Chittagong Stock Exchange Limited (CSE) on Sunday launched two new indices namely as CSE Shariah Index (CSI) and CSE-50 Benchmark Index (CSE-50).
Developed by India Index Services and Products Limited (IISL), a subsidiary of the National Stock Exchange of India Limited (NSE, India) and a subsidiary of NSE Strategic Investment Corporation, the CSE-50 Index and CSE Shariah Index can be utilized by investors to track the performance of the market and Shariah compliant securities respectively that form part of all listed companies on the CSE other than mutual funds and corporate bonds.
Taking advantage of the expertise of neighboring country India, CSE also engaged the services of India-based Taqwaa Advisory and Shariah Investment Solution (TASIS) to design the underlying Shariah framework of the index, a process which took six months to complete. Employing a two-step screening approach, that is, business screening and financial screening, TASIS formulated the Shariah framework using five years’ worth of data of the companies listed in the Bangladesh capital market.
Index development is strategically viewed as a medium for achieving growth in the capital market. On 22 September 2014, the CSE & NSE team made a detailed presentations on the newly developed indices to Bangladesh Securities And Exchange Commission (BSEC), where the BSEC Commission immediately given consent to CSE to launch the indices and highly appreciated the international best practices and Shariah framework followed in construction of these indices.
CSE 50 – the benchmark index of CSE
The CSE 50 Index is constructed in order to provide an appropriate benchmark for Bangladesh capital market. The index constitutes of 50 leading and active stocks to ensure coverage of large portion of market capitalization of CSE.
Salient features of CSE 50 Index:
- Comprises of 50 leading and active stocks
- Market Representation: The CSE 50 stocks represent about 66% of the total market capitalization and around 65% of float-adjusted market capitalization of the CSE listed companies, which makes the index representative of the overall economy.
- Diversification: The CSE 50 covers 13 sectors of the economy and offers investment managers exposure to the Bangladesh market in one efficient portfolio. The Index has been calculated since July 2009 and is well suited for benchmarking, index funds and index-based derivatives.
Index Construction & Review Methodology
The index is calculated using free float market capitalization methodology and has a base date of July 02, 2009 indexed to a base value of 1000.
- Eligible Universe: All common shares listed on the CSE are eligible for inclusion in the CSE 50 index. Corporate bonds, Mutual funds and securities which are classified under ‘Z’ category are not eligible for the index.
- Liquidity: From the eligible universe, companies that have traded more than 75% of trading days during last 6 months period or from date of listing (whichever is latest) are only selected. The remaining companies are then ranked by traded values and bottom 10% companies are not considered.
- Market Capitalization: The remaining pool (post liquidity criteria) is then ranked by float adjusted market capitalization. Prior to January 2012, total market capitalization is considered instead of float adjusted market capitalization.
- Selection of Base Composition: Top 50 companies by market capitalization, from eligible universe satisfying above criteria are selected for index inclusion.
- Index Construction: The CSE 50 is computed using a float-adjusted, market capitalization weighted methodology, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The methodology also takes into account constituent changes in the index and corporate actions such as stock splits, rights issuance, etc., without affecting the index value.
- Review of index composition: Index composition is reviewed on semi-annual basis. Data for 6 months ending June & December each year is considered for review.
- Compulsory Exclusions: The index constituent will be compulsorily excluded from the index if it is: i) Transferred to Z category or; ii) Trading frequency is less than 75% or; iii) Ranked in bottom 10% as per ranking based on traded value – then the constituent shall be compulsorily replaced with best eligible security by market capitalization.
- Better Replacement Identification: The replacement shall be done if any non-index constituent satisfying index eligibility criteria have market capitalization which is twice of the last index constituent. However, the maximum number of replacements with the ‘better replacement criteria’ will be restricted to 3(three). For the purpose of clarity, if there are 4 replacements due to compulsory exclusions then there will not be any better replacement identification done. If there are 2 compulsory exclusions then, only 1(one) security shall be replaced via better replacement identification step.
- Corporate Actions Adjustments: Corporate Action adjustments applied on ex-date; Divisor adjusted to keep index level unaffected.
