UNIVERSITI PUTRA MALAYSIA

ACT 4211

Corporate Finance

Tri-semester 07 2010

An Analysis of Stock Market Indices in Malaysia

Lecturer: Prof. Dr. Shamsher Mohamad

Group Members:

1.ABDULLAH BIN DAUD EX 02217

2.KHAIRUL NIZAM BIN MAHTAR EX 02245

3.LIM SHI SHYANGEX 02249

Table of Contents

LIM SHI SHYANG EX 02249................................................................................................................1

What is a Stock Market Index?....................................................................................................................3

The Origin of Indexing.................................................................................................................................3

Role of Indices.............................................................................................................................................3

Characteristic of a Good Index....................................................................................................................4

Background of Malaysia Financial Market In 1960, the Malayan Stock Exchange was formed and this carried out trading in shares. The market indices of Malaysia are as follows:............................................5

The Main and ACE Market...........................................................................................................................6

Adopting FTSE..............................................................................................................................................6

Indices in Malaysia: FTSE Bursa Malaysia Index Series................................................................................7

The FTSE Bursa Malaysia Index Series is designed to represent the performance of companies, providing investors with a comprehensive and complementary set of indices, which measure the performance of the major capital and industry segments of the Malaysian and regional market........................................7

Tradable Indices..........................................................................................................................................7

Benchmark Indices..........................................................................................................................8

FTSE Bursa Malaysia Hijrah Shariah Index.................................................................................................10

FTSE Bursa Malaysia KLCI..........................................................................................................................13

Review Process..........................................................................................................................................17

Issues..................................................................................................................................................18

New Economic Model (NEM) on Malaysia’s Capital Market.....................................................................18

How Does Stock Market Shows Rising Prices When Economic Fundamentals are Weak?........................19

References.................................................................................................................................................21

Appendix...................................................................................................................................................22

KLCI Calculation Methodology...................................................................................................................22

What is a Stock Market Index?

Firstly, a stock market is a place where stocks of listed companies are traded. A stock market index is thus defined as a listing of a group of stocks with a single figure to summarise the overall performance of the market. In simple lay man term, it is the pulse rate of the economy. Generally, stocks have something in common such as sharing the same exchange, or same industry. Thus, indices can be classified in a wide variety of ways.

The Origin of Indexing

We often see updates of indices from daily news and easily in any newspaper or radio broadcast. The ease of obtaining indices (plural for index) is mainly due to its popularity as a concept in finance. Even in professional financial field, indices are often viewed as a crucial element, which will be discussed in this paper.

The history of indexing dated back as far as 1884 when Charles Dow created the very first stock market index called Dow Jones Transportation Average Origin. Shortly after, many indices were created such as the Dow Jones Industrial Average (DJIA) which is widely publicized and followed today. It did not take long for indexing to be applied for other instruments; fixed income, commodities and real estate.

During the initial years, indexing was ignored because active managers thought they are much better off by selecting winning stocks. Thus, it is important for us to understand the function of indices

Role of Indices

Today, we live in a dynamic world where the stock market is at an accelerated pace than before. We require a quick way to analyze and graph the movement either on the basis of daily, weekly, monthly or yearly – and hence, indices is used for this purpose.

Indices main purpose is to reflect movements in the underlying market precisely. In the context of a stock market index, stock market is the underlying market and it plays an important role in gauging the overall economic health and progress of a country.  

Furthermore, indices, as an average, are often viewed as a standard of comparison to judge the performance of investors. The market rate of return can also be measure from indices and accordingly, investors can evaluate alternative investment by benchmarking to indices.

Indices also exhibits speculative element and allow prediction on market movement. Variety of stock indices are available by dividing the market into pieces; style, sector, industry, region or market capitalization; which allow investors to better determine their exposures.

Characteristic of a Good Index

Schoenfeld S.A. (2004) listed seven key criteria which are applied to evaluate the functionality of an index. The seven key criteria are:

1. CompletenessTo truly reflect the underlying market, a good index should accurately represent the return of the overall underlying market; or what is also referred to as ‘investment opportunity set.’

