South Korea’s KOSDAQ tier system, a capital market reform initiative pushed by the government, is expected to be designed on an absolute, criteria-based approach rather than a relative ranking. Under the structure, the number of listed companies admitted to the top “Select” tier would not be set in advance, and promotion would be allowed at any time once certain requirements are met.
The Korea Exchange said on the 22nd that it is reviewing whether to adopt an absolute assessment system for the KOSDAQ tier system. “Nothing has been finalized, but it is under review,” an exchange official said. Earlier, in March, South Korea’s Financial Services Commission announced that 80 to 170 large, mature companies ranked at the top by market capitalization could enter a top tier tentatively named “Premium.”
The KOSDAQ tier system divides KOSDAQ-listed companies into three segments: Select (blue-chip companies), Standard (ordinary companies) and a management group (distressed companies). Companies in the Standard tier can move up to Select if they meet the requirements.
Initially, the financial authorities and the exchange considered a relative assessment method that would rank listed companies and then determine an appropriate number of companies to include in Select. Some accounts say the plan was to narrow the field to around the top 100 by market capitalization. However, the discussion failed to gain traction as concerns emerged that the “numerical limit” could keep excellent companies out of Select.
“If the number of companies meeting the inclusion criteria gradually increases later, the number of companies in Select could expand to 200-300,” a senior exchange official said. The remark reflects the expectation that the top tier should grow along with the number of quality companies.
Behind the shift toward an absolute assessment is an intent to erase the “KOSPI second-tier league” stigma attached to KOSDAQ. The judgment is that capping the size of the top tier could instead reinforce discriminatory perceptions of KOSDAQ-listed companies as a whole. The perception that KOSDAQ’s original identity as a market for quality technology stocks has faded is also cited as a reason for introducing the system.
The U.S. Nasdaq, which South Korean financial authorities cite as a reference case, also uses an absolute assessment approach. Nasdaq divides listed companies into Global Select, Global and Capital Market segments without setting separate quotas for each group. If a listed company applies, the exchange reviews whether it meets the requirements and allows promotion.
Note: Compiled from announcements by South Korea’s Financial Services Commission and the Korea Exchange and officials’ remarks.
The key question is how to set the promotion and demotion criteria. Market participants say multiple variables, including financial growth, market capitalization and technological competitiveness, should be considered together. Concerns have also been raised that ranking companies solely by market cap or financial metrics could disadvantage some listed companies, such as biotech firms. The exchange is conducting a research project on the matter, but South Korea’s financial authorities have yet to reach a conclusion.
The schedule has also not been finalized. The exchange said it would hold a public hearing on the KOSDAQ tier system in the fourth quarter of this year but has not set a specific date. The exchange’s hands were reportedly tied by a recent court ruling that put the brakes on a delisting over insufficient market capitalization, which also contributed to the delay.
Some observers say the pace of introducing the system could actually accelerate. President Lee Jae-myung said “it is true that South Korea’s stock market is very undervalued” and that “necessary measures will be taken soon,” raising the possibility that the KOSDAQ tier system will return to the forefront of capital market reform.
Market participants expect the broader Select gateway to increase incentives for institutional investors to invest in quality KOSDAQ companies and ultimately lead to value-up opportunities across KOSDAQ. However, if promotion requirements are too strict, the purpose of the system will be undermined, while if they are too loose, Select’s distinctiveness could weaken, making the design of the criteria the deciding factor for success.