Index Number Formation in the Chittagong Stock Exchange
The Index Number System Used in Chittagong Stock Exchange , Bangladesh...
Index Number formation in the Chittagong Stock Exchange
Indroduction : The Chittagong Stock Exchange (CSE) is a not-for-profit organization, formed and registered with the registrar of Joint Stock Companies and Firms in Bangladesh on April 1, 1995 as a public company limited by guarantee with an Authorized capital of 150,000,000 divided into 500 shares of Tk. 300,000 each. The Exchange members are not its beneficiaries since they are not involved in profit sharing and taking dividend. All its surpluses are spent on the development of capital market in the country. The principal activities of the Exchange are to conduct, regulate and control the trade. Starting from a rental building, the exchange currently owns a two-storey building measuring 28,000 square feet. It is the second stock exchange of Bangladesh that started its journey with the aim of offering the investors a transparent and efficient capital market. On October 10, 1995 CSE introduced a fully automated screen based trading system replacing the obsolete setup enabling its trade operations from three major cities in Bangladesh.
Indexes Used in Chittagong Stock Exchange : At present CSE is managing several indices which are listed below: (1) CSE All Share Price Index (CASPI) (2) CSE Selective Categories Index (CSCX) (3) CSE – 30 Index (CSE selective Index) and (4) Sector Wise Indices: General Insurance , Textiles & Clothing , Pharmacy & Chemicals , Foods & Allied , Cement Eng. & Electrical , Leather & Footwear, Services & Property, Papers & Printing, Energy, Mutual Funds, Bank, Ceramic, ICT, Leasing & Finance, Life Insurance, Telecommunication, Miscellaneous . All the indices of the Chittagong Stock Exchange Ltd (CSE) are calculated and maintained following Laspayers Method which was considered as the most transparent and scientific at the time of its inception. Now it is required to adopt a modern and internationally accepted calculation methodology to provide a more sensitive, investable, tradable and transparently managed Index. The enhanced CSE indices will provide a platform for a wider range of investable and appealing opportunities. The constituents will be free float adjusted with only the investable portion included in the index calculation. Globally, the free-float Methodology of index construction is considered to be an industry best practice and all major indexes like MSCI, FTSE and S&P have adopted the same. MSCI, a leading global index, shifted all its indices to the Free-float Methodology in 2002.
Descriptions of the Index numbers used in Chittagong Stock Exchange : (1) CSE All Share Price Index (CASPI) - Value Weighted Method A good market representative index should involve:
Scientific calculation formulas with clear adjustment procedure
Logical scrip selection criteria
Distinct base date
Meaningful base value The only index the CSE has been maintaining since 10th October 1995 is a ALL SHARE PRICE INDEX using Chained Paasche method (A value weighted Index) developed by economist Hermann Paasche It faces question of clarity. This index was subject to unusual ups and downs and without a distinct base value. Therefore in need of a clean slate CSE finds the date 1 January 2000 is the best date to start new Indices.
Paasche Index =
An All Share Price Index with new formula and base date 30th December 1999 (the last day of the year) and new base index of 1000 replaced the previous one and a completely new Selective Index incorporating 30 scrip / chit with base date 30th December 1999 and base index 1000. After intensive study CSE board of directors found out that Laspayers Method (Another Value weighted Index) to calculate index is regarded as the most transparent and scientific method. Laspeyres Index =
The following conditions is followed while calculating the All Share Price Index:
All Share Price Index does not necessarily mean that all the listed stocks should be considered for calculating the index. Inactive stocks not being traded for consecutive six months will not be considered in the calculation.
Only the active scrip will be considered for calculating the index.
Mutual Funds and Debt securities will not be considered in calculating index.
A newly listed scrip will be included in the index after five consecutive trading days.
Only normal trades should be considered in calculating index.
All share price index will be calculated only once in a day - after the trading hour in the on line system.
No changes in number of shares will be allowed during Vector session.
Index committee will review the index - its criteria, performance, calculation method after every six month.
