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 plenty of dishes but nothing actually worth eating. The priority should be serving investors with side dishes that are fresh and safe." (Ahn Donghyun, Professor of Economics at Seoul National University)

"KOSDAQ should be made independent, but we can't just send it out empty-handed. We need to give it a gift-meaning the injection of public funds-before letting it go." (Kim Hakkyun, Chairman of the Korea Venture Capital Association)

Domestic capital market experts agree that a restructuring of the market is necessary to revitalize KOSDAQ, but they also emphasize that the chronic problems of KOSDAQ must be addressed first. They point out that the priority should be to ensure that existing measures such as "removing zombie companies" and "injecting institutional funds" are properly implemented. Regarding how to restructure the market, there are differing opinions: some propose making KOSDAQ independent from the Korea Exchange to create a competitive dynamic with KOSPI, while others suggest benchmarking the Japanese model. There is also a consensus that KOSDAQ-listed companies themselves must demonstrate a willingness to improve their fundamentals by actively communicating with shareholders.

Market Structure Reform: Promotion and Relegation vs. Separation and Independence

One of the major market restructuring proposals being discussed in the industry is the Japanese model. In April 2022, the Tokyo Stock Exchange (TSE) of Japan Exchange Group (JPX) reorganized its five existing markets into three (Prime, Standard, and Growth), introducing a promotion and relegation system in which companies that fail to meet listing maintenance criteria are either demoted or delisted. The listing requirements for the Prime market, which hosts large global companies, were raised, while JASDAQ and Mothers-equivalent to Korea's KOSDAQ and KONEX-were merged into the Growth market to foster the "birth and death" cycle of potential growth companies.

Kim Suyeon, Research Fellow at Lee & Ko, noted in her report "Japan Stock Market Restructuring Strategy and Implications" that "the TSE market restructuring, which was promoted under the policy of prioritizing quality over quantity, led to a decrease in newly listed companies and an increase in delistings." She added, "The market capitalization of both the Prime and Standard markets increased significantly compared to the initial phase of restructuring." In the year following the restructuring, the proportion of Japanese stocks held by foreigners reached 31.8%, the highest level since 1970.

Ahn Donghyun, Professor of Economics at Seoul National University, stated, "KOSDAQ should also be restructured so that listed companies are subject to consistent listing and disclosure standards and can rise from the lower leagues, as in the Japanese case." He argued, "KOSDAQ should be placed as a fourth-tier league beneath Prime, Standard, and Growth. Companies that perform well should be promoted, while those that fail to move up for more than five years should be automatically delisted." He explained that listed companies that fail to generate net profits or have poor corporate governance should be strictly managed to protect investors from losses.

On the other hand, there are also calls to strengthen KOSDAQ's independence. Similar to how NASDAQ competes with the New York Stock Exchange (NYSE) to attract listings, KOSDAQ should break away from the Korea Exchange and seek ways to prevent leading companies from being poached by its rival market, KOSPI.

Kim Hakkyun, Chairman of the Korea Venture Capital Association, said, "KOSDAQ, which is effectively the second division of the Korea Exchange, needs to redefine its position and character as a crucial part of the innovation ecosystem." He added, "As long as it remains just one division within the Korea Exchange, it will be difficult for KOSDAQ to develop its own unique identity or color." He attributed KOSDAQ's inability to retain top market cap companies like Alteogen to a market structure that lacks a sense of competition.

However, experts generally agree that simply focusing on market separation, as proposed by the ruling party, will not solve the fundamental issues. KOSDAQ has a disproportionately high share of individual investors and very few institutional investors, making it difficult for the market to sustain itself. One capital market official said, "Even if KOSDAQ becomes independent from the Korea Exchange, it cannot survive on its own without support from a holding company." He added, "While converting the exchange into a holding company is the right direction, there is a high likelihood that KOSDAQ will be legally separated but still effectively subordinated to the exchange in its current form."

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

Strengthening Value-Up Comes First

There were also warnings about the lukewarm attitude of KOSDAQ-listed companies toward value-up (enhancing corporate value). It was argued that KOSDAQ-listed companies should take the initiative by 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 system or adopting the Japanese model is the right answer. While removing zombie companies, restructuring the exchange, and supplying venture capital are all important, the most necessary thing is to ensure that companies faithfully implement the existing value-up disclosures."

According to the Korea Exchange, since the implementation of corporate value enhancement disclosure in May last year, a total of 170 listed companies (168 formal disclosures and 2 preliminary disclosures) have submitted disclosures as of last month, of which only 41 were KOSDAQ-listed companies. Notably, 63.5% of the disclosed companies were large-cap companies with a market capitalization of over 1 trillion won, while only 6.5% were small-cap companies with a market capitalization of less than 100 billion won.

Research Fellow Lee pointed out, "While the value-up disclosure ratio for the exchange exceeds 50%, KOSDAQ remains at around 2%, which is problematic." He emphasized, "Before discussing market structure reform, companies' efforts toward value-up must come first."