KOSDAQ Independence vs. Japanese Model: "Menu Needs Overhaul First" [KOSDAQ Revitalization] ③

Debate Heats Up Over KOSDAQ Independence and Competition
Japan Injects Fresh Capital Through Promotion and Relegation System
Calls Grow for Strengthening Value-Up Disclosures by Listed Companies

"The current KOSDAQ is like a Korean set menu restaurant with a wide selection but nothing worth eating. The priority should be to serve investors side dishes that are fresh and safe." (Ahn Donghyun, Professor of Economics at Seoul National University)

"It is right to make KOSDAQ independent, but we should not send it out empty-handed. We need to provide it with a gift-in this case, public funds-before letting it go." (Kim Hakkyun, Chairman of the Korea Venture Capital Association)

Domestic capital market experts agree that restructuring the market is necessary to revitalize KOSDAQ, but they also emphasize that the chronic issues of KOSDAQ must be addressed first. They point out that implementing existing remedies, such as expelling zombie companies and injecting institutional funds, is a prerequisite. There is debate over how to restructure the market: some propose making KOSDAQ independent from the Korea Exchange to foster competition with KOSPI, while others argue for benchmarking the Japanese model. There is also a consensus that KOSDAQ-listed companies should demonstrate a proactive commitment to improving their fundamentals by actively communicating with shareholders.

Market Structure Reform: Promotion and Relegation vs. Complete Independence

One of the leading market restructuring proposals in the industry is the Japanese model. In April 2022, the Tokyo Stock Exchange (TSE) of the Japan Exchange Group (JPX) restructured its five existing markets into three (Prime, Standard, Growth), introducing a promotion and relegation system where companies that fail to meet listing maintenance standards are either demoted or delisted. The listing threshold for the Prime market, which features global blue-chip stocks, was raised, while JASDAQ and Mothers-equivalent to Korea's KOSDAQ and KONEX-were merged into the Growth market to foster a vibrant ecosystem for potential growth companies.

Kim Sooyeon, Research Fellow at Bae, Kim & Lee LLC, noted in her report "Japanese Stock Market Restructuring Strategy and Implications" that "the TSE market restructuring, aimed at prioritizing quality over quantity, led to a decrease in new listings and an increase in delistings." She added, "Both the Prime and Standard markets saw a significant increase in market capitalization compared to the initial phase of the restructuring." In the year following the restructuring, the proportion of Japanese stocks held by foreigners reached 31.8%, the highest since 1970.

Ahn Donghyun, Professor of Economics at Seoul National University, argued, "The KOSDAQ market should also be restructured so that listed companies are subject to consistent listing and disclosure standards, allowing them to move up from the lower leagues, as in Japan." He suggested, "KOSDAQ should be positioned as a fourth-tier league below Prime, Standard, and Growth, with promising companies promoted upward, and those unable to move up for more than five years automatically delisted." He emphasized the need for strict management of companies that fail to generate net profits or have poor corporate governance, to protect investors from potential losses.

On the other hand, there are calls to strengthen the independence of KOSDAQ. Like NASDAQ, which competes with the New York Stock Exchange (NYSE) to attract listings, KOSDAQ should break away from the Korea Exchange and develop strategies to prevent leading companies from being poached by KOSPI, its rival market.

Kim Hakkyun, Chairman of the Korea Venture Capital Association, stated, "We need to redefine the position and character of KOSDAQ, which is currently treated as the second division of the Korea Exchange, as a key player in the innovation ecosystem." He added, "As long as KOSDAQ remains just another division within the Korea Exchange, it will be difficult to establish its own unique identity or color." He attributed KOSDAQ's inability to retain top market cap companies like Alteogen to a market structure lacking a competitive spirit.

However, experts generally agree that simply focusing on market separation, as proposed by the ruling party's KOSDAQ restructuring plan, will not solve the fundamental problems. KOSDAQ is seen as having too high a proportion of individual investors and too few institutional investors, making it difficult to thrive independently. One capital market official commented, "Even if KOSDAQ becomes independent from the Korea Exchange, it cannot survive on its own without the support of a holding company. While the conversion of the exchange into a holding company is the right direction, there is a strong possibility that KOSDAQ will be separated only legally and will continue to be subordinate to the exchange in practice."

Experts unanimously agree that efforts must be made to bring institutional investors, who have disappeared from KOSDAQ, back into the market. Chairman Kim emphasized, "The focus of the venture ecosystem should be expanded from startups to include KOSDAQ-listed companies. A dedicated KOSDAQ fund supported by public funds is needed." He added, "The current 2 to 3 trillion won KOSDAQ venture fund is insufficient. At least 30 trillion won should be injected into the KOSDAQ market."

Strengthening Value-Up Efforts Comes First

There have also been calls to sound the alarm over the lukewarm attitude of KOSDAQ-listed companies toward value-up (enhancing corporate value) initiatives. It is argued that KOSDAQ-listed companies must first demonstrate their commitment by more actively participating in value-up disclosures to encourage investors to open their wallets.

Lee Sangho, Research Fellow at the Korea Capital Market Institute, said, "It is difficult to determine whether making KOSDAQ independent and introducing a competitive structure or adopting the Japanese model is the right answer. Expelling zombie companies, restructuring the exchange, and supplying venture capital are all important, but what is most needed is for companies to more faithfully fulfill their existing value-up disclosure obligations."

According to the Korea Exchange, since the implementation of the value-up plan disclosure system in May last year, a total of 170 listed companies (168 regular disclosures and 2 preliminary disclosures) submitted disclosures through last month, with only 41 of them being KOSDAQ-listed companies. Notably, while large-cap companies with a market capitalization of over 1 trillion won accounted for 63.5% of the disclosures, small-cap companies with a market capitalization of less than 100 billion won accounted for only 6.5%.

Researcher Lee pointed out, "While the value-up disclosure ratio at the exchange exceeds 50%, KOSDAQ remains at around 2%, which is problematic. Before discussing market restructuring, companies' efforts toward value-up must come first."