Index Base Date is 30th December 1999
Base Day index 1000
(2) CSE Selective Categories Index (CSCX) - Value Weighted Method At the beginning of new millennium a selective Index will be introduced, which is found to be very popular in almost all the developed exchanges worldwide. Here the selection criteria play a very important role in forming an index. Criteria for a Selective Index It provides a discussion about the important criterion for an index, which is to be used as a benchmark of performance. The criterion is that the movement of the index fully represents the aggregate movement of the index's constituent assets and that the index's returns are realizable by an investor who has held a portfolio identical to the asset mix of the index. Value-Weighted Index satisfies the above criterion. Selection of stocks for the benchmark index should be such that it represents the whole market. In addition it will be guaranteed that the constituent stocks have high percentage coverage of the market in terms of market value. This will make it difficult if not possible for a few investors to manipulate the movement of the index. Chittagong Stock Exchange (CSE) launched a new index named CSCX (CSE Selective Categories' Index) comprised A, B & G category companies from 14th February 2004 to replace the earlier CSE Trade Volume Weighted Index. The Base Date of this index is 15th April 2001 (when A, B & Z category were introduced) and Base Value is set to 1000. The new index includes all but not the Z category companies. This also excludes the companies/scrip which are debt securities, mutual funds, suspended for indefinite period and non-traded for preceding six months of review meeting. The index will be reviewed in the Index Committee Meeting after every six months like other two indices of CSE. This index was disseminated on line to all the Brokers' Work Stations (BWSs) during trading sessions and after every three minutes the index value had been refreshed. The construction principle of this index is based on Laspeyres method like other two CSE indices , CSE all Share Price Index and CSE- 30 Index. It may be mentioned here that the base value of these two indices was also set to 1000 with a base date 30th December 1999.
(3) CSE – 30 Index (CSE selective Index) CRITERIA FOR CSE-30 INDEX After revision done in the Listing & Index Committee Meeting held on 28th Apr 2009 by CSE board, two layer methods are followed for selection of listed companies in the CSE-30 Index. In the first layer method, basic criteria are considered for primary selection. BASIC CRITERIA
Must be listed with the Chittagong Stock Exchange Limited.
In case of IPO/New Issue, this should be on listing either with DSE or CSE for a minimum period of 2 years or remained in Commercial Production in Bangladesh for the minimum same period prior to its listing.
Companies that did not hold their Annual General Meetings regularly will not be considered.
Minimum market capitalization must be Tk. 200 million and at least two times of paid-up capital.
Must have at least 20% free floating share capital. Free floating share capital shall mean the share capital which will exclude Government's holding (other than ICB), Sponsors/Directors & their Associates' holding plus other locked-in portions.
Must have positive revenue reserve/ retained earnings.
Must be traded for at least 50% trading days of the six monthly review period.
Paid dividend in any of the last 2 years.
Company having negative Earning Per Share (EPS) for last two consecutive years will not be considered.
Company falling under settlement category 'Z' will not be considered.
Financial Institution falling under the problem list of Bangladesh Bank will not be considered provided such information is available from an acceptable source.
Company failing to pay the listing fees and/or penalty imposed under the Listing Regulations of CSE for a period of 2 years will not be considered.
At least one company from each sector having minimum seven companies will be taken in the index if the scrip satisfies the above criteria and achieves the minimum point (50 points) as evaluated on the basis of the following Selection Criteria. The sector having less than seven companies will be considered to be a part of Miscellaneous Sector. On being qualified on the basis of the Basic Criteria, the companies are required to meet the following further Selection Criteria to have the final berth in CSE-30 Index.
SELECTION CRITERIA Higher Net Assets Value (NAV) per share Higher rate of Earning Per Share (EPS) Higher rate of Dividend Lower Price Earning (PE) Ratio Higher Dividend Yield (DY) Higher rate of free floating in equity Larger number of shareholders Higher liquidity in terms of trading day Higher liquidity in terms of number of contract Longer duration of continuous remaining in the CSE-30 Index
Regular payment of listing fees Conditions to be followed while forming the selective Index: Only the active scrip will be considered for calculating the index. Mutual Funds and Debt securities will not be considered in this index. Only normal public market trades will be considered. Selective Index will be refreshed after 3 minutes time interval during online trade. At the time of update the Selective Index will consider the Weighted Average Price for each constituent stock. No changes in number of shares will be allowed during the business sessions. Index committee will review the index - its criteria, performance, calculation method after every six month. Index Base Date is 30th December 1999 . Base Day index is set to be 1000.