2. Investability

An index should have no restrictions on who can purchase the securities in the index. If the index includes selection of uninvestable securities, this may result in tracking error.

3. ClearIt is required to have published rules and transparent index methodology in order to attend to potential conflicts of interest between index provider and the constituents.

4. Accurate and Complete DataSince the primary reason for using indices is as benchmarks for performance analysis, data should be therefore widely available.

5. Acceptance by InvestorsInvestors will tend to prefer recognized and widely used indices. Moreover, academic and research commonly focus on established benchmarks to provide insights.

6. Availability of Crossing Opportunities, Derivatives and Other Tradable ProductsMore applicable for institutional investors, crossing allows for cost saving on the basis of indices are more liquid.

7. Relative Low Turnover and Related Transaction CostDue to the fluidity of markets, an index must reflect changes in the market in order to be regarded as a true benchmark. However, index rebalancing results in turnover, leading to rebalancing cost. Lower turnover causes lower rebalancing cost thus, easier to track.

Background of Malaysia Financial MarketIn 1960, the Malayan Stock Exchange was formed and this carried out trading in shares. The market indices of Malaysia are as follows:

Composite Index Industrial Index

Finance Index. Properties Index

Mining Index

Syariah Index

Plantations Index

Technology Index

Second Board Index

MESDAQ Market Index

Consumer Products Index

Industrial Products Index

Construction Index.

Trading/Services Index

The Singapore Stockbrokers' Association of 1930 was the first formal securities business organization in the country. It was rechristened as Malayan Stockbroker's Association in 1937. 1973 saw the separation of Malaysia and Singapore stock exchanges into KLSEB and SES. The Kuala Lumpur Stock Exchange is also known as Bursa Malaysia Berhad. The stock exchanges of Malaysia are Kuala Lumpur Stock Exchange, Kuala Lumpur Commodity Exchange and Malaysia Monetary Exchange. 

Malaysia financial market is governed and regulated by Bursa Malaysia Berhad, or also known as Malaysia Stock Exchange (MYX). Previously known as Kuala Lumpur Stock Exchange (KLSE), the name change to Bursa Malaysia was following the demutualization process, which at that time consisted of a Main Board, Second Board and MESDAQ Board with total market capitalization of MYR 700 billion. It is only later in 2009 that the

Main and ACE market were introduced to substitute the Main Board, Second Board and MESDAQ.

The Main and ACE MarketThe Main Market was the product of merging Main Board and Second Board, consisting of established companies. On the other hand, the MESDAQ Market; short for ‘Malaysian Exchange of Securities Dealing and Automated Quotation’; which is focused on Technology-based companies is revamped into an alternative market called ACE Market; short for ‘Access, Certainty, Efficiency’; consisting of companies of different sizes and sectors.

Mainly, the significant changes are in the regulatory approach, particularly in listing and capital-raising.The changes in board structure objective is to provide companies with a clearly defined platform to raise capital, subsequently enhance efficiency, access and certainty in fund raising process as well as maintaining protection to investors. This board structure also makes Bursa Malaysia a more attractive platform for Malaysia and foreign companies

Adopting FTSE In 2006, Bursa Malaysia collaborated with FTSE Group in launching the FTSE Bursa Malaysia Index Series which consists of tradable and benchmark indices. FTSE Group is an independent company jointly owned by the Financial Times and the London Stock Exchange - thus forming the F-T and S-E based on the original acronym.

The ongoing efforts of Bursa Malaysia to maintain globalization necessitates the collaboration with FTSE and below are some of the benefits from the collaboration:

a. Investable – To ensure no restrictions on purchasing the securities, the indices are ensured accurate representation of the securities available for investment through FTSE calculation methodology.

b. Tradable – Liquidity is important in trading to ensure stock availability as well as ease of trading. Hence, by employing liquidity screening on all stocks, the tradability of index series is enhanced.

c. Transparent – By incorporating an international index construction standards, indices are more transparently managed.

