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  • 1. Index Guide 1 Philippine Stock Exchange 1 Philippine Stock Exchange GUIDE TO PSE INDICES Part 1. INDEX OVERVIEW 1.1 Background The first known index in the history of the Philippine stock market, called the Mining Share Average, was developed when the mining industry enjoyed a boom in the 1940s. Other sector indices were later developed as more companies, which were engaged in other business activities, listed at the Manila Stock Exchanges (MSE) and the Makati Stock Exchange (MkSE). To track market performance, the MkSE and the MSE each maintained a composite index, using different computational methodologies. In 1987, the two exchanges decided to adopt a common set of composite index stocks as a means of providing a uniform guide for stock market investors. This index was composed of the Class “A” shares of 10 commercial-industrial stocks, nine mining stocks, and six oil stocks. In 1990, the methodology of the index was changed from price-weighted to market capitalization-weighted. In order to maintain continuity of the indices upon the implementation of this new method, the closing levels of the various indices on February 28, 1990 were used as their respective base index levels. The following formula was used to compute the different indices: Current Total market Capitalization Current Composite Index = x Base Index Base Total Market Capitalization where: Total Market Capitalization = Last Traded Price x Outstanding Shares PSE Corporate Planning & Research Section
  • 2. Index Guide 2 Philippine Stock Exchange 2 Using the chain-linking method, the current level of the index is computed by deriving the change in the market capitalization of index stocks from the previous trading day closing level to the current trading day’s level and multiplying this with the previous day’s closing index level. The indices subsequently underwent many revisions. More sector indices were introduced and the criteria for index inclusion were modified to ensure that investors are provided with indices that better reflect market behavior. 1.2 Structure of the Philippine Stock Exchange Indices The Philippine Stock Exchange (Exchange) index series consists of the PSEi, six sector indices and the All Shares Index. With the exception of the All Shares Index, all these indices are free float-adjusted. PSEi. The PSEi is the main index of the Exchange. It is composed of a fixed basket of 30 companies, whose selection is based on a specific set of criteria. The PSEi measures the relative changes in the free float-adjusted market capitalization of the 30 largest and most active common stocks listed at the PSE. By gauging changes in the stock prices of select listed companies, the PSEi provides a snapshot of the market’s overall condition. The base level of the PSEi was pegged at 1,022.045 points. This was reckoned according to the close of the index on February 28, 1990, which is the PSEi’s base date. The name PSEi was adopted by the Exchange in April 2006. In the past, various labels were used to refer to the Exchange’s main index, such as the Phisix and the PSE Composite Index. Sector Indices. To track the performance of specific sectors of the market, the PSE also maintains six sector indices representing each major sector under the revised industry classification of the Exchange. These indices are the (1) Financials Index; (2) Industrial Index; (3) Holding Firms Index; (4) Property Index; (5) Services Index; and (6) Mining & Oil Index. Below is a summary of the base date and base value of each index: PSE Corporate Planning & Research Section
  • 3. Index Guide 3 Philippine Stock Exchange 3 Table 1. Base date and values of PSE Sector Indices Indices Base date Base value Financials 14-Nov-96 1,000.00 Industrial* 28-Feb-90 1,422.20 Holding Firms 29-Dec-05 1,000.00 Property** 30-Sep-94 1,000.00 Services 29-Dec-05 1,000.00 Mining & Oil*, *** 28-Feb-90 4,752.45 Notes: * Base date shown is the date when the market capitalization method was first used to compute the indices. Base value refers to the average index level quoted at that time by PSE’s two precursors, the MSE and MKSE. ** Originally 100.00 but the index was realigned to the 1,000.00 level starting November 15, 1996 (all prior values x 10). ***Previously separate, the Mining and Oil sectors, along with their respective indices, were folded together on January 2, 2006, with the combined index continuing the level of the Mining index. All Shares Index. The All Shares Index is a complementary index to the PSEi. It is considered a broader barometer of the index, because it includes all the common stocks of companies listed at the Exchange. The base value of the All Shares Index was set on November 14, 1996, at 1,000.00 points. The full market capitalization method is used in computing the All Shares Index. The All Shares index excludes those listed in the Small and Medium Enterprises (SME) Board. 1.3 Index Methodology The Exchange uses free float-adjusted market capitalization for computing the index to make it a more accurate benchmark of market performance. The free float methodology is deemed to provide a more accurate reflection of market activity than the full market capitalization methodology which the Exchange used prior to April 2006. This is because only the actual shares available for trading are being used to track the performance of the market. It removes the distortion that arises when companies with large market capitalization dominate the index, even if only a minimal percentage of their shares are actually traded. Likewise, the use of the free float methodology rewards companies with wider ownership base by increasing their weights in the index. PSE Corporate Planning & Research Section
  • 4. Index Guide 4 Philippine Stock Exchange 4 For any trading day, the index is computed by deriving the change in the index components’ current total free float-adjusted market capitalization from the base total free float-adjusted market capitalization, and multiplying this change with the previous day’s closing index level. The base total free float-adjusted market capitalization is the sum of all the products of the index stocks’ previous day’s last traded price and their current free float shares. Below is the formula for computing the index: Σi ( Pit x Qit ) PSE Indext = x PSE Indext-1 Σi ( Pit-1 x Qit ) where: Pit = last traded price of company i at day t Qit = number of free float shares of company i at day t Pit-1 = (adjusted) last traded price of company i at day t-1. Adjustments are applied to the base free float-adjusted market capitalization when there are stock dividend declarations, stock rights offerings, stock splits, or reverse stock splits. Such corporate actions result in adjustments in a company’s previous day’s last traded price. PSE Corporate Planning & Research Section
