10 percent of the acquisition prices of the additional shares they have in Hyundai Steel.
Hyundai and Kia said they had asked the regulator to extend a grace period for the sale, which is currently 6 months after a merger.
The FTC would review whether or not impose a fine should the firms fail to meet the deadline, an official told Reuters. ($1 = 1,171.4300 won) (Editing by Richard Pullin and Stephen Coates)