Indices in Malaysia: FTSE Bursa Malaysia Index Series

The FTSE Bursa Malaysia Index Series is designed to represent the performance of companies, providing investors with a comprehensive and complementary set of indices, which measure the performance of the major capital and industry segments of the Malaysian and regional market. 

The Family Tree of Indices in Malaysia. Source: www.klse.com.my

Red indicates tradable indices while blue indicates benchmark indices.

Tradable Indices

1. FTSE Bursa Malaysia KLCI (FBM KLCI)Widely followed by investors as the benchmark for the Malaysian market, the FBM KLCI is made up of the 30 largest companies in the FTSE Bursa Malaysia EMAS Index; in other words, the Main Board’s largest 30 companies; by full market capitalization.

2. FTSE Bursa Malaysia Mid 70 Index (FBM Mid 70 Index)Contains the following 70 companies in the FTSE Bursa Malaysia EMAS Index by full market capitalization.

3. FTSE Bursa Malaysia Top 100 Index (FBM Top 100 Index)Encompasses the constituents of the FBM KLCI and the FBM Mid 70 Index, which totals to the top 100 companies of the Main Board.

4. FTSE Bursa Malaysia Hijrah Shariah IndexConsists of the largest 30 companies of the FTSE Bursa Malaysia EMAS Index by full market capitalization. In order to meet the needs of international Shariah-compliant investors, the constituents have to meet a triple screening process –the FTSE’s global standard screening, the Yasaar’s International Shariah screening and the Malaysian Securities Commission’s Shariah Advisory Council (SAC) screening.

5. FTSE Bursa Malaysia Asian Palm Oil Plantation IndexAvailable in ringgit-based and dollar-based, this index allows investors to track the performance of selected major listed plantation companies. Countries selection is based on the classification of FTSE as ‘developed, advanced emerging and secondary emerging countries’ which excludes Japan, Australia and New Zealand.

Benchmark Indices

1. FTSE Bursa Malaysia EMAS Index (FBM EMAS Index)Encompasses the constituents of the FBM Top 100 Index and FTSE Bursa Malaysia Small Cap Index.

2. FTSE Bursa Malaysia Small Cap Index (FMB Small Cap Index)Made up of eligible companies within the top 98% of the Bursa Malaysia Main Market but excludes constituents of the FBM Top 100 Index.

3. FTSE Bursa Malaysia Fledgling IndexConsists of the remaining 2% Main Market companies that meet the requirements and also excludes FBM EMAS Index. In simpler term, it is an average of the share prices of very small companies in Bursa Malaysia.

4. FTSE Bursa Malaysia EMAS Shariah IndexMade up of Shariah-compliant constituents of the FBM EMAS Index satisfying the screening requirements of the SAC. This index is mainly developed for domestic Shariah-compliant investors.

5. FTSE Bursa Malaysia ACE Index (FBM ACE Index)Made up of all eligible companies listed on the Bursa Malaysia ACE Market

6. FTSE Bursa Malaysia Palm Oil Plantation IndexSimilar to the tradable counterpart, it is based on the FBM EMAS Index and consists of companies which earn a commendable proportion of revenue from palm oil activities.

FTSE Bursa Malaysia Hijrah Shariah Index

Over the previous years, the Islamic equity market underwent rapid growth in untapped markets in Asia, Middle East and North Africa, much due to the high demand of large populations in the Islamic funds industry. Additionally, contributions of participants from financial institutions and high net worth individuals had contributed to this growth.

There were some issues causing the delayed development of Islamic equities in Malaysia despite the increasing demand. Challenges faced include high costs to set up and finance a Shariah board, expensive screening processes and relatively small size of many funds.

Under the Securities Commission Malaysia (SC), the Shariah Advisory Committee (SAC) are involved in establishing general requirements that are required to be fulfilled in order for a stock to be classified as Shariah compliant. The SAC laid out these specific benchmarks to safe guard minimal prohibited elements or related to the Shariah – thus determining the status of a mixed company as a Shariah approved company. Before the initiatives by SAC, Bank Islam Malaysia Berhad; the first Islamic Bank in Malaysia; had taken the first step to review and identify companies listed on the KLSE as permissible for Muslims to invest in. It was a significant event in Malaysia Islamic equity market as it provided the much-needed break through for Muslims to participate in the stock market.