  • 5. Index Guide 5 Philippine Stock Exchange 5 Part 2. INDEX COMPOSITION 2.1 Eligibility Only companies with common stocks listed in the main board of the PSE for at least six months during the review period are eligible for inclusion in the PSEi and sector indices. Foreign companies whose shares are simultaneously listed at the PSE and in other exchanges overseas are not eligible for the PSEi but may be included in the sector indices. Companies shall be considered ineligible for inclusion in the index due to conditions that may cause their stocks to be unavailable for trading for a significant period of time for the next six months from the scheduled recomposition of the indices. Such conditions include, among others, the commencement of delisting proceedings against the company, or when it is suspended from being traded in the PSE. 2.2 Free Float Restriction Only the free float shares of a company are factored in when computing the indices. Free float, also known as public float, refers to the portion of the outstanding shares that are freely available and tradable in the market, or those shareholdings, which are non-strategic in nature. In determining a company’s free float, its outstanding shares shall be adjusted to exclude shares classified as being held strategically. The following are viewed as strategic in nature and are deducted from the outstanding shares: • Shares held by founders, directors and officers, and their families. For this purpose, directors shall refer to anyone owning at least one share capital of the corporation of which he is elected as a director and also refers to independent directors defined under Rule 38 of the IRR of the Securities Regulation Code (SRC). Officers shall refer to the president, secretary and treasurer, as specified under the Corporation Code, and other officers PSE Corporate Planning & Research Section
  • 6. Index Guide 6 Philippine Stock Exchange 6 elected by the board of directors of a corporation, as may be provided for in the corporation’s by-laws. • Shares held by government-run social security funds SSS and GSIS. These shares are considered non-public shares if their acquisition is made with the intention of acquiring significant influence over the management of affected company. Otherwise, they are public shares. • Restricted shares or shares under lock-up • Treasury shares • Shares held by employees under stock ownership plans • Shares held by affiliates. For this purpose, an affiliate shall refer to a person who directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with the person specified, through the ownership of voting shares or other means, such as contractual agreements, as defined under the PSE Revised Listing Rules. • Shares held by principal shareholders or those who individually or collectively control 10% or more of the outstanding shares Shares lodged under the PCD Nominee Corp. account of the Philippine Depository and Trust Corporation (PDTC) are classified as free float except the shareholdings of an entity whose shares lodged at the PDTC comprise 10% or more of the outstanding shares of a company. The underlying shares of Philippine Deposit Receipts (PDRs) are considered as free float except when the shares that underlie the PDR-holding of an entity constitute 10% or more of the company’s outstanding shares. The underlying shares of depositary receipts issued in overseas exchanges are also considered as free float except when the shares that underlie the depositary holding of an entity constitute 10% or more of the company’s outstanding shares. In computing the free float shares of dual-listed companies or those companies which shares are likewise listed in other exchanges, only the number of shares that are deemed traded in the PSE or those shares held by locally domiciled investors shall be treated as free float. PSE Corporate Planning & Research Section
  • 7. Index Guide 7 Philippine Stock Exchange 7 Data on free float shares are based on the Public Ownership Reports (PORs) that the listed companies submit to the Exchange every quarter or at other periodic intervals as may be required by the Exchange. 2.3 Selection Criteria PSEi The Exchange conducts a bi-annual free float-based review of all listed companies, and the results become the basis also for a bi-annual re- composition of the PSEi. While it is held every six months, the data used for the review encompasses a one-year period. The first review or examination, which covers the period January to December for the immediately preceding year, becomes the basis for the PSEi re-composition every May of the year that follows the period under examination. The second review, which covers the period July of the immediately preceding year up to June of every current year, becomes the basis for the PSEi recomposition every November of any current year. The review is based on the following criteria: 1. Free Float Level– a company’s free float shares must be at least 10% of its outstanding shares at the end of the review period. 2. Liquidity or Average Daily Trading Value– during the review period, the total value of shares traded in the regular market of the Exchange (i.e., excluding block sales and odd lot transactions), divided by the days during which the company is eligible for trading, should not be less than P5 million. The number of days for which a company is eligible for trading shall refer to the total number of trading days less the number of days when a company’s stock is suspended or halted from trading for a full trading day. 3. Tradability – during the review period, the shares of the company must be traded at least 95% of the days when the shares are eligible for trading. 4. Volume Turnover Ratio – the total volume of shares of a company traded must at least be ten percent (10%) of its free float shares during the review period. PSE Corporate Planning & Research Section
