Corporate Actions and Events Guide for the purposes of Euromoney Indices index calculations

Transcription

1 for the purposes of Euromoney Indices index calculations

2 Contents 1. Introduction Aims of the Guide Guide Upkeep Disclaimer Expert Judgement 1 2. Index Calculation Index Calculation Formula Market Capitalisation Calculation Formula Divisor Adjustments Total Return Index Calculation Formula 3 3. Corporate Actions and Adjustments Scrip Issues Splits Write-Up/Off of Capital Redenomination Renominalisation Special Dividends Rights Issues Index Shares and Index Factor Total Outstanding Shares (TOS) Update Index Factor Update Additions, Deletions and Suspensions Additions Deletions Suspensions Mergers and Acquisitions (M&A) Dividends Dividend Types Withholding Tax Gross Income Capital Net Income Calculation Net Income Calculation using Withholding Tax Rates Late Dividends Special Situations Parallel Lines of Stock in Hong Kong 33 Appendix A : Worked Example 34 Appendix B : Revision History 42 Disclosure & Disclaimer 43

3 1. Introduction 1.1 Aims of the Guide This document outlines the treatment of corporate actions and events by Euromoney Indices (hereafter EI ) in the calculation of market capitalisation weighted indices. A corporate action is defined by EI as an event that affects a company s number of shares in issue and/or the share price. Other specific index actions taken by EI are addressed in this guide. This includes changes to index shares, constituent changes (additions, deletions, suspensions) and also the treatment of dividends. Appendix A provides a worked example for an index simulating multiple corporate actions and events occurring on a single day and detailing the calculations in line with the Index Calculation Formula in section Guide Upkeep EI will review its at least once a year. Any changes will result in an Updates section in the revised edition. Appendix B has a revision history of any amendments made. 1.3 Disclaimer This document should be read in conjunction with EI Ground Rules for specific indices. These documents outline the index methodology for inclusion in the index. This document solely discusses corporate actions and events. EI strives to cover all corporate actions and events in this document. However, sometimes an undefined corporate action may take place. Undefined events will usually be treated in a way defined in this document. If this is not the case, then EI will apply Expert Judgement to deal with this event in the most appropriate way. 1.4 Expert Judgement As defined in the Expert Judgement Policy, available on the Euromoney Indices website, 1

4 2. Index Calculation 2.1 Price Index Calculation Formula The Price Index return is a weighted average return of its constituent companies, where the weights are the market capitalisations. The weights are adjusted to accommodate capitalisation issues and corporate actions; this is the same method of calculation as that used for many equity indices. The Price Index calculation formula is: PRIndex t = PRIndex 0 x M t D t Where: PRIndex t = Price Index value at time t PRIndex 0 = Price Index value as at the inception date of the Index M t = Market Capitalisation at time t, defined in Section 2.2 D t = Divisor at time t, defined in Section 2.3 The Divisor is a figure that represents the total market capitalisation at the base date of the Index. It is only adjusted (formula below) to accommodate changes to constituents and changes in the constituents share capital, thus avoiding distortions in the Index. 2.2 Market Capitalisation Calculation Formula The Market Capitalisation formula is: M t = (P it N it F it X it) Where: P it = Closing price of constituent i at time t N it = Number of shares of constituent i at time t F it = Weighting factor of constituent i at time t X it = Exchange rate for P it into the currency of the index 2

5 2.3 Divisor Adjustments The Divisor adjustment formula is: Dt = Dt-1 x 1 + CAit Mt-1 Where: D t = Divisor at time t D t-1 = Divisor at time t minus 1 day CA it = Capital adjustment of constituent i between time t-1 and t M t-1 = Market Capitalisation of the Index at time t minus 1 day Note: The calculation of CA it is outlined in sections 3, 4, and 5 (page 5 to page 29) 2.4 Total Return Index Calculation Formula (applies to both Net and Gross Total Return Indices) The Total Return Index calculation formula is: TRIndex t = TRIndex (t-1) x Where: M t + Inc t MO t TRIndex t = Total Return Index value at time t TRIndex t-1 = Total Return Index value at time (t-1), i.e. the previous day and Inc t = (Divit Nit Fit Xit) Where: Div it = Dividend per share of constituent i at time t N it = Number of shares of constituent i at time t F it = Weighting factor of constituent i at time t X it = Exchange rate for Div it into the currency of the index at time t and MO t = M t x PRIndex (t-1) PRIndex t 3

6 The same formula is used for both Net Total Return Indices and Gross Total Return Indices. For Net Total Return Indices, the dividends, Div it, are net of withholding tax. For Gross Total Return Indices, the dividends, Div it, are gross of withholding tax. Withholding tax rates used in Euromoney Indices index calculations are maintained by Euromoney Indices using a variety of publicly available sources. Please contact Euromoney Indices for more information on the rates or refer to the specific Index Ground Rules. 4