The major characteristics of the Islamic equity markets are the absence of interest-based transactions, doubtful transactions and unlawful stocks of companies which deal in non-Shariah compliant activities – these activities must be free from any form of unethical or immoral elements. Commonly, investors holding corporate shares are entitled to capital gain or loss in the

form of dividends. However, there is no issue of dividend receipts being riba as the distribution of dividends meets the principle of Musharakah.

The SAC also ponders upon various fatwa which have become exceptions to the maxim, being translated into, “… if there is a mix of the permissible and the prohibited, then it is ruled as prohibited”. For instance, mixing of slaughtered animals by Muslims and non-Muslims is totally prohibited. This fatwa is in line with the maxim as such a mixed item is prohibited in essence. On the other hand, if an item, in essence, is not prohibited but is prohibited for other reasons, it requires a different perspective. For example, money in essence is not prohibited but money earned as a result of theft, robbery or cheating or non-halal sources is strictly prohibited – and this applies to securities. If dividends are distributed from profits which have been obtained from non-Shariah compliant activities of the company, then the securities are prohibited, according to the tolerable benchmarks set by the SAC.

SAC screens for Shariah compliant stocks at the central level biannually. The screening methodology as developed by SAC involves both qualitative and quantitative information. Quantitatively, the criteria for screening are primarily based on the activities or sources of income for the companies. No screening is done on debt or liquidity, indicating the screening processes requires income statements rather than balance sheets. The qualitative parameters involve the screening of the businesses that are prohibited or disapproved by Shariah, where main activities of the companies should be in line with Shariah principles. This screening process removes the need for individual funds or investment companies to create their own Shariah screening criteria.

Additionally, there are two criteria for companies which are:

1. The public image of the company must be good. Comparing to Middle Eastern screening of listed companies, SAC took a different angle as financial gearing is not tested and instead, SAC focuses majorly on activities of the companies. This implies that companies with more liquid than illiquid assets are entitled to be classified under this criterion.

2. The nature of business of the company is important and considered ‘maslahah’ (in the public interest) to the Muslim community as well as the country. Also, this criteria attends to the issues of complicated permissible and non-permissible activities factored into the revenue of a company. If non-permissible activities are involved, then the non- permissible element must be very minimal and involves matters such as umum balwa (common plight and difficult to avoid), custom and the rights of the non-Muslim community, commonly accepted by Islam.

Furthermore, four benchmarks based on juristic reasoning have been established by SAC in order to have an objective minimum acceptable level of mixed contributions from non-permitted activities. Hence, in order to qualify, companies should not breach any of the four benchmarks:

1. The benchmark for acceptable revenues generated by clearly prohibited activities for example, conventional bank (riba), gambling, liquor and pork; is a maximum of 5%.

2. A benchmark of 10% is applied on profits from activities involving prohibited elements that affect most people and deemed unavoidable, such as interest income derived from fixed deposits placed in conventional financial institutions or tobacco-related activities.

3. 20% benchmark is applied if companies have mixed sources of revenues, such as rental income derived from premises that operate

non-Shariah compliant activities, including gambling, selling liquor and pork.

4. 25% benchmark is for companies with activities that are generally permissible under Shariah and also maslahah (public interest), but contains certain elements that could affect the Shariah status of these activities for instance, hotel and resort operations or share trading, which are deemed non-permissible according to the Shariah.

As of September 2009, 88% of the securities listed on the Bursa Malaysia’s bourse are Shariah compliant and represent two-thirds of Malaysia’s market capitalization. The FTSE Hijrah Shariah index and the FTSE Bursa Malaysia EMAS Shariah index provide a broad benchmark for Shariah compliant investment for investors. The FTSE Bursa Malaysia Hijrah Shariah Index is a tradable index, consisting of the largest 30 companies in the FTSE Bursa Malaysia EMAS Index by full market capitalization, all meeting the screening requirements of international Islamic investors. Thus, it acts a vehicle to allow capital providers to invest based on risk adversity, rate of return and period of investment which suits their preference.

