Addressing a briefing at the KSE building on Friday, KSE Managing Director Nadeem Naqvi said the new method for computing the widely used index would better reflect the stock market performance while reducing the element of manipulation.
“While the rules for composition and re-composition of the index will remain unchanged, the only difference will be that KSE-100 Index companies will now be selected on the basis of their tradable shares rather than their full capitalisation,” he said.
Under the current computational methodology, one company with the largest market capitalisation from each of the 32 KSE sectors – except the open-ended mutual fund sector – is included in the KSE-100 Index. The rest of the index constituents are the largest market capitalisation companies listed on the stock exchange in descending order.
After October 15, the index will be composed according to the companies’ free-float, which means those shares that are readily available for trading and, therefore, excluding stocks held by directors, sponsors, government holding and other locked-in shares.
An Index Experts Committee (IEC) approved the shift of KSE-100 Index to free-float in the first quarter of 2012, which was ratified by the KSE Governing Board in April. Naqvi said the move was likely to reduce volatility in the market and increase the number of retail investors.
He added that market heavyweights would be less likely to dominate the KSE-100 Index now because the new index computational methodology was based on the number of shares issued by a company that were actually available for trade, rather than its full capitalisation.
For example, the weight of Oil and Gas Development Company (OGDC) under the KSE-100 Index full capitalisation methodology was 21.45% at the end of trading session on September 27. However, if calculated on the basis of free-float, OGDC’s weight in the index will come down to 13.08% because more than two-thirds of the company’s ownership rights rest with the government and are not tradable.
On the contrary, the weight of Engro Corporation will increase from 1.53% to 3.18% if computed on the basis of free-float, instead of full capitalisation, due to the fact that a larger proportion of its shares can be traded on the stock market.
Replying to a question, KSE Deputy Managing Director Haroon Askari said the KSE management was likely to address the issue of illiquid stocks with minimal traded volumes in the next re-composition of the index due in six months.
He added a stock ceased to be part of the Bombay Stock Exchange Index if it remained dormant on 80% of trading days during a six-month period. If the same liquidity model is introduced in Pakistan, Askari added, about six to seven KSE-100 Index companies will be hit.
Published in The Express Tribune, September 29th, 2012.
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