7 3. Corporate Actions and Adjustments The corporate actions are described using ratios (e.g. for every 1 share held shareholders receive 2 new shares). For the purposes of this guide, the subsequent assumptions apply: X represents the current shares Y represents the new shares For each event type, we provide worked examples to illustrate the treatment within an index. The capital adjustment (which could be 0) is computed and it is this value which impacts the index divisor outlined in section 2.3. Each corporate action is assumed to be in the same currency as the company impacted by the event. In practice, where a corporate action does involve a different currency, the price adjustment and capital changes are made using the exchange rates on the Effective Date. Each index Ground Rules document will specify the data source of the exchange rates to be used. 3.1 Scrip Issues (Bonus Issues) In general, EI separate scrip issues into three separate sub-sections: Regular Scrip Issue Scrip Issue in Other Eligible Stock Scrip Issue in Other Ineligible Stock REGULAR SCRIP ISSUE (STOCK DIVIDEND) A regular scrip issue is a form of secondary issue where a company's cash reserves are converted into new shares and given to existing shareholders in the same class of equity already held. Alternatively, this is referred to as a stock dividend and is processed by EI as a Regular Scrip Issue. Share Adjustment Price Adjustment Timing of application New number of shares = Old number of shares * [(X+Y)/X] Adjusted price = Original Share Price * [X/(X+Y)] Ex date Divisor Change: No change the capital change (CA it) is zero and therefore the divisor does not change. 5

8 Example: Regular Scrip Issue Company K offers new shares under the terms: 1 new share for every 5 shares already held (X=5, Y=1) Original price = 1200p Original shares in issue = 100 Original market capitalisation = 100*1200p = 1200 New number of shares in issue = 100*[(5+1)/5] = 120 New price of shares = 1200p*[5/(5+1)] = 1000p New market capitalisation = 120*1000p = 1200 = Original market capitalisation Capital adjustment = SCRIP ISSUE IN OTHER ELIGIBLE STOCK (SPIN-OFF) A scrip issue in other stock is a form of secondary issue where a company's cash reserves are converted into new shares and given to existing shareholders, but not the same class of equity held before. This event covers spin-offs, where a newly created independent company is formed through the sale or distribution of new shares, from an existing business or division in a parent company. The new shares become eligible for inclusion in the index. Each index series has specific rules governing the treatment of spin-offs and these are documented in the relevant Ground Rules. The eligible scrip issue shares will be processed as either: Total Outstanding Shares (TOS) Increase (section 4.1.1) TOS Increase occurs when the other eligible stock is already an index constituent. or Addition (section 5.1) An addition occurs when the other eligible stock becomes an index constituent following a spin-off. The adjustments below are applied to the stock having the scrip issue: Share Adjustment Price Adjustment Timing of application No change Adjusted price = [(X*Original Common Share Price)-(Y*Original Price offering of Other Stock)]/X Ex date Divisor Change: No change a negative capital change (CA it) is applied to the original line of stock and a positive capital change is applied to the other eligible stock. The net effect is zero, as the capital changes cancel one another out. 6

9 Example: Scrip Issue in Other Eligible Stock (existing constituent) Company K offer new shares under the terms: 4 new preference shares for every 10 existing common shares already held (X = 10, Y = 4). The preference shares are an existing index constituent. Original common share price = 1200p Original common shares in issue = 100 Original common market capitalisation = 100*1200p = 1200 Original price of preference shares = 480p Original preference shares in issue = 60 Original preference shares market capitalisation = 288 Original total market capitalisation of Company K (common and preference shares) = 1488 Market price of preference shares = 480p Additional preference shares being issued = 40 New price of common shares = [(10*1200p) - (4*480p)]/10 = 1008p New market capitalisation of common shares = 100*1008p = 1008 New market capitalisation of preference shares = (40*480p) = 480 New total market capitalisation of Company K = (100*1008p) + ( (40*480p) = 1488 = Original market capitalisation Capital adjustment of common shares = -480p*(4/10)*100 = Capital adjustment of preference shares = 480p*40 = 192 Total capital adjustment to index = = 0 Example: Scrip Issue in Other Eligible Stock (spin-off added to index) Company K spins off one of its divisions, creating independent Company J. Company J meets the index requirements and is added to the index. For every 10 shares held in Company K, shareholders receive 4 new Company J shares (X = 10, Y = 4). Original share price of Company K = 1200p Original shares in issue of Company K = 100 Original market capitalisation of Company K = 100*1200p = 1200 Initial price 1 offering of Company J = 200p 2 Initial share offering of Company J = 100*(4/10) = 40 Initial market capitalisation of Company J = 40*200p = 80 New price of Company K shares post-spin-off = [(10*1200p)-(4*200p)]/10 = 1120p New market capitalisation of Company K = 100*1120p = Note: If price of other stock is unknown, then EI calculates it using the adjustment in the price of the parent company. 2 Note: If the price spin-off does not trade on the ex-date, it is unlikely EI would add the spin-off, unless an explicit statement of trading is made in the immediate short-term by the exchange it trades on or the company itself. 7

