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Index Number Formation in the Chittagong Stock Exchange

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The Index Number System Used in Chittagong Stock Exchange , Bangladesh
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    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
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