On September 24, 2024, the Korea Exchange (the “KRX”) announced the companies included on, and selection criteria for, the Korea Value-up Index (the “Index”). Starting from September 30, after completion of the system operation test, both domestic and foreign investors will have access to real-time updates regarding the Index. The Index is part of the Corporate Value-up Support Program (the “Support Program”), which was announced by the Financial Services Commission on February 26, 2024. Its primary objective is to incentivize and encourage companies’ efforts to enhance their value. To this end, the Index will serve as a benchmark for pension funds and other institutional investors, assisting them in identifying high-value investment targets, while also resulting in greater overall investment through the creation of Index-linked ETFs.
The KRX announced that it has adopted various qualitative criteria for the Index, in addition to more obvious requirements such as market capitalization. It has also implemented a relative evaluation method that takes into account differences across industries to prevent particular industries from dominating the Index. Furthermore, the KRX said it is not limiting inclusion on the Index to high-value companies but also intends to include promising companies with significant growth potential. The specific selection criteria are as follows:
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① |
Representation: A company must be among the top 400 in regards to market capitalization (which would constitute approximately 90% of the total aggregate market capitalization). |
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② |
Profitability: A company must not have reported a deficit for the past two consecutive years or on an aggregate basis over the past two years. |
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③ |
Shareholder Returns: A company must have either paid dividends or engaged in share repurchases in each of the past two consecutive years. |
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④ |
Market Standing: A company must have a price-to-book ratio that places it among the top 50% of companies in terms of overall rankings or industry-specific rankings. |
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⑤ |
Capital Efficiency: From companies that satisfy the above criteria, the final top 100 stocks will be selected based on their capital efficiency (i.e., return on equity ranking by industry). |
The final Index includes companies from various sectors such as information technology, industrial goods, healthcare, consumer discretionary goods, financial/real estate, materials, consumer staples, communications, and energy, with 67% of the stocks coming from KOSPI and the remaining 33% coming from KOSDAQ.
In addition, to encourage participation, the KRX announced a three-stage scheme to facilitate the quick settlement of the Support Program by providing benefits to (i) companies that disclose their plans to increase value, and (ii) those included on the Index. Specifically:
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1. |
Companies that disclosed their plans to increase value under the Support Program by September 23, 2024 were included on the Index as special exceptions (which will be maintained for two years), regardless of whether they met the selection criteria. |
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2. |
Starting from the re-evaluation of companies to be included on the Index in June 2025, companies already on the Index that continue to meet the minimum selection criteria (i.e., items ① through ④ of the selection criteria above) will also be included again as special exceptions (also to be maintained for two years). Incentives (consisting of relaxed criteria) will also be offered to companies that were not included on the Index but successfully implemented their plans to increase their value, while penalties (consisting of stricter criteria) will be applied to companies which were included on the Index but failed to implement their plans. |
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Beginning with the re-evaluation of companies to be included on the Index in June 2026, the Index will primarily consist of companies that have successfully implemented their plans to increase their value. |
Regarding its plans for the listing of Index-linked financial instruments, the KRX announced that Index-based ETFs are expected to be listed in early November 2024, following a six-to-eight-week review process for ETF listings and the submission of registration statements. According to the KRX, the results of a survey of major asset management companies regarding the demand for Index-based ETFs indicated that approximately ten of 26 asset management firms in the domestic ETF market are expected to participate.
The announcement of the Index and selection criteria may result in institutional investors, shareholder activists, and minority shareholders (i) expressing concerns, including with respect to whether the companies in which they hold stock have been included on the Index, whether such companies should disclose their plans to increase value under the Support Program and whether plans disclosed by such companies are appropriate, or (ii) suggesting improvements to the plan for disclosure. Companies are therefore encouraged to pay close attention to how the announcement may affect investor relations, and to consider potential disruptive effects on subsequent shareholder meetings.
Related Topics
#Value-Up #ETF #Korea Value-up Index #Corporation Law #Legal Update