10 Total market capitalisation of Company K and Company J (once added to index) = = 1200 Capital adjustment of Company K = -200p*(4/10)*100 = - 80 Capital adjustment of Company J = 200p*40 = 80 Total capital adjustment to index = = SCRIP ISSUE IN OTHER INELIGIBLE STOCK A scrip issue in other ineligible stock is a form of secondary issue where a company's cash reserves are converted into new shares and given to existing shareholders, but not the same class of equity held before. This other stock may be B shares, warrants, options, convertible bonds or other ineligible lines of stock. They are not eligible for inclusion into the index. The adjustments below are applied to the stock having the scrip issue: Share Adjustment Price Adjustment Timing of application No change Adjusted price = [(X*Original Common Share Price)-(Y*Original Price offering of Other Stock)]/X Ex date Divisor Change: Negative a negative capital change (CA it) is applied to the original line of stock. Example: Scrip Issue in Other Ineligible Stock Company K offers new B shares under the terms: 4 new B shares for every 10 existing common shares already held (X = 10, Y = 4). The B shares are redeemable for cash at 120p per share. Original common share price = 1200p Original common shares in issue = 100 Original common market capitalisation = 100*1200p = 1200 Original price of B shares = 120p Original B shares in issue = 60 Original B shares market capitalisation = 72 New price of common shares = [(10*1200p) - (4*120p)]/10 = 1152p New market capitalisation of common shares = 100*1152p = 1152 Capital adjustment to index = -120p*(4/10)*100 =

11 3.2 Splits Splits can be separated into two sub-sections: Stock Split/Subdivision Stock Consolidation STOCK SPLIT / SUBDIVISION A stock subdivision is the division of the nominal value by a company. Shareholders receive a ratio of new shares for the amount of shares already held. This results in an increase in the number of shares but a decrease in price. Shareholders investment is worth the same as before. Share Adjustment Price Adjustment Timing of application New number of shares = Current number of shares*(y/x) Adjusted Price = Current Price*(X/Y) Ex-date Divisor Change: No change the capital change (CA it) is zero and therefore the divisor does not change. Example: Stock Subdivision Company K shareholders will receive 5 new shares for every 1 share held currently (X = 1, Y = 5). Original market share price = 1200p Original shares in issue = 100 Original market capitalisation = 100*1200p = 1200 New number of shares in issue = 100*(5/1) = 500 New share price = 1200p*(1/5) = 240p New market capitalisation = 500*240p = 1200 Capital adjustment to Company K and index = 0 9

12 3.2.2 STOCK CONSOLIDATION A stock consolidation is a consolidation of the nominal value of a company, implemented by issuing shares to holders each of which replaces more than one existing share. This mechanism is also used to increase the share price. Share Adjustment Price Adjustment Timing of application New number of shares = Current number of shares*(y/x) Adjusted Price = Current Price*(X/Y) Ex-date Divisor Change: No change the capital change (CA it) is zero and therefore the divisor does not change. Example: Stock Consolidation Company K shareholders will receive 1 new share for every 5 shares currently held (X=5, Y=1). Original market share price = 1200p Original shares in issue = 100 Original market capitalisation = 100*1200p = 1200 New shares in issue = 100*(1/5) = 20 New share price = 1200p*(5/1) = 6000p New market capitalisation = 20*6000p = 1200 Capital adjustment to Company K and index = Write-Up/Off of Capital WRITE-UP OF CAPITAL A write-up of capital is an increase in a company s capital by virtue to the change to the nominal value. Essentially a write-up of book value to a fair market value; as is common during M&A deals. Share Adjustment Price Adjustment Timing of application No change No change N/A Divisor Change: No change no capital is being raised or distributed so the capital change (CA it) is zero and the divisor does not change. 10

13 3.3.2 WRITE-OFF OF CAPITAL A write-off of capital is a decrease in a company s capital by virtue to the change to the nominal value. Essentially a write-off of book value to a fair market value; as is common during M&A deals. Share Adjustment Price Adjustment Timing of application No change No change N/A Divisor Change: No change no capital is being raised or distributed so the capital change (CA it) is zero and the divisor does not change Redenomination A redenomination is a change in the nominal currency of the shares of the company. This is on a 1 for 1 basis (X:Y) Share Adjustment Price Adjustment Timing of application Divisor Change: No change no capital is being raised or distributed so the capital change (CA it) is zero and the divisor does not change Renominalisation No change No change N/A A renominalisation is a change in the nominal value of a security which changes the shareholding. Share Adjustment Price Adjustment Timing of application New number of shares = Original number of shares*(y/x) Adjusted Price = Original Price*(X/Y) Ex-date Divisor Change: No change no capital is being raised or distributed so the capital change (CA it) is zero and the divisor does not change. 11

14 Example: Renominalisation Company K shareholders will receive 4 new shares for every 2 shares held (X = 2, Y = 4). Original market share price = 1200p Original shares in issue = 100 Original market capitalisation = 100*1200p = 1200 New shares in issue = 100*(4/2) = 200 New share price = 1200p*(2/4) = 600p New market capitalisation = 200*600p = 1200 Capital adjustment to Company K and index = Special Dividends In general, dividends are treated as income and there is no adjustment made to the divisor of an index. However, where a dividend is defined as special or is an irregular payment, then EI treats these dividends as a capital event and applies a corporate action in this case. In general, EI separate corporate actions for dividends into two separate sub-sections: Special Cash Dividend Stock Dividend (see section ) Section 6.1 outlines the dividend types and corresponding treatment of them within an index. This section covers payments received in cash and payments treated as special SPECIAL CASH DIVIDEND (CAPITAL REPAYMENT) A special cash dividend is a non-recurring distribution of company assets that is outside the scope of the regular dividend policy, usually distributed in the form of cash to shareholders. In certain circumstances where the dividend is not declared as special, but the amount is greater than 15% of the company s share price and is deemed to be an irregular payment, then the dividend may be treated as special. Share Adjustment Price Adjustment Timing of application No change Original Share Price Special Cash Dividend Ex-date 12