  • 8. Index Guide 8 Philippine Stock Exchange 8 5. Free float-adjusted market capitalization – Companies that pass the first four criteria are ranked from highest to lowest according to free float- adjusted market capitalization (computed using the volume-weighted average price or VWAP during the review period). The final selection is then done in two stages. In the first stage, the two (2) highest-ranked companies from each of the six (6) sectors shall fill the first 12 slots to ensure sector representation. In the second stage, the 18 highest-ranked companies from among the other qualifiers shall fill the remaining slots. If a company has common stocks that are classified (e.g., Class “A” and Class “B”) or has an underlying PDR issue, the activity of all share classes or types are taken together. Sector Indices To qualify for the sector indices, a company must satisfy the following requirements: 1. Liquidity or Average Daily Trading Value – the value of the company’s shares traded in the PSE’s regular market during the review period, divided by the days eligible for trading, must not be less than P1 million. 2. Tradability – the shares of the company must be traded at least 75% of the days when the shares are eligible for trading. The sector indices have no limit on their number of constituents, and all companies that meet the two criteria mentioned above gain inclusion in their respective sector indices. PSE Corporate Planning & Research Section
  • 9. Index Guide 9 Philippine Stock Exchange 9 Part 3. CHANGES IN-BETWEEN REVIEW PERIODS 3.1 If an index company is delisted, it shall be removed from the roster of index companies. The slot vacated by the delisted company cannot be filled up until after the end of the next review period. 3.2 An index company, whose shares are the subject of a trading suspension, may be removed from the roster index component companies. The reasons for such removal may include the affected company’s non-compliance with continuing listing and disclosure requirements; an order of revocation against the company from the SEC; and the company’s non-payment of fines, debts or obligations. If the trading suspension is lifted, the affected company will be included in the next review period. 3.3 When two index companies merge, the surviving entity will remain a member of the index. The slot vacated by the merged company will not be filled until the next review period when all the companies will be subjected to examination against the set criteria. 3.4 When an index company merges with a non-index member company, the surviving entity will remain or will become part of the index, as the case may be. 3.5 Adjustment for Corporate Actions Adjustments in the free float shares of index constituents arising from corporate actions shall be made accordingly. Changes in the float shares arising from stock dividends and rights offerings are applied on the ex-date. For stock rights offerings, the free float shares are adjusted on the ex-right date. This figure shall be adjusted upon the receipt by the PSE of an updated POR that reflects the fully availed shares at the end of the offer period. For primary and secondary offering, the shares shall be updated after the receipt by the PSE of an updated POR from the company that reflects the changes arising from the public offering. PSE Corporate Planning & Research Section
  • 10. Index Guide 10 Philippine Stock Exchange 10 Table 3. Corporate Actions with Corresponding Change in Free Float Type of Adjustment Adjustment Date Change in Free Float Declaration of stock Ex-Div Date Current free float x (1+ % stock dividends div) Stock right offerings Ex-Right Date Current free float x [1+ (no. of offer shares/no. of held shares)] Primary and secondary 10 days after the As reported by Company Offer Submission of Updated POR Adjustments arising from stock splits, reverse stock splits, restructuring, and declassification of stocks are applied on the effectivity date of the relevant corporate action. PSE Corporate Planning & Research Section
  • 11. Index Guide 11 Philippine Stock Exchange 11 Part 4. INDEX MANAGEMENT 4.1 Publication and Dissemination Announcements regarding the changes in the composition of the indices will be made, as much as practicable, one month prior to their implementation. The notice shall be made by way of press release and the publication of a memorandum in the PSE web site. 4.2 Index Computation The PSEi, sector indices and the All Shares Index are calculated through the computerized trading system of the Exchange and reflected in all computer terminals hooked to the system. The level of the indices may be monitored through radio, television, the PSE web site and other web sites that provide reports on the performance of the stock market. The final results of trading are published in the PSE Daily Quotation Report, as well as in major newspapers. 4.3 Sector Classification A company is classified by the Exchange into sectors in accordance with the business activity that generates the bulk of the company’s revenues. This means of classification replaces the old scheme where a company is classified in accordance with the purpose stated in its Articles of Incorporation. However, in cases where a company has not been in operation, other considerations, such as the plans and prospects of the company, shall be used as a guide in determining its sector classification. The sector and sub-sector classifications are listed in Table 3. 4.4 Quarterly Update/Adjustment of free float shares Free float shares of index constituents shall be updated quarterly. The Exchange shall base the adjustment on the PORs submitted to the Exchange by the listed companies. PSE Corporate Planning & Research Section
  • 12. Index Guide 12 Philippine Stock Exchange 12 Table 3. PSE Sector Classification Sector Sub-sector Financials Banks Other Financial Institutions Industrial Electricity, Energy, Power & Water Food, Beverage & Tobacco Construction, Infrastructure & Allied Services Chemicals Diversified Industrials Holding Firms n/a Property n/a Services Media Telecommunications Information Technology Transportation Services Hotel & Leisure Education Diversified Services Mining & Oil Mining Oil 4.5 Change in Index Rules and Procedures Any change or revision in the rules and procedures contained herein shall be duly announced to the public for the information and guidance of all concerned. PSE Corporate Planning & Research Section