A list of listed companies whose price-to-book ratios (PBR) have remained in the bottom tier of their industries for 3 years will be disclosed for the first time in November. The benchmark is the bottom 25 percent for KOSPI and the bottom 10 percent for KOSDAQ.

The Financial Services Commission and the Korea Exchange on July 28 announced detailed standards for a low-PBR company disclosure system.

The exchange will split listed firms into KOSPI and KOSDAQ and then classify them into 11 industries based on the Global Industry Classification Standard (GICS). It will calculate PBR every half-year and select for disclosure companies that are included in the bottom 25 percent within their industry on KOSPI, or the bottom 10 percent on KOSDAQ, for 6 consecutive half-year periods.

PBR is an indicator obtained by dividing a company’s market capitalization by its net assets. The lower the figure, the more it indicates that the market is valuing the company lower compared with its book net assets.

Supplementary standards were also 마련됐다 to prevent companies from escaping disclosure due to a temporary rise in share prices. Even if a firm exceeds the benchmark once in between, it will be included for disclosure if its PBR is below the benchmark in 6 of the most recent 7 half-year periods, including the disclosure point.

However, for the first disclosure in November, if the PBR on Oct. 22, the calculation reference date, exceeds the benchmark, the company will be excluded from the disclosure list regardless of its past PBR.

The PBR calculation will use net assets stated in annual business reports and semiannual reports. Market capitalization will be based on a reference date set 7 trading days before the disclosure date, applying the average over the 20 trading days immediately preceding and including the reference date.

Financial authorities in March presented “bottom 20 percent within an industry for 1 consecutive year” as an example of the disclosure standard for low-PBR companies. They later extended the application period to 3 years and differentiated thresholds by market, considering industry boom-bust cycles and the time needed for outcomes from value-up efforts to appear.

For KOSDAQ, the benchmark was eased to the bottom 10 percent in consideration that volatility in company PBRs and industry rankings could increase during a market structure overhaul. Financial authorities also plan to review ways to tighten the standard after the KOSDAQ market stabilises.

A special exemption will also apply that excludes a company from disclosure for 1 year if it discloses a corporate value-up plan that includes a low-PBR improvement plan. The exemption will not apply, however, to companies that have continued to fall below the market-by-market and industry-by-industry benchmarks over the most recent 6 years, or 12 half-year periods.

The exchange plans to build a system that allows companies to check their past half-year PBR, industry ranking and whether they fall under the disclosure target.

Applying the system based on May, the number of disclosure targets is estimated at 80 to 130 companies on KOSPI and 40 to 90 on KOSDAQ. That corresponds to about 5 to 10 percent of all listed companies.

The list of low-PBR companies will be disclosed through the exchange website on the first trading day of May and November each year. A “low PBR” tag will also be attached to the stock names in securities firms’ home trading systems (HTS) and mobile trading systems (MTS).

The exchange plans to conduct management interviews, briefing sessions and consulting for companies subject to disclosure. It also plans to reflect related content in guidelines for delisting substance reviews and in stewardship code guidelines that guide institutional investors’ proxy voting. Specific application standards have not yet been presented.

The exchange will issue an advance notice of revisions to regulations and detailed rules from Aug. 5 to 24. It plans to disclose the first list of low-PBR companies on Nov. 2 after approval at regular meetings of the Securities and Futures Commission and the Financial Services Commission in September.