15 Divisor Change: Negative EI apply a negative capital change (CA it) as the base market capitalisation decreases following the decrease in price. The value of the capital change is equivalent to the dividend paid multiplied by the shares in issue. Therefore, the divisor change is negative. Example: Special Cash Dividend Company K issues a dividend outside the scope of its usual dividend policy to the amount of 60p per share. Original market share price = 1200p Original shares in issue = 100 Original market capitalisation = 100*1200p = 1200 Dividend amount per share = 60p New share price = 1200p*[1-(60/1200)] = 1140p New market capitalisation = 100*1140p = 1140 Capital adjustment to Company K and index = 100*-60p = Rights Issues A rights issue is an offering by a company for existing shareholders to purchase additional shares at a subscription price which is usually at a discount to the current share price of the company. Rights issues can be processed in three separate ways according to the subscription price: Rights issue equal to or at discount Rights issue at premium Rights issue where the subscription price is unknown The types of rights issues separated into these sections are as follows: Regular rights issue Non-renounceable rights issue Rights issue in other stock 13

16 3.7.1 PROCESSING RIGHTS ISSUES Rights Issue equal to or at a discount In the case of a rights issue at a discount, the subscription price for new shares is less than the market price (minus any dividend). The price and shares adjust to take into account the uptake of new shares. Share Adjustment Price Adjustment Timing of application New number of shares = Original number of shares*[(x+y)/x)] Adjusted price = [(Y*Subscription Price)+(X*Original Share Price)]/(X+Y) Ex-date Divisor Change: Increases EI apply a positive capital change (CA it) as the base market capitalisation increases following the uptake of new rights issued shares. The value of the capital change is the value of the rights issue. Therefore, the divisor change is positive. Example: Rights Issue equal to or at a discount Company K declares a Rights Issue at a discount. For every 4 share held in Company K, shareholders can purchase 1 further share at 600p (X = 4, Y = 1). 3 Original market share price = 1200p Original shares in issue = 100 Original market capitalisation = 100*1200p = 1200 Subscription price = 600p New number of shares = 100*[(4+1)/4] = 125 New price of shares = [(1*600) + (4*1200)] / (1+4) = 1080p New market capitalisation = 125*1080p = 1350 Capital adjustment to Company K and index = 100*(1/4)*600p = Rights Issue at premium In the case of a rights issue at a premium, the subscription price is greater than the market price (minus any dividend). In this case, the price and shares are not adjusted to take into account the premium because there is no incentive for shareholders to pay over the market price for new shares. Share Adjustment Price Adjustment Timing of application No change No change Date when new shares are listed 3 Note: New shares are eligible for next dividend 14

17 Divisor Change: No change EI do not apply a capital change (CA it) as the base market capitalisation does not change Rights Issue where the subscription price is unknown In the case of a rights issue where the subscription price is unknown, then no action will be taken. Even in the event that the subscription price becomes known, the price will be noted by EI, but they will not act to historically change the price. Share Adjustment Price Adjustment Timing of application No change No change Ex-date Divisor Change: No change EI do not apply a capital change (CA it) as the base market capitalisation does not change. Where the parent company share price adjusts, EI will apply Expert Judgement and process as a spinoff receiving the rights, see TYPES OF RIGHTS ISSUES (ENTITLEMENT OFFERS) Renounceable Rights Issue A renouceable rights issue is a form of secondary issue that allows a company's existing shareholders to buy a proportional number of additional shares at a given price within a fixed period. In a renouceable rights issue, the issue is in the same class of shares as those already held. When a rights issue is declared, shareholders are issued with nil paid rights. In a renouceable rights issue, there are three options for the shareholder here: Take the option and buy all the shares offered Take the option but buy a proportion of the shares offered buying some shares for cash and selling the opposite proportion of the nil paid rights for cash also (perhaps funding new shares with the nil paid rights sale) Do not take the option and sell the nil paid rights for cash in full Nil paid rights are deleted once they trade on an equivalent basis with the existing shares. Renouceable rights issues are processed according to the subscription price, see

