CASE 30 INDEX RULES
I. Introduction:
1- What Is An Index?
An index is a numerical value used to measure changes in financial markets. The index is
set at a numerical level on the base period or starting point against which a percentage
change can be compared to at any particular point of time. The index measures the moves
up and down of stocks or bonds or funds etc. reflecting market price and market direction.
A stock index will reveal the overall trend in the equity market. In other words, how in
general the market is performing? It is a comprehensive measure of market trends
indicating the general stock market price movements. Thus, the index will be the
investor’s yardstick for the level of the whole stock market, or a certain group of stocks,
against which the performance of individual stocks can be measured or judged. Indices are
worldwide instruments used by investors in developed as well as developing markets.
2- Benefits of Creating Indices:
1. Summarizes the whole market: An index, typically, is composed of companies from
all sectors of the economy so it provides an easy way to quantify the performance of
the economy as well as the market as a whole. Therefore, indices act as indicators of
business conditions since stock markets are believed to be sensitive to business
conditions. An index can also be constructed for a sector to measure the performance
of that sector.
2. Allows for a self-regulating market: Arbitrageurs can easily identify discrepancies in
the market and correct the market to ensure that prices are accurate.
3. Leading indicator: Prices of companies, represented in the index, are equivalent to the
present value of future cash flows. If future cash flows are expected to change
(increase or decrease), the index will reflect these expectations.
4. Marketing instrument: International investors can compare the performance of the
country’s index to other indices around the world. A strong return will increase public
awareness and foreign investment in this market.
3- Most Commonly-Used Method for Calculating Indices:
The most commonly used method is the Market Capitalization methodology. Under this
methodology, each stock represented in the index contributes to the index proportionally to
its market capitalization.
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4- Worldwide Indices
The most common and well-known worldwide indices include Standard & Poor’s,
Financial Times, Dow Jones, Morgan Stanley etc. It is worth noting that these largelyfollowed indices are calculated by private companies, not stock exchanges. These indices
are closely monitored and followed by portfolio and fund managers, analysts, as well as
investors, because they can measure their performance against a commonly used yardstick
within the stock market.
It should be pointed out that also stock exchanges in both developed and developing
markets calculate their own indices. Some of the most famous stock exchange indices
include NYSE, DAX, CAC, Nikkei, Hang Seng, ISE, BOVESPA, WIG etc.
5- Free Floated Indices
The free float is the share capital of a company, which is freely available for trading in the
market. Limited free floats often cause liquidity problems with investors and traders
finding there are insufficient shares available to meet their needs. In extreme cases, this can
cause price distortions. Many fund managers, as well as index users, argue that including
such companies at their full capitalization can make an index an unrealistic benchmark for
performance measurement purposes.
As a result, the trend in recent years, of well-known index providers, such as FTSE,
Morgan Stanley and others, has moved towards calculating indices after adjusting them for
the free float.
In specific, Morgan Stanley Capital International, started its free float adjustment for
Egypt’s index in both its Emerging Markets Free (EMF) index and All Country World
Index Free (ACWIF) index as of 31 May 2002.
Thus, currently stock exchanges are either studying implementing free floated indices in
order to attach more foreign investors to their markets or have already started using free
float indices such as Johannesburg Stock Exchange.
In order to remain on par with international standards, CASE has undertaken a
precedent and pioneering step, in the Middle East North Africa Region, by being the
first exchange, to change its index calculation methodology and account for free float,
in its new CASE 30 index.
Thus, CASE 30 index will reflect investable opportunities for global investors by taking
into account any market restrictions on share ownership. These restrictions can assume
several forms: specific companies may have limits for investors after amounting to a given
percent; specific industries may be restricted to investors after amounting to a given
percent, any government holdings or long term holdings of shares by certain groups. The
detailed definition of the free float for CASE 30 companies is provided in section III-9.
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II. CASE 30 Price Index
1. The Cairo & Alexandria Stock Exchanges Exchange (CASE) discontinued its “CASE
50 Price & Return Indices” as of 31 January 2003. CASE 50 indices were calculated
over the period 1/1/2000-31/01/2003.
2. As of 2 February 2003, CASE started publishing a new index, CASE 30 Price
Index, which has a start date of 1/1/1998 and a base value of 1000 points.
