KARACHI, Aug 16: The Karachi Stock Exchange (KSE) plans to introduce “KSE Sensitive Index”, the primary objective of which, the bourse said, was to have a benchmark by which stock price performance can be compared over a period of time.
“In particular, the KSE Sensitive Index is designed to provide investors with a sense of how large company’s scrips of the Pakistan’s equity markets are performing”, the bourse said in a notice circulated to members on Tuesday.
KSE added that the introduction of such an index would be similar to other indicators that track various sectors of Pakistan’s economic activity such as the gross national product, consumer price index, etc. The bourse observed that globally, the free-float methodology of index construction was considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P, STOXX and SENSEX have adopted the same. “MSCI, a leading global index provider, shifted all its indices to the free-float methodology in 2002”, KSE recalled.
It was not abundantly clear, when the KSE intended to launch the ‘Sensitive Index’, but it was believed still to be in the planning stage. The KSE did mention in its notice that the base period of KSE Sensitive will be July 2005 and the base value will be 1,000 index points. This will be indicated by the notation 2005=1000.
The bourse stated that the KSE Sensitive Index would be calculated using the “Free-float Market Capitalization” methodology. As per this methodology, the level of index at any point of time reflects the free-float market value of 30 component stock relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of free-float shares determined for the purpose. “The free float shares will be adjusted so that no company will have a weightage of more than 10 per cent of the free-float market capitalization on the composition/re-composition date.
Advocating the advantages of Sensitive Index, the KSE stated that free float methodology improves index flexibility in terms of including any stock from all the listed stocks. This improves market coverage and sector coverage of the index. For example, under a Full-market capitalization methodology, companies with large market capitalization and low free-float can be included in the index. However, under the free-float methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes difficult to include closely held companies in the index while at the same time preventing their undue influence on the index movement.
The bourse noted that the scrip (to be included in sensitive index) should figure in Top 30 companies listed by ‘final rank’. The final rank is arrived by assigning 25 per cent weightage to the rank on the basis of full market capitalization on the date of composition/re-composition and 75 per cent weightage to the liquidity rank based on three months daily turnover.
The bourse has described ‘selection criteria’, ‘calculation methodology, maintenance of KSE Sensitive, on-line computation of the Index; review period and adjustment for cash dividend, bonus, rights and newly issued capital, in some detail. Investors may be able to see all those details when the bourse posts the notice on its website, hopefully on Wednesday.