18 Non-renounceable Rights Issue A non-renounceable rights issue is the same as a regular rights issue except shareholders are denied the option of selling any of the nil paid rights offered to them. Therefore, if a shareholder decides not to fully exercise their right to buy new shares; they will lose value on their investment. Non-renounceable rights issues are processed according to the subscription price, see The exception is for UK non-renounceable rights issue. These issues are classed as open offers, i.e. there is no additional benefit to holding the stock before the issue as opposed to after it. In this case, no capital adjustment is made at the time. Any share changes will result in a total shares outstanding update (see section 4.1.) once the number of rights taken up has been announced by the company Rights Issue in Other Stock A rights issue in other stock is a form of secondary issue that allows company's existing shareholders to buy a proportional number of additional shares in a different stock to the one already held. Share Adjustment Price Adjustment Timing of application Share adjustment takes place in other stock but not in existing stock Adjusted Price = Share Price of Existing Shares*{1-[[Y*(Share Price of Other Stock - Subscription Price of Other Stock)]/(X*Market Price of Existing Shares)]} Ex-date Capital Change: Negative EI apply a negative capital change (CA it) as the base market capitalisation decreases following the price change in the original line of shares. The value of the capital change is the value of the rights issue in the other line. Therefore, the divisor change is negative. Example: Rights Issue in Other Stock 4 Company K declares shareholders in the company have the right to purchase 2 preference shares for every 4 common shares held (X = 4, Y = 2). Market share price of common shares = 1200p Market shares in issue of common shares = Note: For the purposes of this example, the rights issue in other stock is at a discount. Where there is no discount, a capital adjustment is not applied. 16

19 Market share price of preference shares = 300p Subscription price of preference shares = 250p New price of common shares = 1200p*{1-[[2*(300p-250p)]/(4*1200p)]} = 1175p New market capitalisation of common shares= 100*1175p = 1175 Capital adjustment to common shares = 100*(2/4)*(250p-300p) =

20 4. Index Shares and Index Factor This section covers the Shares in Issue included in an index and also the index factor which determines the proportion of the shares which are included in an Index. 4.1 Total Outstanding Shares (TOS) Update The TOS amount is the total number of shares authorized and issued by a company. The figure for TOS is regularly monitored through a variety of data sources and is used in calculating the Free Float (see 4.2.1) of a company. As well as through corporate actions (section 3), changes (increases or decreases) to the TOS amount are made for a variety of reasons including: Placing of new shares Company buy-back Acquisition The timing of the implementation of updates to the TOS amount is specified in the Ground Rule document for the relevant index. This section concerns changes to TOS which are not the direct consequence of corporate actions described in section TOS INCREASE Increases in TOS are made following receipt of updated information from the company for example as a result of an open offer, private placing, exercise of executive share options or through the listing of new shares following an acquisition. Share Adjustment Price Adjustment Timing of application New TOS = Original TOS + New shares No change Ex-date Divisor Change: Positive EI apply a positive capital change (CA it) as the base market capitalisation increases following the increase in TOS. The value of the capital change is equivalent to the new TOS figure minus the old TOS figure multiplied by the previous price. Therefore, the divisor change is positive. Example: TOS Increase Company K with 100 issued shares lists an additional 20 shares via an open offer. 18

21 Original market share price = 1200p Original shares in issue = 100 Original market capitalisation = 100*1200p = 1200 New TOS = = 120 New market capitalisation = 120*1200p = 1440 Capital adjustment to Company K and index = 20*1200p = TOS DECREASE Decreases in TOS are made following receipt of updated information from the company for example as a result of a share buyback, share delisting or through the cancellation of shares following a partial acquisition. Share Adjustment Price Adjustment Timing of application New TOS = Original TOS - Shares removed No change Ex-date Divisor Change: Negative EI apply a negative capital change (CA it) as the base market capitalisation decreases following the decrease in TOS. The value of the capital change is equivalent to the new TOS figure minus the old TOS figure multiplied by the previous price. Therefore, the divisor change is negative. Example: TOS decrease Company K with 100 shares repurchases 10 shares from shareholders at market price. Original market share price = 1200p Original shares in issue = 100 Original market capitalisation = 100*1200p = 1200 New TOS = = 90 New market capitalisation = 90*1200p = 1080 Capital adjustment to Company K and index = -10*1200p = Index Factor Update The Index Factor is a percentage value which restricts the TOS used in an index. The Index Factor is most commonly used to represent the available free float (see below) but can also be used to represent the Foreign Investor Limit or to constrain the weight of a stock within an index based on 19

22 the underlying Index Ground Rules. The examples provided below relate to Free-Float changes; however the treatment is the same for other Index Factor changes FREE-FLOAT FACTOR For EI Indices that are based on free-float, a Free Float Factor is calculated and periodically reviewed by analysing the number of shares available for investment. This means locked in shares held by company management or major shareholders are not counted towards the free float market capitalisation. These tightly held shares are aggregated and the total percentage of the TOS is then rounded down to the nearest multiple of 20%. The Free Float Factor is 100% minus this number. Consequently, Free Float Factors are 20%, 40%, 60%, 80%, or 100%. In addition, the free float bandings have tolerance levels. A movement must be 5% beyond the threshold for EI to adjust the Free Float Factor. Other EI calculated Index Series apply alternative free float methodologies, for example, factors that are based on exact rather than banded free floats. However any change to the free float factor applies the same treatment as outlined in the examples below FREE FLOAT INCREASE Divisor Change: Positive EI apply a positive capital change (CA it) as the base market capitalisation increases following the increase in the free float. The value of the capital change is equivalent to the new free float adjusted TOS minus the old free float adjusted TOS multiplied by the closing share price on the business day prior to the free float change. Therefore, the divisor change is positive. Example: Flee Float Increase (beyond tolerance level) Company K s free float is 20% (20% of shares available are traded). J Corporation decides to sell an additional 25% of Company K to the market. There are now 45% of the TOS generally available to trade and round down to the nearest 20%, so the free float factor increases to 40%. Original market share price = 1200p Original TOS = 100 Original Free Float = 20% Original free float market capitalisation = 100*1200p*20% = 240 New Free Float = 40% New market capitalisation = 100*1200p*40% = 480 Capital adjustment to Company K and index = 1200p*(100*40% - 100*20%) =