3. An internal Senior Committee at CASE was responsible for the design of CASE 30.
The Committee will be responsible for the maintenance of CASE 30 as well as other
future indices to be produced by CASE.
4. CASE 30 Price Index includes the top 30 companies in terms of liquidity and activity.
5. CASE 30 is a price index i.e. it measures the return on investment from the change in
market value of the stock (capital appreciation/depreciation) only.
6. CASE 30 Price Index is weighted by market capitalization adjusted by the free
float. Adjusted Market capitalization of a listed company is the number of its listed
shares multiplied by the closing price of that company multiplied by the percent of
freely floated shares.
7. A company which fits the criteria of CASE 30, but does not provide its free float to the
Disclosure Department of CASE on the required dates, as stated in the Listing Rules of
CASE, will be excluded from the CASE 30 Index.
8. The above points clearly indicate that CASE is emphasizing the importance of free
float as one of the main and important criteria for the inclusion in CASE 30 index as
well as calculating the weight of each company in the CASE 30 index. These are strict
rules that would ensure market participants that the index constituents truly represent
actively traded companies and that the index is a good and reputable barometer for the
Egyptian market.
III. CASE 30 Methodology
1. Liquidity is the most important criterion for selecting the constituents or companies
that comprise CASE 30, not profitability. Therefore, a loss making company may be
included, especially if we are talking about the new economy stocks that take a longer
period before they achieve profits. This part is subjective and depends on the discretion
of the committee at CASE responsible for index construction. Any decision taken by
this committee will be made public via CASE’s publications, web site etc. beforehand
so that those who follow the index are aware of the changes and adjustments that take
place.
2. CASE 30 avoids concentration on one industry and therefore has a good representation
of the various industries/sectors in the economy.
3. CASE 30 is weighted by each company’s adjusted market capitalization (listed shares
adjusted by free float).
4. Companies that go bankrupt, merge with other companies or are acquired by other
companies will be excluded from CASE 30.
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5. Only fully paid shares are included in CASE 30.
6. Only shares denominated in Egyptian Pounds are included in CASE 30.
7. Only common shares are included in CASE 30. Preferred shares, convertibles, bonds
and mutual funds are excluded.
8. CASE 30 Index avoids cross holdings. In case a holding company owns various
subsidiaries, either the holding company is included and subsidiaries are excluded.
Thus, holding companies owned by families or individuals is carefully reviewed
before inclusion in the index. Cross holdings means significant ownership of one
company in another company or stakes held in one company by another. In terms of
indices, they can create a form of double counting, if both companies are included in
the same index, in that the value of the holding in one company is reflected in the share
price of the other. Thus, the practice of including both companies in the index is
avoided because it can skew industry weights, distort valuation ratios and overstate the
true market size. Therefore, significant cross ownership, amounting to 30% or
more is excluded in CASE 30. For example if company A owns 30% of company
B and company A is already included in index, then Company B would be
excluded from index. Another example is a holding company owning various
subsidiaries. Whenever possible, the operating or subsidiary companies, as they
are better representatives of industries than holding companies, are included and
the holding company is excluded, to avoid double counting. The choice of whether
to include the holding company or its subsidiaries depends on which of them is more
active and liquid and is a decision to be made by the Index Committee of CASE.
9. The Free float of any company included in the index must be at least 10% or more
to be considered for inclusion in the index. Free float means the freely floated shares
that are traded and held by the public at large. Strategic ownership by any individual or
entity, whether private or public is excluded. Thus, shareholders, whether private or
public companies, banks, funds, entities or individuals (private investors or
insiders such as management) owning more than 5% of a company are
considered strategic owners and are excluded from free float. The following
entities are also excluded from free float: public sector banks, public insurance
companies, public sector companies, any other public institutions or entities, Holding
Companies, Employee Share Ownership Associations (ESAs). Also, founders of any
listed company, no matter the size of their ownership, are excluded from free float, for
the first two years of operation of the company, since they are not allowed to sell their
shares, according to the law. Finally, ownership of less than 5% of a listed company by
public sector mutual funds is considered free float, since public sector mutual funds
(banks or insurance companies) are privately managed by private fund management
companies.