Free Float Free-float Methodology Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the Index. Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading at the Stock Exchange. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. Free-Float Calculation Methodology:
Basic method of calculating Index in CSE In countries where the stock price is strictly regulated and stock split is frequently happening, the Price - weighted Index can be suitable whereas in countries like Bangladesh price is generally unregulated and the event of stock splitting is also rare, therefore Price weighted Index is not suitable for us. That is what the Chittagong Stock Exchange contends. Whereas Dhaka Stock Exchange also uses Price weighted index as well along with Islamic Shariah based Index. A general Example of Value weighted Index used in Chittagong Security Exchange is as follows: Trading days DAY 1 (base day) DAY 2
Value of portfolio Tk 20,000 Tk 21,000
Index 1000 1050
We take Day 1 as the base day. The index on that day will be taken as a standard. The value assigned to the base day index is 1000 in this example. On Day 2 the value of the portfolio has changed from Tk 20,000 to Tk 21,000, a 5% increase. Therefore, the value of the index on Day 2 will change to indicate a corresponding 5% increase in market value. The computation follows the procedure below:
2nd Day's index =
2nd day's portfolio value -----------------------------------------------------Base Day's portfolio value (Say, Day 1)
X Base Day's index (Say Day 1's)
= 1050 Therefore the basic formula for Index calculation in CSE is = X Base Index Value The information about sampling is not available. In general, an index based on a larger percentage of the total number of listed stocks will be more representative than that one based on a smaller percentage. Although an index that consists of all listed stocks can be considered as more representative, a number of stocks may have very few transactions, the quoted price of these stocks may not reflect their true market value. An index may still be highly representative even if it consists of only a relatively small percentage of the total number of stocks. Here, the sample selection process plays an important role. We know that There are, in general, three different weighting methods, namely, value-weighted / market value-weighted method such as Hong Kong Stock Index (HSI) , unweighted (or equally weighted) such as Financial Times Ordinary Share Index , and price-weighted such as Dow Jones Industrial Average (DJIA) . Value-weighted method may be considered as a most appropriate method than others for both the bourses of the country (DSE & CSE) since the existing indices of the bourses
have been calculating under value-weighted method. For a value-weighted index, the weight of each constituent stock is proportional to its market share in terms of capitalization. We can assume that the amount of money invested in each of the constituent stocks is proportional to its percentage of the total value of all constituent stocks. Examples include all major stock market indices of Hong Kong, London and many others.
Computation of Value Weighted Indices and Adjustments for Changes in Market Capitalization The computation of a value-weighted index is useful to think in terms of evaluating the performance of a portfolio of securities. Some adjustments need to be made due to changes in market capitalization of the portfolio's constituent stocks. The adjustment procedures are discussed in detail below. To make our computation simple, we need to keep the number of constituent stocks small. Let us assume that the index is composed of only three stocks: A, B and C.
Day 1 (base day) Market Data of Constituent Stocks on Day 1 Stock Shares Outstanding A 20 B 5 C 10 Aggregate Market Value (AMV) = 290
Closing Price 10 8 5
Market Value 200 40 50
The market value of each stock at closing is given by the product of the number of shares outstanding and the closing price. For stock A, for instance, it is 20 shares times Tk.10 which yields Tk.200. The aggregate market value (AMV) of all constituent stocks is the sum of the market value of each stock. The AMV of day 1 is Tk.290. Day 1 will be taken as the base day on which the index is set at 1000
Day 2 Market Data of Constituent Stocks on Day 2 Stock Shares Outstanding A 20 B 5 C 10 Aggregate Market Value (AMV) = 300
Closing Price 10 9 5.5
Market Value 200 45 55
As there is no change in capitalization, no adjustment is needed on Day 2. The AMV is equal to Tk.300. The computation of the index on Day 2 follows the procedure below: Day 2's AMV Day 2's index = -------------------- X Day 1's index Day 1's AMV
300 = ------- X 1000 290 = 1034.4828 It should be clear that the change in the index value shows the relative change in the aggregate market value of the constituent stocks. There is a 3.45% increase in AMV (also in index) on Day 2 relative to Day 1 (the base day). Adjustment to Changes in Capitalization Adjustments need to be made from time to time as a result of changes in capitalization of the constituent stocks. They are discussed in detail below:
Day 3 (Ex-Bonus) Company "A" issues 50% bonus shares. Its shares are to be traded ex-bonus at the ratio of "1 for 2", i.e., one share will be given as bonus for every 2 shares held. This issue of shares is going to change the total number of shares outstanding on Day 3. The adjustment is shown below: 20(1+2) New Total No. of Shares Outstanding of Company A = -----------2 = 30 Market Data of Constituent Stocks on Day 3 Stock Shares Outstanding A 30 B 5 C 10 Aggregate Market Value (AMV) = 310
Closing Price 7 8 6
Market Value 210 40 60
Therefore, Day 3's AMV Day 3's index = ---------------------- X Day 2's index Day 2's AMV 310 = ----------- X 1034.4828 300 = 1068.9656 Note that the closing price of Company A on day 3 is Tk. 7/- determined by demand and supply factors in the market against the theoretically adjusted price (to the extent of disclosure) of Tk. 6.67 made on day 2 after closing market / on day 3 before starting market. If the company issuing bonus share also recommends / declares cash dividend, then the cash dividend (to the extent of disclosure) should also be adjusted in the aforesaid theoretical price.