23 4.2.3 FREE FLOAT DECREASE Divisor Change: Negative EI apply a negative capital change (CA it) as the base market capitalisation decreases following the decrease in the free float. The value of the capital change is equivalent to the new free float adjusted TOS minus the old free float adjusted TOS multiplied by the existing price before the free float change. Therefore, the divisor change is negative. Example: Flee Float Decrease (beyond tolerance level) Company K s free float is 100% (all shares are traded). J Corporation decides to buy a 45% stake in Company K. The Free Float Factor is rounded down to 40% and the overall Free Float is 60%. The company has also simultaneously announced an increase in TOS of 5%. Original market share price = 1200p Original shares in issue = 100 Original Free Float = 100% Original free float market capitalisation = 100*1200p*100% = 1200 New TOS = 105 New Free Float = 60% New free float market capitalisation = 105*1200p*60% = 756 Capital adjustment to Company K and index = -1*1200p*[(100*100%)-(105*60%)] =

24 5. Additions, Deletions and Suspensions The maintenance of an Index requires that constituent stocks be added or deleted in accordance with the underlying Ground Rules. Special treatment is required to cater for index constituents that have suspended trading and also previously suspended stocks that have resumed trading. 5.1 Additions Additions to an Index follow the application of the Index Ground Rules and are usually caused by: Periodic index review (Quarterly Review) Spin-offs Initial Public Offering (IPO) Replacement following a deletion to an Index with a fixed number of stocks When an addition is processed, it is done using the latest closing price (normally the previous day s close) and the previous day s closing TOS before its entry into the index the following day. Addition TOS amount used Addition share price used Capital Change Timing of application Previous day s closing TOS amount Previous day s closing share price Change = TOS of New Constituent *Share Price of New Constituent Ex-date Divisor Change: Positive the capital change (CA it) applied to the index is equivalent to the market capitalisation of the new constituent. Therefore the divisor will have a positive adjustment. Example: Addition to index Company K is added into the index following a quarterly index review. Previous day s closing price of Company K = 1200p Previous day s closing TOS amount of Company K = 100 Previous day s closing market capitalisation of Company K = 100*1200p = 1200 Previous day s closing market capitalisation of index = New market capitalisation of index = = Capital adjustment to index = 100*1200p =

25 5.2 Deletions Deletions from an Index follow the application of the Index Ground Rules and are usually caused by: Periodic Index review (Quarterly Review) Merger Acquisition Delisting When a deletion is processed, it is done using the closing price on the effective date and the TOS on the effective date. Deletion TOS amount used Deletion share price used Capital Change Timing of application Effective date TOS amount Effective Date closing share price Capital Change = TOS of Existing Constituent*Share Price of Existing Constituent*-1 Effective Date Divisor Change: Negative a negative capital change (CA it) to the index is the equivalent to the market capitalisation of the deleted constituent multiplied by -1. Therefore a negative adjustment to the divisor is made. Example: Deletion at full price Company K is removed from the index. Closing price of Company K on the effective Date = 1200p TOS amount of Company K = 100 Closing market capitalisation of Company K = 100*1200p = 1200 Closing market capitalisation of index = New market capitalisation of index = (100*1200p) = Capital adjustment = 100*1200p*-1 = Suspensions Suspensions to an index or stock exchange can occur at any time, subject to a company or stock exchange announcement. Suspension may occur for a number of reasons including: Bankruptcy Files for bankruptcy protection Insolvency Breach of stock exchange rules Temporary suspension following or preceding a corporate action/reconstruction 23

26 Suspension period If a company is suspended on its exchange, it will normally remain in an Index for a period of 10 business days. If it remains suspended after this time, EI may delete the company. Each index series will have specific rules covering Stock Suspension in terms of timing, replacement stocks, etc., and will generally allow for Expert Judgement to be applied as each case may require a slightly different treatment depending on the particular issue. For example, EI may change this suspension period at their discretion. If it is decided that the suspended constituent s immediate future is negative (and will remain so in the near future) then EI may delete the constituent before the 10 day period is over. Similarly, if it is decided that the constituent s immediate future is positive (and will remain so in the near future), it may be allowed to remain suspended for a longer period of time without deletion from the index SUSPENSION (constituent removal) In the event a constituent is suspended and deleted from an index (usually because of bankruptcy and liquidation proceedings), the constituent is suspended at the previous day s closing price and TOS amount prior to the announcement of the suspension. When the constituent is deleted, it is deleted at the price of zero. This represents the loss on the investment as the shares originally held in the constituent are deemed worthless as they no longer traded. Suspended (is deleted) TOS amount used Closing TOS amount day before announcement of suspension Suspension (is deleted) share price used Capital Change Timing of application 0 No change Effective Date Divisor Change: No change no capital change (CA it) is applied and therefore no division change occurs. This is to take into account the loss in value of the index and any original investment in the deleted company. Example: Suspension (constituent removal) Company K becomes suspended on its stock exchange due to filing for bankruptcy. 5 days later it is liquidated and no longer exists as a business. Closing price of Company K before suspension = 1200p Closing TOS amount of Company K before suspension = 100 Closing market capitalisation of Company K before suspension = 100*1200p = 1200 New market capitalisation of Company K following deletion = 100*0p = 0 Capital adjustment to Company K and the index = 0 24

