PSE renames index, adopts free float system

PSE renames index, adopts free float system
By Zinnia B. Dela Peña
The Philippine Star 03/15/2006

In line with its reform agenda, the Philippine Stock Exchange (PSE) board has agreed to rename the PSE composite index as "PSEi" effective on the first trading day of April.

The main index is presently being referred to as the Phisix.

PSE president Francis Lim said the new index name will be implemented simultaneous with the free float criterion, which will serve as the yardstick in determining the inclusion or exclusion of companies in the PSEi.

Lim said the renaming of the index is part of a brand recognition program that management is implementing for the local bourse.

"We want to highlight the reforms we have put in place at the PSE, and we want investors to know that the brand ‘PSEi’ is associated with these reforms. We believe there is added value in those reforms, and we want investors to get an instant recall of the changes, which are beneficial to them, with the help of a recognizable brand, "Lim said.

The PSEi will serve as the new barometer of stock price movement in the exchange.

Lim said the exchange will hold a parallel run for a week before the new index computation will be implemented.

The local bourse adopted the free float requirement after studies noted a global trend among stock exchanges and index providers to adopt the same standard.

Free float refers to the issued and outstanding shares of a listed company that are not held by strategic partners and owners. Hence, free float shares are freely tradable among non-strategic investors in the public.

As approved by the PSE board, the free float portion should represent at least 10 percent of the outstanding shares of the listed stock.

Listed firms with less than 10-percent free float shares will not qualify for inclusion in the PSEi.

Lim explained that investors will benefit from the new index computation because the revised criteria will encourage listed companies to widen their investor base.

"The new computation, which we intend to review every six months, will promote more stock market growth and, in turn, enhance the value of the stocks," Lim said.

In determining the composition of the index, the PSE currently uses only four criteria – full market capitalization, liquidity, tradability, and sector representation.

In the new formula, a listed company must satisfy three additional criteria — free float shares, free float market capitalization and volume turnover ratio — to qualify for inclusion or retention in the elite list of PSEi companies.

In order to pass the liquidity criterion, a stock must have an average daily value turnover of not less than P5 million during a period in review to be considered for index inclusion or retention.

By tradability, the exchange means that, during any given period in review, a stock must be traded at least 95 percent of the total trading days.

Under the PSE’s prevailing guidelines, companies do not qualify for index inclusion if they fail to meet the liquidity and tradability criteria.

Those that hurdle this initial elimination stage go through a second screening process, where they are grouped according to sector and then ranked, based on the full market capitalization of each company.

The two top firms in each of the six sectors under the PSE’s classification standard occupy the first 12 slots in the 30-company index. The 18 other slots are occupied by companies, which get the next-highest rank in terms of full market capitalization.

In the new formula, the listed companies must meet the 10-percent free float requirement and a third criterion, called volume turnover ratio, before they can hurdle the initial screening process and proceed to the next round.

To meet the volume turnover ratio requirement, at least 10 percent of the free float shares of a listed stock must be actually traded.

Under the new formula, the same procedure of sector representation will be followed in the second screening process. But this time companies are ranked, not according to full market capitalization, but according to their free float market capitalization.