FTSE Bursa Malaysia KLCI

Kuala Lumpur Composite Index (KLCI) was launched on April 4, 1986 as an open ended index with a total of 83 companies and calculated three times a day with trading volume criteria of 250 lots per annum. Then, on January 30, 1990, the index calculation frequency was increased to 15 minutes. Trading volume criteria was then increased to 1,000 lots per annum on May 29, 1992.

To accommodate the listing of stock index futures, the number of constituents in KLCI was increased and capped at 100 stocks on April 18, 1995. Moreover, the computation frequency was increased to every 60 seconds. Mar 19, 1998 marks the enhancement to the objectives which were focused on improved tracking of the economy.

As of July 6, 1999, the Kuala Lumpur Composite Index (KLCI) undergone a transformation through adopting FTSE’s global index standards and will be known as FTSE Bursa Malaysia KLCI (FBM KLCI). It continues to be the bellwether index for the Malaysian stock market - as it had been since its introduction in April 1986.

One of the prominent features of this transformation is that the FBM KLCI will be leaner and more robust. Instead of the original 100 stocks, FMB KLCI will consist of the 30 largest eligible companies filtered by market capitalization. A market capitalization index is generated by determining the total market capitalization of all stocks in the index and dividing by the total number of shares of all the stocks.

The main objective is to enable the index easier to replicate. In other words, an investor who is tracking the benchmark index will now only required to

purchase 30 stocks, rather than owning 100 different stocks. Purchasing 100 stocks carries a few disadvantages; one being a much larger basket and additionally, more cost is required to maintain and risk of some of the smaller stocks to be illiquid.

In this transformation, the largest 30 companies encompasses roughly 70% of the total market capitalization for the local bourse – in line with the percentage of market capitalization for benchmark indices in key global markets such as the S&P 500. Hence, FBM KLCI has become a more investor-friendly benchmark index with a manageable basket of stocks.

The adoption of standards by FTSE Group offers the FBM KLCI instant recognition and risen its credibility among investors - both local and foreign. 

As discussed earlier, the tie-up with FTSE has provided benefits in three main area – tradable, investable and transparent. Stocks are liquidity screened to ensure tradable, which requires each constituent stock to maintain a minimum turnover of 10% of its free float shares in the 12 months prior to an annual review in December. 

To enhance investablility, FBM KLCI is computed based on free float adjusted market capitalization. Companies must have at least 15% of free float to be eligible for inclusion. Meaning, a stock with higher free float will have greater weightage in the index. A case example will be if Public Bank has a free float factor of 100%, it will be weighted based on its entire market capitalization. On another note, if Sime Darby has a free float factor of 75%, it will only be weighted based on 75% or three-quarters of its market capitalization.  

Table below lists the 30 constituent stocks for the FBM KLCI together with

respective weightage in the index based on share prices as at June 11, 2010. The weightage is dynamic as it will vary in line with share price movements.

With clearly defined rules, the transparency of FBM KLCI will also be enhanced. Furthermore, the index will be calculated at a frequency of 15 seconds as compared to the 60 seconds of KLCI thus, being more in sync with rapid changes in the dynamic market environment.

As a result of FBM KLCI transformation, it has lead to the creation of more

investment options such as Exchange Traded Funds (ETF), exchange traded derivatives, structured warrants and other index-linked funds that will improve overall market depth and liquidity. An ETF is also known as a passive unit trust whereby its basket of stocks simply replicates the constituent stocks of the underlying index. Generally, ETF has cheaper management fees as compared to traditional unit trusts but maintain the same benefits of diversification. Currently, we have the FBM30etf which tracks the FBM30 index.

To remain a representative of the market, the FBM KLCI will preserve the continuity of historical trend. Indirectly, market observers; typically, the group of technical market analysts; who require a need of continuity, will benefit from this. There will also be no amendment to the index value as FMB KLCI will adopt the KLCI's last closing value when it is launched.

