[Exclusive] Kosdaq to Use Absolute Criteria for Select-Tier Promotions

Promotion to top tier if market cap and financial thresholds are met

No cap on upgrades as long as requirements are met

South Korea has decided to adopt an absolute-evaluation system for the Kosdaq promotion-relegation framework, a key part of its capital-markets reform drive. The move means companies can be promoted to Select, the top tier for higher-quality firms, whenever they meet criteria such as financial standards and market capitalization.

A senior Korea Exchange official said on Oct. 22 that the system will not use relative rankings to fix the number of Select companies at 50 or 70. Instead, it will use absolute criteria.

The Kosdaq promotion-relegation system would divide listed companies into three segments: Select for higher-quality companies, Standard for general companies and a management group for troubled firms. Companies in the Standard segment could move up to Select if they meet the required conditions.

The government had initially considered ranking listed companies on a relative basis and then determining an appropriate number for the Select tier. But many experts argued that, rather than setting a quota, strong companies that meet the promotion criteria should be allowed into Select at any time.

Financial authorities are reviewing a plan to classify companies using not only market capitalization, but also sales and profit growth and technological competitiveness.

No cap like Nasdaq, meaning top-tier roster could reach 300 companies

Bid to erase 'Kospi second division' label, with promotion criteria still unresolved

When the Financial Services Commission announced in March that it would introduce the Kosdaq promotion-relegation system, it was considering setting the number of companies in the Select tier in advance. Regulators have since decided to let that pool expand at any time, concluding that a fixed quota would make it harder to grow Select and could run counter to efforts to differentiate the Kosdaq market.

Authorities initially envisioned limiting Select to fewer than 100 companies based on market capitalization, according to a person familiar with discussions on the system. Early guidance from regulators suggested only several dozen companies would be included, the person said, meaning the tier would be narrowed based on market-cap rankings. There was also broad speculation that Select would be run as a concentrated group to meet demand from institutional investors seeking targeted exposure to stronger Kosdaq companies.

Financial authorities and the Korea Exchange have now decided not to operate the system by fixing the number of Select constituents in advance. If more companies meet the listing standards over time, the number in Select could expand to 200 to 300, the senior exchange official said. Officials also expect the segment to grow overall as more companies deliver stronger performance.

A larger Select tier could help erase the stigma that Kosdaq is a "second division" version of the main Kospi market. One of the main reasons authorities are pursuing the framework is their view that Kosdaq's original identity as a market for high-quality technology stocks has faded. The government is aiming for a sequence of effects: successful differentiation of the Select tier, stronger incentives for institutional investors to buy high-quality companies and broader value-up opportunities for Kosdaq firms.

Nasdaq, which financial authorities are using as a key reference in designing the system, also uses an absolute-assessment approach. It divides listed companies into the Nasdaq Global Select Market, Nasdaq Global Market and Nasdaq Capital Market. It does not impose separate quotas on each segment. Companies can apply for promotion and are moved up if they pass a review of whether they meet the requirements.

After Nasdaq introduced its segment system in 2006, the number of companies moving from the New York Stock Exchange to Nasdaq increased sharply, according to a financial investment industry official. There is broad support in and around the government for designing Kosdaq so it can produce effects similar to Nasdaq's, the official added.

The key issue now is how to set promotion and relegation standards. Market participants say the framework should take into account multiple factors, including financial growth, market capitalization and technological competitiveness. The exchange is also conducting a research study on the matter. Financial authorities, however, have yet to reach a conclusion on the criteria.

The exchange has also not finalized the schedule for a public hearing on the Kosdaq promotion-relegation system, which it had said would be held in the fourth quarter of this year. An investment industry official said a recent court decision blocking a delisting over failure to meet market-capitalization requirements has forced the exchange to focus on responding to that issue. As a result, the bourse has not yet decided when to hold the hearing.

Shim Woo-il, Hankyung.com reporter goodwill@hankyung.com