10. The main indicators employed to choose the constituents of CASE 30 include:
Ranking all traded companies during the last six months according to
total value traded or turnover per company. The top 30 are the most
active companies.
The most liquid or active companies chosen above in terms of value
traded must be traded at least 50% of the traded days during this
period. For example if the total number of traded days during the last
six months period is 120 (5 x 4 x 6), then to be part of the index the
company must be traded at least 60 days during this period. Therefore,
if a company is among the most active in terms of value traded but
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does not trade 60 days in the last six months period so it will be
excluded from the index.
Avoid cross holdings in the selection of the 30 Companies.
CASE 30 is weighted by market capitalization adjusted by the free
float.
11. CASE 30 constituents are reviewed & changed twice a year (end of January and end of
July) by CASE Committee whereby constituents are changed (added or deleted), if
necessary, based on the above-mentioned criteria.
12. CASE 30 was first calculated on 1/1/1998 and its value was 1000.
IV. Appendix (Detailed Calculation of CASE 30 Price Index)
1. Adjusted Market Capitalization Weighting Methodology for Calculating CASE 30
Price Index:
The formula used for calculating CASE 30 is straightforward. The daily index value is
calculated by dividing the adjusted market value (Last closing price X number of listed
shares X percent of free float) of all constituent companies by a divisor. Adjusted Market
Value is synonymous to Adjusted Market Capitalization.
Index Value = Adjusted Market Value of all Companies
Divisor
2. Divisor
The divisor is a factor that converts adjusted market capitalization of constituent
companies to the index level. It is derived at the starting point of the index (Base date) by
dividing the adjusted market capitalization by an arbitrary number or Multiplier. For
example, if one wanted the starting point for the index to be 1.0, one would divide the
adjusted market capitalization by itself. For CASE 30, the index was set at 1, 000 on its
start date, one would then set the divisor at 1/1000 of the adjusted market capitalization.
3. Steps to Calculate The Divisor at The Base Date:
Step 1: Calculate the adjusted market capitalization of constituent companies at starting
date t0 It is equal to the sum of closing price multiplied by listed shares of constituent
companies times the percent of free float at starting date.
Step 2: Assume that we will set the starting value of index at 1000.
Step 3: Calculate index divisor on the starting date t0 as follows
Index Divisor at t0 = Adjusted Market Value t0
Index value t0 = 1000
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In order to calculate the index value on the end date or any other date tn, calculate the
adjusted market capitalization of constituent companies on the specified date tn then apply
the following:
Index Value tn = Adjusted Market Value tn
Divisor t0
4. Adjustments to The Divisor
A) Company Additions and Deletions
When a company, is added to, or deleted from, the index, the adjusted market
capitalization of that company is added to or deleted from the index and the total market
capitalization will rise or fall accordingly, which will affect the index level. Since indices
should reflect only market forces that change the value of the company, therefore, the
index divisor is adjusted to maintain a constant index value.
These adjustments are made at the beginning of the set date (ex-date) before trading
begins, as outlined later.
B) Market Capitalization Adjustments
There are two ways in which a company’s market capitalization can change:
Market forces driving the price of the shares up or down. When this occurs, the index is
designed to reflect these market forces and no adjustments are required to the Divisor.
Corporate actions where a company issues new shares or issues stock rights, which
impacts its market value. When these corporate actions occur that affects the market
capitalization, they are not reflected in the value of the index. Corporate actions that affect
the market capitalization of the index require an offsetting divisor adjustment in order to
prevent the value of an index changing due to such an event. By adjusting the divisor, the
index value remains constant before and after the event.
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Summary of The Frequent Corporate Actions and Their Resulting Adjustments.
Corporate Action
Adjust
Shares
Adjusted Price Equals
Effect on
Divisor
No
Adjust
Previous
Close
Price
No
Cash Dividend (Price
Return Index)
Cash Dividend (Total
Return Index)
Special Cash Dividend
(From non operating
income)
Stock Split
–
No effect
No
Yes
P – cash dividends
Decrease
No
Yes
P – cash dividends
Decrease
Yes*
Yes
No effect
Yes*
Yes
P
----------------------------------------1 + % increase in shares
P x reverse split ratio
Reverse Split
Stock Dividend in same Yes*
Co.