27 5.3.2 SUSPENSION (constituent addition following stock resuming trading) In some cases, a company will be deleted following a period of suspension, but the company will resume trading after its suspension. Subject to the suspension period having been less than 6 months, the eligible company will normally be re-added to the index at zero (the price at which it is deleted). Suspended (is deleted but re-added later) TOS amount used Closing TOS amount day before announcement of suspension Suspension (is deleted but re-added later) share price used Capital Change 0 No change Timing of application Effective Date Divisor Change: No change no capital change (CA it) is applied and therefore no divisor change occurs. This is to take into account the gain in value of the index and any original investment in the deleted company. An investor will have not gained the re-added constituent s value, merely recouped the investment previously lost through deletion. Example: Suspension (constituent removal but re-addition) Company K becomes suspended on its stock exchange due to filing for bankruptcy, it is deleted from the index. However, it resumes trading following its deletion from the index, and is re-added. Closing price of Company K before suspension = 1200p Closing TOS amount of Company K before suspension = 100 Closing market capitalisation of Company K before suspension = 100*1200p = 1200 Closing market capitalisation of index (excl. Company K) = Closing market capitalisation of index before Company K suspension = = Market capitalisation of Company K following deletion = 100*0p = 0 Market capitalisation of index following deletion = (100*0p) = Company K re-added: Market capitalisation of index following re-adding = (100*1200p) = Capital adjustment to Company K and the index = 0 25

28 5.4 Mergers and Acquisitions (M&A) This section focuses on the administration of mergers and acquisitions. Specific Index Ground Rules documents will outline the application of mergers and acquisitions in terms of timing, replacement stocks etc. The application of the rules will result in the processing of changes specified within this document, for example shares increase, stock addition, stock deletion. An acquisition is an event in which a company (acquirer) buys most, if not all, of another company (target). M&A events can be divided into three separate methods 5 : Acquisitions funded by cash Acquisitions funded by stock and cash Acquisitions funded by stock only Furthermore, these acquisition methods can be separated into three further subsections based on the source of acquiring/target company: (a) (b) (c) Acquiring company and target company are in the same index Only target company is in the index Only acquiring company is in the index For EI, the processing of M&A deals depends on the index type. The different types of index methodology can be generally divided into: Fixed number of constituent indices Floating number of constituent indices The sub-sections below outline the treatment for each combination of acquisition method (cash and/or shares), acquisition source (by existing or non-existing constituent) and index type (fixed or floating number of constituents). 5 Note: Mergers are also classified into one of the three groupings and EI may apply Expert Judgement to assign one company the acquiring and one the target. 26

29 5.4.1 ACQUISITIONS FUNDED BY CASH Acquisitions funded by cash are purchases of other companies by cash flows. In other words, no stock is exchanged Fixed number of constituents Index Constituents a Acquiring company and target company are in the same index Acquiring Company Fixed Constituent Index Action Taken No action Target Company Fixed Constituent Index Action Taken Target deleted and replaced Index Capital Change See section 5.1 and b Only target company is in the index N/A Target deleted and replaced See section 5.1 and c Only acquiring company is in the index No action N/A No change Floating number of constituents Index Constituents a Acquiring company and target company are in the same index Acquiring Company Floating Constituent Index Action Taken No action Target Company Floating Constituent Index Action Taken Target deleted and not replaced Index Capital Change See section b Only target company is in the index N/A Target deleted and not replaced See section c Only acquiring company is in the index No action N/A No change 27

30 5.4.2 ACQUISITIONS FUNDED BY CASH AND STOCK Acquisitions by cash and stock are purchases of other companies with cash and by issuing new stock of the acquiring company to the shareholders of the target company Fixed number of constituents Index Constituents a Acquiring company and target company are in the same index Acquiring Company Fixed Constituent Index Action Taken TOS Increase Positive capital adjustment Target Company Fixed Constituent Index Action Taken Target deleted and replaced Index Capital Change See section and 5.1 and b Only target company is in the index N/A Target deleted and replaced See section 5.1 and c Only acquiring company is in the index TOS Increase Positive capital adjustment N/A See section Floating number of constituents Index Constituents a Acquiring company and target company are in the same index Acquiring Company Floating Constituent Index Action Taken TOS Increase Positive capital adjustment Target Company Floating Constituent Index Action Taken Target deleted and not replaced Index Capital Change See section and b Only target company is in the index N/A Target deleted and not replaced See section c Only acquiring company is in the index TOS Increase Positive capital adjustment N/A See section

