investment finance

INVESTMENT FINANCE

M GhaniBBS (B&F)

KSE 30 INDEX Intro…

• 30 companies.• Index calculation. (Free-float market capitalization methodology).• Index construction methodology.• Index flexibility. (each company is for index). • Full-Market capitalization methodology. (large market capitalization).• Index points 10,000.• Base year 2005.

FREE - FLOAT METHODOLOGY

• Total shares available for trading at the stock exchange.• Excludes the shares held by controlling directors sponsors, Promoters, Government.

OBJECTIVE AND DESCRIPTION

• Free-Float calculation can be used to construct stock indices for better market representation.

• It gives weight for constituent companies as per their actual liquidity in the market.• Free-Float can be used for regulatory purposes such as risk management and market surveillance (NASDAQ unit).

FREE-FLOAT CALCULATION METHODOLOGY

• Total Outstanding Shares XXX

• Less: Shares held by Directors/sponsors XXX• Government Holdings as promoter/acquirer/controller XXX• Shares held by Associated Companies (Cross holdings) XXX• Shares held with general public in Physical Form XXX

XXX

• Free-Float: XXX

DETERMINING FREE-FLOAT FACTOR

• The listed companies shall submit their pattern of shareholding, in the prescribed manner, to the Exchange. The Exchange will determine the free-Float factor for each such company.

FREE-FLOAT BANDS• % Free-Float Free-Float Factor • >0 – 5% 0.05

• >5 – 10% 0.10• >10 – 15% 0.15• >15 – 20% 0.20• >20 – 25% 0.25• >25 – 30% 0.30• > … …• > … …• > … …• > … …• >90 – 95% 0.95• >95 – 100% 1.00

TO QUALIFY FOR INCLUSION INKSE-30 INDEX

• Defaulters or its trading is suspended, declared Non-Tradable.• Open-End and Closed-End Mutual Funds will not be eligible.• Securities available in the Central Depository System.• Listing history of at least two months on KSE.• Record of at least one financial year.• Minimum free-float shares of 5% of total outstanding shares.

SELECTION CRITERIA• Free-Float market capitalization. (outstanding free-float shares*closing market price).• Liquidity. buyers and sellers in the market, best bid price and the best offer price, average, best price to trade.

FINAL RANKTop 30 companies on the basis of final ranking.

• 50% weightage on the basis of free-float market capitalization.• 50% weightage to the liquidity based of the securities.• Highest free-float market capitalization.• Lowest Impact cost.

KSE-30 INDEX BASED ON JUNE 30, 2005

KMI 30 index

• Same process.• But selection criteria varies.

ELIGIBILITY CRITERIA

• For any stock to be Shar’iah compliant, it must meet ALL six criteria.

1: BUSINESS OF THE INVESTEE COMPANY • The core business of the company should not violate any principle of

Shar’iah.• conventional banks,• insurance companies,• leasing companies or • the companies involved in some other business not approved by the

Shar’iah.

INTEREST BEARING DEBT TO TOTAL ASSETS, <37%

Any interest bearing debt including• Conventional Bank Loans, • Issuing preference shares,• Commercial Paper, • Finance Lease, • Hire Purchase, • Bonds,• TFCs, etc.

3: NON-COMPLIANT INVESTMENTS TO TOTAL ASSETS, <33%

• Conventional money market instruments, • Interest bearing bank deposits,• Conventional mutual funds, • Commercial Paper, • Derivatives,• Bonds, T-Bills, • etc.

4: NON-COMPLAINT INCOME TO TOTAL REVENUE, <5%

Non Compliant Income includes income from.• Gambling,• Gharar,• Any penalty charged on late payments, • Insurance claim,• Addictive drugs, • Alcohol,• etc.

5: ILLIQUID ASSETS TO TOTAL ASSETS, >25%

The Sum of all those assets whose trade price can deviate from par value, according to the rules of Shar’iah.

• Inventory of raw materials, • Work-in-process, • All fixed assets such as property, plant & equipment, stores,• etc.

6: NET LIQUID ASSETS/SHARE VS MARKET PRICE/SHARE

• Market Price per share should be at least equal to or greater than net liquid assets per share.

AS KSE 30 INDEX

• Defaulters or its trading is suspended, declared Non-Tradable.• Open-End and Closed-End Mutual Funds will not be eligible.• Securities available in the Central Depository System.• Listing history of at least two months on KSE.• Record of at least one financial year.• Minimum free-float shares of 5% of total outstanding shares.

DIFFERENCES

•KSE 100 index•KSE 30 index•KMI 30 index