Day 4 (Ex-Rights) Stock C has declared 40% rights share at the ratio of "2 for 5" at Tk.1.50 each including a premium of Tk. 0.5 each. The offer expires on Day 4 (i.e. ex-rights). As mentioned earlier, it is useful to treat the constituent stocks as a portfolio held by an investor. In the computation of the index on Day 4, the investor is assumed to exercise the rights. Therefore, the new number of shares outstanding for stock is given below: 10(2+5) New Number of Shares Outstanding for Stock C = ---------5 = 14 Market Data of Constituent Stocks on Day 4 Stock Shares Outstanding A 30 B 5 C 14 Aggregate Market Value (AMV) = 314
Closing Price 6.5 9.2 4.5
Market Value 195 46 63
Since all rights are exercised, capitalization adjustment needs to be made on day 3 after closing market / on day 4 before starting market. The number of shares outstanding increases by 4. This will cause an increase in capitalization by Tk.6 (= 4 x 1.50). The adjusted AMV on Day 3 after closing market / on day 4 before starting market in the index computation on Day 4 will be: 310 + 6 = 316 Therefore, Day 4's AMV Day 4's index = --------------------------------- X Day 3's index Adjusted Day 3's AMV 304 = ---------- X 1068.9656 316 = 1028.3720
1028.3720 - 1068.9656 Percentage change = ------------------------------- X 100% 1068.9656 = -3.80% The index dropped from 1068.9656 to 1028.3720. This can be interpreted as a 3.80% decrease in AMV.
Day 5 (Replacement) Stock B is replaced by stock D, which has a closing price at Tk.11.5 on Day 4 and its number of shares outstanding is 20. Market Data of Constituent Stocks on Day 5 Stock Shares Outstanding A 30 D 20 C 14 Aggregate Market Value (AMV) = 500
Closing Price 7 11 5
Market Value 210 220 70
The adjustment on Day 4's AMV in computing Day 5's Index follows a procedure as if the stock replacement had taken place on Day 4. The adjusted AMV on Day 4 is given as: Stock Shares Outstanding A 30 D 20 C 14 Aggregate Market Value (AMV) = 488
Closing Price 6.5 11.5 4.5
Market Value 195 230 63
Therefore, Day 5's AMV Day 5's index = --------------------------------- X Day 4's index Adjusted Day 4's AMV 500 = ------ X 1028.3720 488 = 1053.6598
Day 6 (Addition) Stock E is added to the index as a constituent stock on Day 6. Stock E has a closing price of Tk.4 and the number of shares outstanding is 40 on Day 5. Market Data of Constituent Stocks on Day 6 Stock Shares Outstanding A 30 C 14 D 20 E 40 Aggregate Market Value (AMV) = 703.2
Closing Price 7.2 4.8 12 4.5
Market Value 216 67.2 240 180
Since the number of stocks has changed, we need to compute the adjusted AMV for Day 5 in computing Day 6's index. Day 5's adjusted AMV will be equal to the original AMV plus the market value of stock E on Day 5. This is equal to Tk.500 + 160 (4 X 40) = 660.
Day 6's AMV Day 6's index = ---------------------------------- X Day 5's index Adjusted Day 5's AMV 703.2 = ------- X 1053.6598 660 = 1122.6266 Any new issue should not be considered in the computation of index for “x” days from the date of first trade. “x” may be a single digit parameter e.g. x = 1, 2, 3...... days. Here, in DSE and CSE, “x” is equal to 1. Shares issued under Repeat Public Offer (RPO), conversion, amalgamation, acquisition etc. should be treated as new issue (addition) and adjusted to give effect in the index on the following day of crediting/ issuing of those shares as per the guideline of “Day 6”.
Day 7 (Deletion) Stock C is deleted from the index's constituent stocks. The new total number of stocks is reduced to 3. Market Data of Constituent Stocks on Day 7 Stock Shares Outstanding A 30 D 20 E 40 Aggregate Market Value (AMV) = 656
Closing Price 7 12.3 5
Market Value 210 246 200
The adjusted AMV on Day 6 will be a reduction by the amount of market value of stock C on Day 6. Day 6's adjusted AMV will be equal to Tk 703.2 - 67.2 = 636. Day 7's AMV Day 7's index = --------------------------------- X Day 6's index Adjusted Day 6's AMV 656 = ----- X 1122.6266 636 = 1157.9293
Day 8 (Ex-Dividend) Cash dividends of Tk .50 per share are declared for stock E and Day 8 is to be ex-dividend. Market Data of Constituent Stocks on Day 7 Stock Shares Outstanding A 30 D 20 E 40 Aggregate Market Value (AMV) = 646
Closing Price 7.2 12.3 4.6
Market Value 216 246 184
No adjustment is needed, as there is no change in capitalization. 646 Day 8's index = ------- X 1157.9293 656 = 1140.2779 Note that the price of stock E drops. This is a normal phenomenon as a stock goes ex-dividend. Day 8’s index records a decrease as well. Note that the closing price of Company E on day 8 is Tk. 4.6 determined by demand and supply factors in the market against the theoretically adjusted price (to the extent of corporate disclosure) of Tk. 4.50 made on day 7 after closing market / on day 8 before starting market.