Yes
P
-----------------------------------------1 + % increase in shares
No effect
Stock Dividend in another No
Co.
(Not in the Index)
Stock Dividend in another Yes*
Co.
(In the Index)
Public Offering
Yes*
Yes
P – (value of stock
distributed per share)
dividend Decrease
Yes
P – (value of stock
distributed per share)
dividend No effect
No
–
Rights Offering
Yes*
Yes
Spin Off (a distribution of No
shares
to
existing
shareholders
of
a
subsidiary split from the
parent co.)
Repurchase shares (buy- Yes*
back)
Yes
(P x no. of rights)+subscription price Increase
x no. of new shares
-----------------------------------------no. of rights to buy one new share +
( 1 x % increase in shares)
P – (value of spun off shares Decrease
distributed per share)
Combination
stock Yes*
distribution and rights
offering
Yes
Yes
No effect
Increase
Prior Market Cap – (repurchase price Decrease
x no. of repurchased shares)
-----------------------------------------Outstanding shares
Prior Market Cap+ Subs. Price x new Decrease
shares
-----------------------------------------Outstanding shares
* It will be equal to the actual shares outstanding after corporate action is taken.
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The following steps are followed to calculate the Index level when an adjustment to the
Divisor is deemed required:
1- Calculate the Adjusted Market capitalization, which is equal to the sum of adjusted
closing prices, multiplied by adjusted listed shares for the companies, multiplied by the
percent of free float.
2- Calculate the new divisor:
New Divisor = Previous Divisor x (Adjusted market cap)/(Previous market cap)
The new divisor is simply the figure that maintains the Index at the same level as before
the change in market cap i.e. the new divisor can be alternatively computed as follows:
Divisor =
Adjusted market cap
Previous Index level
3-Calculate adjusted market capitalization, which is equal to closing price times listed
shares times percent of the free float.
4-Calculate index value by dividing adjusted market capitalization by divisor.
Attached is An Illustrative Example.
Action
Formula
1- 2 for 1 Stock
P
Split
---------------------------------------------1 + % increase in shares
210%
Stock
P
Dividends
---------------------------------------------1 + % increase in shares
3- Stock Dividend P-(value of stock dividend distributed per share)
in another Co. not
in index
4- 3 for 2 Stock
P
Split
---------------------------------------------1 + % increase in shares
510%
Stock P – value of stock dividend distributed per share)
dividends in another
Co. in index
6- Rights offering (P x number of rights) + (subscription price x no of
(10 rights for each new shares)
--------------------------------------------new share @ $ 16
number of rights +(1x no. of new shares)
7- 3 for 10 spin off P-(Value of spin off shares distributed per share )
ratio,
price
of
spinoff share is $ 9
8- Tender Offer Prior Market Cap–(Purchased price x no. of
(1000 shares @ purchased shares)
Calculation
Adjusted
Price
15
30
---------(1 + 1)
33
--------------(1 + 0.10)
21 – 1
30
20
31.5
-----------(1+0.5)
15 - 1.6
21
13.4
(22x10)+(16 x 1)
-------------------10 +( 1 x 1)
21.45
16-(3/10 x9)
13.3
45100(1000X24)
17.58
8
$24/share)
---------------------------------------------------------------Outstanding shares – purchased shares
1,200
Prior Market Cap – (Repurchased price x no. of 93600repurchased shares)
(3400X15.25)
---------------------------------------------------------------Outstanding shares
3800
P
17.75
--------------------------------------------------------1+ % increase in shares
( 1 + 1)
9- Repurchase of
shares
(buyback)
3,400 shares @ $
15.25/share
10- 2 for 1
distribution
then
right offerings (2
rights for 1 new
share @ $11)
Then
10.98
=8.875
(P x no. of rights)+(subscription price x no. of new
shares)
--------------------------------------------(8.875
x 9.58
no. of rights +(1 x no. of new shares)
2)+(11x1)
--------------------2 + (1 x 1)
11- Rights offering
(2 rights for 1 new
share @ $ 8) and 2
for 1 distribution
12- Reverse Split
Prior market cap + new subscription
-----------------------------------Outstanding shares
P x Reverse Split Ratio
(11.75x3800)+
(8x1900)
------------9500
7.75 x 2/1
6.30
15.5
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