[Exclusive] President Warns of 'Korea Discount' in Stock Market... Cross-Listing Ratio Plummets This Year

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President Lee Jaemyung has repeatedly pointed to dual listings as a chronic cause of the undervaluation of the Korean stock market, and as a result, the dual listing ratio, which approached 18% at the end of last year, has recently plummeted to around 9%. With the government now moving to effectively ban dual listings in principle, the ratio is expected to fall even further in the future.

According to NH Investment & Securities on March 19, as of March 17, the dual listing ratio in the Korean stock market stood at 9.2%. This ratio, which was 17.9% at the end of last year, has fallen by nearly half in less than three months. The dual listing ratio is calculated by dividing the market value of shares in other listed companies held by companies listed on KOSPI and KOSDAQ by the total market capitalization.

The sharp decline in the dual listing ratio this year is attributed to President Lee's continued criticism, which led the Financial Services Commission and the Korea Exchange to virtually block such listings by companies. On January 22, President Lee pointed out during a luncheon with the special committee for KOSPI 5000 of the Democratic Party of Korea that "the dual listing issue is a cause of the Korea Discount (undervaluation of the Korean stock market)." He reiterated his criticism on March 18 at a meeting at the Blue House on "Stabilizing and Normalizing the Capital Market," stating, "The dual listing of listed companies is one of the reasons for the undervaluation of our stock market."

With the president's firm stance on banning dual listings, LS Group abandoned its plans to list its affiliate Essex Solutions earlier this year. LTC, a KOSDAQ-listed company, also withdrew its plan to list its subsidiary LSE, and Oscotec's efforts to list its subsidiary Genosco were also scrapped. These companies actually applied for subsidiary listings to the Korea Exchange, but approval was not even granted. Both HD Hyundai Group and SK Group are also preparing to list HD Hyundai Robotics and SK Ecoplant, respectively, but such plans are now expected to face significant hurdles.

An NH Investment & Securities official explained, "Since the second half of last year, dual listings have significantly declined, and with the sharp rise in the market capitalization of large-cap stocks, which serve as the denominator for the calculation, the dual listing ratio has naturally decreased as well."

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However, the dual listing ratio in Korea remains the highest among major economies. As of the end of last year, the dual listing ratio was only 0.05% in the United States, 2.4% in China, 2.7% in Taiwan, and 4.0% in Japan, all far lower than Korea. Dual listings cause "double counting," where the value of both the parent and subsidiary companies is counted twice. This double counting can lead to a decline in the share price of the parent company, undermining the interests of existing shareholders. For this reason, many advanced economies strictly prohibit dual listings.

Kim Woojin, professor at Seoul National University Business School, stated, "In advanced economies such as the United States and the United Kingdom, dual listings are virtually nonexistent, and while Japan had some, most have been eliminated over the past decade. Although Korea is late in addressing this issue, it is the right move to reduce dual listings for the protection of shareholders."

The government has decided, in principle, to ban dual listings moving forward. On March 18, Lee Eogwon, Chairman of the Financial Services Commission, emphasized at a meeting, "We will establish specific standards and conduct strict reviews to fundamentally ban dual listings, so that the interests of ordinary shareholders are not harmed by the simultaneous listing of parent and subsidiary companies."

Experts believe that resolving the dual listing issue will help address the undervaluation of the Korean stock market. Kim Dongwon, head of the Research Center at KB Securities, emphasized, "Dual listings are one of the chronic causes of the undervaluation of the Korean stock market. If dual listings are fundamentally prohibited, the valuation of the Korean market will rise, resulting in a higher total market capitalization."

Lee Namwoo, chairman of the Korea Corporate Governance Forum, explained, "In the United States and Europe, there are virtually no cases of simultaneous listings of parent and subsidiary companies as seen in Korea. Even without legal regulation of dual listings, the duty of loyalty to shareholders operates as a mechanism to fundamentally prevent such practices."

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In addition to banning dual listings, the government has announced various measures to address the chronic undervaluation of the Korean stock market. The Financial Services Commission will reorganize the KOSDAQ market into a two-league system: a "premium market" for mature innovative companies and a "standard market" for growing companies. The plan is to implement a promotion and relegation system within KOSDAQ, allowing companies to move between markets according to their growth stage. In addition, the scope of the KOSDAQ customized technology special listing system will be expanded to include six new sectors this year-advanced robotics, K-content, and cybersecurity-in addition to the existing sectors of biotechnology, artificial intelligence (AI), space, and energy.

Ko Youngho, Director of the Capital Markets Division at the Financial Services Commission, stated, "The number of premium market stocks is expected to be around 80 to 170, but this may be adjusted according to regulatory revisions and market operation. After collecting opinions in the second half of this year, the system could be implemented as early as the beginning of next year."

The list of companies with low price-to-book ratios (PBR) will be disclosed every six months. A PBR below 1 means that a company's market capitalization is less than its liquidation value, indicating that the market's assessment of the company's assets is excessively low. The intention is to put pressure on companies that deliberately keep their stock prices low to expand controlling shareholders' interests, despite low PBRs, by adopting a "naming and shaming" approach. If a company's PBR remains in the bottom 20% of its industry for two consecutive half-year periods, it will be published on the Korea Exchange's Value-Up website and tagged as a "low PBR" stock.

To strengthen the response to unfair trading practices such as stock price manipulation, the joint response team will be significantly expanded, and authorities such as the right to request communication records and investigative powers for special judicial police will also be enhanced. In addition, new legal grounds will be established to allow the confiscation of investment principal in cases of insider trading and fraudulent transactions. Previously, principal confiscation was only applied to market manipulation, but now it will be expanded to cover all forms of unfair trading.

Other measures include strengthening the stewardship code (guidelines for institutional investors' exercise of voting rights) to encourage active monitoring of management by institutional investors, and establishing a third-party assessment system to disclose whether institutional investors are faithfully implementing the code, along with lists of compliant and non-compliant institutions.

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