It is expected that CSE 50 – the Benchmark Index will be ideally used for:
- Portfolio benchmarking
- Launching Exchange Traded Funds (ETFs), Index Funds tracking Bangladesh market
- Issuances of Index linked products such as Structured Products (SP), Exchange Traded Notes (ETNs)
- Development of Derivatives products, etc.
Shariah Framework & CSE Shariah Index
Taqwaa Advisory and Shariah Investment Solutions (TASIS) has devised Shariah framework for Bangladesh market by analyzing data of the listed companies for five years and selected shariah compliant security year-on-year basis.
Shariah Screening – TASIS for the purpose of Shariah screening of stocks employs two steps of screenings.
- Business Screening: In the first step, TASIS screens the stocks on the basis of its business activities; those involved in Shariah non complaint (Haram) activities are excluded. All noncompliant businesses such as financial services, tobacco, alcohol, pork, vulgar entertainment, manufacturer of explosives etc. are screened out. This step is called Business screening process and the stocks qualifying the test are termed as “Business complaint”.
- Financial Screening: In the second step, TASIS applies the financial screening norms on those “Business complaint” stocks; the stocks qualifying this test are termed as “Shariah complaint stocks” and are permissible for the investors to invest in. During the process the business complaint stocks are screened on 3(three) financial ratios, the upper limits of which are set by the TASIS Shariah Board in the context Bangladesh market. TASIS Shariah Board has approved the following limits for the 3(three) respective ratios:
Financial Screening Ratios Ratio Limit (%)
- Debt to Total Assets 33
- Interest income + 9% Interest-based
Investments to Total Income 4
- Cash & Cash Equivalent + Receivables/ Total Assets 90
Based on the TASIS Shariah screening, the methodology, construction and maintenance framework for the CSE Shariah Index (CSI) has been developed by India Index Services and Products Ltd (IISL), a group company of the National Stock Exchange of India Limited and a subsidiary of NSE Strategic Investment Corporation Limited. It may be mentioned here that while constructing the CSE Shariah Index priority has been given to the Shariah compliance in comparison to the market dynamics of the index constituents.
Salient features of CSE Shariah Index:
- Index comprises of Shariah compliant stocks
- Market Representation: The CSE Shariah Index (CSI) stocks represent about 48.60% of the total market capitalization and around 41.35% of float-adjusted market capitalization of the CSE listed companies. The CSE Shariah Index (CSI) covers 17 sectors of the economy.
- Diversification & Constituents: The CSE Shariah Index (CSI) 17 sectors of the economy. No of Constituents: Variable (63 constituents as on 31st August, 2014).
Index Construction & Review Methodology
The index is calculated using free float market capitalization methodology and has a base date of July 04, 2010 indexed to a base value of 1000.
- Eligible Universe: All CSE listed Shariah compliant companies other than Mutual Funds and Corporate bonds. The index is a based on free float adjusted market capitalization.
- Selection of Base Composition: Shariah compliant companies that from part of the eligible universe are selected for index inclusion.
- Index Construction: The CSE Shariah Index (CSI) is computed using a float-adjusted, market capitalization weighted methodology, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The methodology also takes into account constituent changes in the index and corporate actions such as stock splits, rights issuance, etc., without affecting the index value.
- Review of index composition: Index composition is reviewed on an annual basis. Data for year ending June each year is considered for review. The shariah compliant security shall be compulsorily included in the index.
- Compulsory Exclusions: The index constituent will be compulsorily excluded from the index when: i) the constituent company becomes non-shariah compliant OR ii) the constituent company gets delisted.
- Corporate Actions Adjustments: Corporate Action adjustments applied on the day when stock traded on ex-entitlement basis. Divisor adjusted to keep index level unaffected in case of rebalancing or corporate action adjustments.
It is expected that CSE Shariah Index (CSI) will be used by the investors who wants to track performance of shariah compliant securities that form part of all listed companies on CSE. Globally, product on shariah indices are available and increasing interest is seen in investing in such products by investors.