31 5.4.3 ACQUISITIONS FUNDED BY STOCK ONLY Acquisitions funded by stock only, is a complete purchase of a company by new stock of the acquiring company and distributing it to the shareholders of the target company, replacing their now defunct target company shares Fixed number of constituents Index Constituents a Acquiring company and target company are in the same index Acquiring Company Fixed Constituent Index Action Taken TOS Increase Positive capital adjustment Target Company Fixed Constituent Index Action Taken Target deleted and replaced Index Capital Change See section and 5.1 And b Only target company is in the index N/A Target deleted and replaced See section 5.1 and c Only acquiring company is in the index TOS Increase Positive capital adjustment N/A See section Floating number of constituents Index Constituents Acquiring Company Floating Constituent Index Action Taken Target Company Floating Constituent Index Action Taken Index Capital Change a Acquiring company and target company are in the same index TOS Increase Positive capital adjustment Target deleted and not replaced See section and b Only target company is in the index N/A Target deleted and not replaced See section c Only acquiring company is in the index TOS Increase Positive capital adjustment N/A See section

32 6. Dividends A dividend is a distribution of a company s profits to shareholders. Dividends can take the form of a cash payment or a stock distribution; neither requires any adjustment to the index. For the purposes of calculating a total return index, dividends are processed when a company is quoted ex-dividend. Where applicable, the full, gross dividend is used in the total return calculation. However, the UK is an exception, and a net dividend (10% tax) is used. In certain circumstances, where a dvidiend amount is greater than 15% of the underlying share price and is deemed an irregular payment, the dividend may be changed to a Special Dividend and classed by EI as a corporate action. It will have a negative impact on the market capitalisation of the index and the divisor (see 3.6.1) Dividend Types Listed below are the most common dividend payment types 6 and their treatments: Dividend Type Description Income or Capital Event YEARLY PAYMENT INTERIM DIVIDEND QUARTERLY PAYMENT FINAL DIVIDEND A yearly payment is a dividend distribution paid once per year. A company has the option, but not an obligation, to pay its shareholders a proportion of profits in cash. The amount paid is fixed per share held in the company. An interim dividend is a dividend distribution paid when the dividend structure issues allows dividends to be paid at a frequency greater than once per year. Usually an interim dividend is paid before a company's AGM and final year reports. It is complimented by a final dividend, (or other interim dividends), but generally the interim(s) are much smaller compared to the other dividend. A quarterly payment is a dividend distribution paid four times per year. A company has the option, but not an obligation, to pay its shareholders a proportion of profits in cash. The amount paid is fixed per share held in the company. A final dividend is a dividend distribution paid when the dividend structure issues allows (or requires) dividends to be paid at a frequency greater than once per year. Usually declared after company AGM and implemented afterwards also. It is complimented by an interim dividend, but generally the final dividend is larger than the interim(s). INCOME INCOME INCOME INCOME 6 Note: Other dividend payments do occur and are recorded by EI. Their emission is for the brevity of this document. 30

33 Dividend Type Description Income or Capital Event MONTHLY DIVIDEND A monthly dividend is a dividend distribution paid twelve times per year. A company has the option, but not an obligation, to pay its shareholders a proportion of profits in cash. The amount paid is fixed per share held in the company. INCOME SPECIAL CASH DIVIDEND SCRIP INSTEAD OF DIVIDEND DIVIDEND FROM RESERVES OR ASSETS SCRIP OPTIONAL TO DIVIDEND A special cash dividend is a non-recurring distribution of company assets that is outside the scope of the regular dividend policy, usually distributed in the form of cash to shareholders. In any case where the dividend amount is greater than 15% of the underlying share price, this dividend may be classed as a Special Cash Dividend Scrip instead of dividend is a non-recurring distribution of stock to shareholders instead of a cash payment. EI process such an event as a corporate action. Depending on the issue, EI treat this dividend as a regular scrip issue or a stock dividend. Dividends from reserves or assets are non-recurring distributions of cash. This cash is not from profits. Use of this dividend is usually for tax purposes. In some countries, for example Brazil and Switzerland, these dividends have become common practice and EI therefore treat the dividend as INCOME. A scrip issue optional to a dividend is a non-recurring distribution of cash or stock. These dividends have a cash equivalent (yearly payment, Interim, etc.) and the cash is deemed the default. Non-inclusion prevents double counting. CAPITAL Negative capital adjustment See section CAPITAL Zero capital adjustment See section CAPITAL Negative capital adjustment See section INCOME HALF YEARLY PAYMENT A half-yearly payment is a dividend distribution paid twice per year. A company has the option, but not an obligation, to pay its shareholders a proportion of profits in cash. The amount paid is fixed per share held in the company. Both dividend payments are of equal amount. INCOME ALTERNATIVE CURRENCY An alternative currency dividend is where the dividend payment is available in an alternative currency. These are not included as the primary record will be covered in another dividend type. INCOME RESCINDED PAYMENT Rescinded payment dividends are dividends which are proposed but never paid. These dividends are recorded for information purposes only, as they have no effect on the stock and thus the index. N/A 6.2. Withholding Tax Withholding taxes require taxes to be paid to governments on dividend income before the distribution of the income to non-residents. The tax depends on the country of domicile of the recipient of a dividend. 31