Korea Exchange (KRX) CEO Jeong Eun-bo explains the thinking behind the Corporate Value-up Index during a press meeting at the KRX headquarters in Seoul, Tuesday. Yonhap

The Corporate Value-up Index is facing continued criticism from the securities industry, both domestically and abroad.

Critics argue that the index has strayed far from its original purpose, as many undervalued high-dividend stocks were excluded, while stocks with low dividend yields and limited shareholder returns were included.

The index — announced by the Korea Exchange (KRX) on Tuesday — is part of the Corporate Value-up Program, a government-led initiative to revamp the stagnated stock market by improving corporate governance and shareholder returns.

An employee at UBS, a global investment bank based in Switzerland, commented that it was left "speechless" after reviewing the 100 stocks on the index. In an investment note sent to institutional clients, Wednesday, he slammed the KRX, urging the exchange to quickly realize that the index will not function as intended.

The market's dissatisfaction with the index largely stems from the stock selection process.

The exchange said it underwent a five-step screening. Initially, stocks within the top 400 by market capitalization were selected, excluding those with consecutive losses or combined losses over the past two years.

The selection was then narrowed to include companies that had consistently paid dividends or conducted share buybacks over the past two years and whose price-to-book ratio (PBR) ranked within the top 50 percent, either overall or within their respective industry.

"The index faces a significant limitation due to its overly simplistic stock selection criteria, which rely primarily on high PBR and return-on-equity (ROE). Companies making efforts to align with the policy objectives are not being properly recognized," iM Securities analyst Lee Woong-chan said.

The low PBR led to the surprising exclusion of KB Financial Group and Hana Financial Group from the index, despite their proactive shareholder return initiatives. On the other hand, several significantly overvalued companies were included, such as HANMI Semiconductor with a PBR of 18 and POSCO DX with a PBR of 9.8.

The criteria for shareholder returns are also being criticized. It only considered whether returns have occurred, without factoring in qualitative aspects such as scale. According to iM Securities, 53 out of the 100 stocks in the index have a dividend yield below 2 percent, while 54 percent of the stocks have a dividend payout ratio under 20 percent.

Another concern is that the index may closely mirror a semiconductor index, as both Samsung Electronics and SK hynix, the top two companies by market capitalization, are included. Combined, these two companies account for nearly 30 percent of the index. When adding mid-cap stocks related to semiconductor equipment and components, the weight of the industry becomes even more pronounced.

Amid concerns about the ambiguous identity of the index, attention is now shifting to the potential success of the Value-up exchange-traded fund (ETF), set to launch in November.

CLSA, a Hong Kong-based brokerage, released a report titled "Value-down?" and claimed that the amount of capital flowing into the upcoming ETF will be limited unless the composition of the stocks is revised.

Facing increasing criticism, the KRX held an emergency media briefing on Thursday.

The exchange stated that the primary goal of developing the index is not to identify undervalued or high-dividend companies. Instead, the aim is to build an index composed of leading companies across various sectors that demonstrate strong qualitative indicators. Actively involving these companies, it said, will enhance the overall value of the Korean stock market.

The exchange also explained that if the size of shareholder returns becomes the sole selection criterion, high-growth companies that prioritize value creation through future investments rather than dividends could be at a relative disadvantage.

Additionally, the exchange plans to differentiate itself from major market indices by capping the weight of individual stocks within the index at 15 percent.

"We plan to maintain ongoing communication with the market regarding the future operation of the index," it said.