KOSDAQ tiered system: A stigma or a stepping stone?

South Korea's Financial Services Commission (FSC) is set to implement a new tiered segment system for the KOSDAQ stock market in January, dividing listed companies into 'Select,' 'General,' and 'Management' categories. This reform aims to differentiate companies based on their performance and compliance, with the goal of attracting institutional funds, improving corporate valuations, and bolstering investor confidence in the KOSDAQ market.

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These reforms are expected to increase institutional fund inflows to KOSDAQ Select companies, leading to appropriate corporate valuations, deterring delisting to the securities market, and enhancing investor confidence in the KOSDAQ market by filtering out problematic companies into the management group.

The proposed system will establish specific criteria for companies to enter and remain within each segment. Companies in the top 'Select' segment are expected to benefit from increased institutional investment, potential inclusion in benchmark indices, and greater research coverage. Meanwhile, the 'Management' segment will serve as a stricter category for underperforming or problematic companies, aiming to enhance overall market credibility by filtering out struggling firms.

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The existence of the upper segment itself provides a strong incentive for companies in the general segment to improve.

However, the reform has sparked debate, particularly concerning its impact on smaller companies within the 'General' segment. Industry groups like the Venture Business Association and Venture Capital Association have voiced concerns that the new structure could unfairly label these companies as "non-prime" or "unreliable," potentially making it harder for them to raise capital and for venture capital firms to exit their investments. They argue that the total pool of investment funds is fixed, and channeling more money into the 'Select' segment would inevitably reduce liquidity for others.

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If the scope of the management group expands to include not only companies subject to management, investment attention, and listing suitability reviews, but also other problematic companies, this pressure will increase.

Proponents of the reform counter that the existence of a higher 'Select' segment provides a strong incentive for companies in the 'General' segment to improve their performance, governance, and financial standing to achieve upward mobility. They also point to recent regulatory changes, such as stricter delisting requirements and the public disclosure of companies with low price-to-book ratios, which increase pressure on all listed firms to maintain performance. Furthermore, government initiatives, including specific funds targeting KOSDAQ companies and tax incentives for certain investment vehicles, are expected to increase overall investment in the market, rather than merely reallocating existing funds.

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It is reasonable to view the KOSDAQ market structure reform not as a policy that stigmatizes companies as unreliable, but as a policy that enhances their dynamism and allows them to take a leap forward.