Index Number Formation in The Chittagong Stock Exchange

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
Regular payment of listing fees
Conditions to be followed while forming the selective Index:
Only the active scrip will be considered for calculating the index.
Mutual Funds and Debt securities will not be considered in this index.
Only normal public market trades will be considered.
Selective Index will be refreshed after 3 minutes time interval during online trade.
At the time of update the Selective Index will consider the Weighted Average Price for each
constituent stock.
No changes in number of shares will be allowed during the business sessions.
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 is set to be 1000.

Free Float Free-float Methodology
Free-float Methodology refers to an index construction methodology that takes into consideration
only the free-float market capitalization of a company for the purpose of index calculation and
assigning weight to stocks in the Index. Free-float market capitalization takes into consideration only
those shares issued by the company that are readily available for trading at the Stock Exchange. It
generally excludes promoters' holding, government holding, strategic holding and other locked-in
shares that will not come to the market for trading in the normal course.

Free-Float Calculation Methodology:

Basic method of calculating Index in CSE
In countries where the stock price is strictly regulated and stock split is frequently happening, the
Price - weighted Index can be suitable whereas in countries like Bangladesh price is generally
unregulated and the event of stock splitting is also rare, therefore Price weighted Index is not
suitable for us. That is what the Chittagong Stock Exchange contends. Whereas Dhaka Stock
Exchange also uses Price weighted index as well along with Islamic Shariah based Index.
A general Example of Value weighted Index used in Chittagong Security Exchange is as follows:
Trading days Value of portfolio Index
DAY 1 (base day) Tk 20,000 1000
DAY 2 Tk 21,000 1050
We take Day 1 as the base day. The index on that day will be taken as a standard. The value assigned
to the base day index is 1000 in this example. On Day 2 the value of the portfolio has changed from
Tk 20,000 to Tk 21,000, a 5% increase. Therefore, the value of the index on Day 2 will change to
indicate a corresponding 5% increase in market value. The computation follows the procedure
below:

2nd day's portfolio value
2nd Day's index = ------------------------------------------------------ X Base Day's index (Say Day 1's)
Base Day's portfolio value (Say, Day 1)

=

X 1000

=

X 1000

=

X 1000

= 1050

Therefore the basic formula for Index calculation in CSE is =

X Base Index Value

The information about sampling is not available. In general, an index based on a larger percentage
of the total number of listed stocks will be more representative than that one based on a smaller
percentage. Although an index that consists of all listed stocks can be considered as more
representative, a number of stocks may have very few transactions, the quoted price of these
stocks may not reflect their true market value. An index may still be highly representative even if
it consists of only a relatively small percentage of the total number of stocks. Here, the sample
selection process plays an important role.

We know that There are, in general, three different weighting methods, namely, value-weighted /
market value-weighted method such as Hong Kong Stock Index (HSI) , unweighted (or equally
weighted) such as Financial Times Ordinary Share Index , and price-weighted such as Dow Jones
Industrial Average (DJIA) . Value-weighted method may be considered as a most appropriate method
than others for both the bourses of the country (DSE & CSE) since the existing indices of the bourses
have been calculating under value-weighted method. For a value-weighted index, the weight of each
constituent stock is proportional to its market share in terms of capitalization. We can assume that
the amount of money invested in each of the constituent stocks is proportional to its percentage of
the total value of all constituent stocks. Examples include all major stock market indices of Hong
Kong, London and many others.
Computation of Value Weighted Indices and Adjustments for
Changes in Market Capitalization

The computation of a value-weighted index is useful to think in terms of evaluating the performance
of a portfolio of securities. Some adjustments need to be made due to changes in market
capitalization of the portfolio's constituent stocks. The adjustment procedures are discussed in detail
below.
To make our computation simple, we need to keep the number of constituent stocks small. Let us
assume that the index is composed of only three stocks: A, B and C.
Day 1 (base day)

Market Data of Constituent Stocks on Day 1

Stock Shares Outstanding Closing Price Market Value
A 20 10 200
B 5 8 40
C 10 5 50
Aggregate Market Value (AMV) = 290

The market value of each stock at closing is given by the product of the number of shares
outstanding and the closing price. For stock A, for instance, it is 20 shares times Tk.10 which yields
Tk.200. The aggregate market value (AMV) of all constituent stocks is the sum of the market value of
each stock. The AMV of day 1 is Tk.290. Day 1 will be taken as the base day on which the index is set
at 1000

Day 2

A 20 10 200
B 5 9 45
C 10 5.5 55
As there is no change in capitalization, no adjustment is needed on Day 2. The AMV is equal to
Tk.300. The computation of the index on Day 2 follows the procedure below:

Day 2's AMV
Day 2's index = -------------------- X Day 1's index
Day 1's AMV

300
= ------- X 1000
290

= 1034.4828

It should be clear that the change in the index value shows the relative change in the aggregate
market value of the constituent stocks. There is a 3.45% increase in AMV (also in index) on Day 2
relative to Day 1 (the base day).
Adjustment to Changes in Capitalization
Adjustments need to be made from time to time as a result of changes in capitalization of the
constituent stocks. They are discussed in detail below:

Day 3 (Ex-Bonus)
Company "A" issues 50% bonus shares. Its shares are to be traded ex-bonus at the ratio of "1 for 2",
i.e., one share will be given as bonus for every 2 shares held. This issue of shares is going to change
the total number of shares outstanding on Day 3. The adjustment is shown below:

20(1+2)
New Total No. of Shares Outstanding of Company A = ------------
2

= 30

A 30 7 210
B 5 8 40
C 10 6 60

Therefore,

Day 3's AMV
Day 3's index = ---------------------- X Day 2's index
Day 2's AMV

310
= ----------- X 1034.4828
300

= 1068.9656
Note that the closing price of Company A on day 3 is Tk. 7/- determined by demand and supply
factors in the market against the theoretically adjusted price (to the extent of disclosure) of Tk. 6.67
made on day 2 after closing market / on day 3 before starting market.
If the company issuing bonus share also recommends / declares cash dividend, then the cash
dividend (to the extent of disclosure) should also be adjusted in the aforesaid theoretical price.
Day 4 (Ex-Rights)
Stock C has declared 40% rights share at the ratio of "2 for 5" at Tk.1.50 each including a premium of
Tk. 0.5 each. The offer expires on Day 4 (i.e. ex-rights). As mentioned earlier, it is useful to treat the
constituent stocks as a portfolio held by an investor. In the computation of the index on Day 4, the
investor is assumed to exercise the rights. Therefore, the new number of shares outstanding for
stock is given below:
10(2+5)
New Number of Shares Outstanding for Stock C = ----------
5

= 14


A 30 6.5 195
B 5 9.2 46
C 14 4.5 63

Since all rights are exercised, capitalization adjustment needs to be made on day 3 after closing
market / on day 4 before starting market. The number of shares outstanding increases by 4. This will
cause an increase in capitalization by Tk.6 (= 4 x 1.50). The adjusted AMV on Day 3 after closing
market / on day 4 before starting market in the index computation on Day 4 will be:
310 + 6 = 316
Therefore,
Day 4's AMV
Day 4's index = --------------------------------- X Day 3's index
Adjusted Day 3's AMV

304
= ---------- X 1068.9656
316

= 1028.3720

1028.3720 - 1068.9656
Percentage change = ------------------------------- X 100%
1068.9656

= -3.80%
The index dropped from 1068.9656 to 1028.3720. This can be interpreted as a 3.80% decrease in
AMV.

Day 5 (Replacement)

Stock B is replaced by stock D, which has a closing price at Tk.11.5 on Day 4 and its number of shares
outstanding is 20. Market Data of Constituent Stocks on Day 5

A 30 7 210
D 20 11 220
C 14 5 70
The adjustment on Day 4's AMV in computing Day 5's Index follows a procedure as if the stock
replacement had taken place on Day 4. The adjusted AMV on Day 4 is given as:

A 30 6.5 195
D 20 11.5 230
C 14 4.5 63

Therefore,

Day 5's AMV

500
= ------ X 1028.3720
488

= 1053.6598

Day 6 (Addition)

Stock E is added to the index as a constituent stock on Day 6. Stock E has a closing price of Tk.4 and
the number of shares outstanding is 40 on Day 5.


A 30 7.2 216
C 14 4.8 67.2
D 20 12 240
E 40 4.5 180
Aggregate Market Value (AMV) = 703.2

Since the number of stocks has changed, we need to compute the adjusted AMV for Day 5 in
computing Day 6's index. Day 5's adjusted AMV will be equal to the original AMV plus the market
value of stock E on Day 5. This is equal to Tk.500 + 160 (4 X 40) = 660.

Day 6's AMV
Day 6's index = ---------------------------------- X Day 5's index

703.2
= ------- X 1053.6598
660

= 1122.6266

Any new issue should not be considered in the computation of index for x days from the date of
first trade. x may be a single digit parameter e.g. x = 1, 2, 3...... days. Here, in DSE and CSE, x is
equal to 1.
Shares issued under Repeat Public Offer (RPO), conversion, amalgamation, acquisition etc. should
be treated as new issue (addition) and adjusted to give effect in the index on the following day of
crediting/ issuing of those shares as per the guideline of Day 6.

Day 7 (Deletion)

Stock C is deleted from the index's constituent stocks. The new total number of stocks is reduced to
3. Market Data of Constituent Stocks on Day 7

A 30 7 210
D 20 12.3 246
E 40 5 200

The adjusted AMV on Day 6 will be a reduction by the amount of market value of stock C on Day 6.
Day 6's adjusted AMV will be equal to Tk 703.2 - 67.2 = 636.

Day 7's AMV

656
= ----- X 1122.6266
636

= 1157.9293

Day 8 (Ex-Dividend)

Cash dividends of Tk .50 per share are declared for stock E and Day 8 is to be ex-dividend. Market
Data of Constituent Stocks on Day 7

A 30 7.2 216
D 20 12.3 246
E 40 4.6 184

No adjustment is needed, as there is no change in capitalization.
646
Day 8's index = ------- X 1157.9293
656

= 1140.2779

Note that the price of stock E drops. This is a normal phenomenon as a stock goes ex-dividend. Day
8s index records a decrease as well.
Note that the closing price of Company E on day 8 is Tk. 4.6 determined by demand and supply
factors in the market against the theoretically adjusted price (to the extent of corporate disclosure)
of Tk. 4.50 made on day 7 after closing market / on day 8 before starting market.

Index Number Formation in The Chittagong Stock Exchange

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