Table below compares the top ten companies in FBM KLCI and KLCI dated at as April 30, 2009:

As observed, the largest company in both FTSE KLCI and KLCI is Sime Darby (10.07% in FBM KLCI and 7.25% in KLCI). More importantly, we saw

that these top 10 companies represent 70% of FBM KLCI, as compared to only 50% of KLCI.

Table below compares the bottom ten companies in FBM KLCI and KLCI dated at as April 30, 2009:

Also observed is the FBM KLCI is a better representative of its constituents with the bottom 10 companies reflecting 9.5% of the index, while only reflects 0.7% in KLCI.

Review Process

Semi-annual review occurs in June and Dec and in order to review the constituents, data from the close of business on the last day of trading in May and Nov is used. The revision is then implemented after close of business on 3rd Friday in June and Dec. The diagram below illustrates the process during the review:

In FBM KLCI which consists of the largest 30 eligible companies ranked by full market cap, a company will be added to the periodic review if the its market capitalization rises above 25th position while a company will be deleted during the review if its ranking falls below 36th position. The deleted company will then be moved to FBM Mid 70 index. A company which rises to 85th position will be added to FBM Mid 70 index and will be de

leted from FBM Mid 70 if falls to 116th or below. If a company ranks at or above 97% full market capitalization of main board, it will be included into FBM Small Cap index but if a company ranks below 99%, it will be moved to FBM Fledgling Index.

Issues

New Economic Model (NEM) on Malaysia’s Capital Market

The Government has reacted to the complaints from foreign investors about the lack in good equities due to sovereign holdings. Another issue was that shares were tightly held by government agencies. Liquidity was suppressed and the variety of stocks was lacking for fund managers due to this occurrence which at times, multiple government agencies can be holding

the same stock. In directly, this causes a decline in private investments both foreign and domestic – even local companies prefer to invest overseas.

As part of the NEM , Malaysian government dropped the 30% Bumiputera equity requirement for initial public offerings and fund raisings on June 30, 2009. This was a significant change in the local capital markets, boosting foreign investment and also in conjunction with efforts to further liberalize the economy of Malaysia. Conjunctionally in this announcement, companies with Malaysian-based operations listed or seeking to be listed in the Main Market have to allocate 50% of the public spread requirement to Bumiputera investors. Adding further, stock brokers and unit trust management companies are allowed for 70% foreign ownership, as compared to the initial level of 49%. Also, foreigners are allowed to own 100% of fund management companies. Following on, a second wave of privatization involving 17 companies was announced.

M Salleh, 2010, wrote that it is not surprising that the first initiative of NEM was to reenergize the private sector because it is the main foundation for growth. The economy of Malaysia has to progress towards knowledge-based industries thus, propelling investment in research and development which is also part of NEM. Additionally, the fundamentals of listed companies are emphasized as they are the main influence of investment from investors and there is always a risk-reward relationship involved.

How Does Stock Market Shows Rising Prices When Economic Fundamentals are Weak?

According to Sivalingam G. (2009), the current behavior of KLCI is contrary to the expectations of finance and economic theory. When market index is up, the Gross Domestic Product (GDP) is down and exports falls sharply. In answering to this unexpected behavior lies firstly in whether the stock market should reflect the economic fundamentals

The prices of 100 stocks in KLCI rise and fall according to demand and even a company is deemed as risky, it can exhibit high and rising prices if investors dump their money into the stock. Thus, this is where large investors; primarily hedge funds and institutional investors; influence the stock price and behavior of KLCI.

Understanding this relationship explains why some countries encourage foreign hedge funds and investors, as they are able to move the market. In early 1990s, this occurred to KLCI but after creating a spike in prices, these large investors fled in 1996 when exports began to decline thus, the start of 1997/98 East Asian financial crisis.

The Efficient Market Hypothesis has three variations:

1. Weak-form efficiency, where all available historical information are reflected;

2. Semi-strong-form efficiency, where all historical and current published information are reflected; and

3. Strong-form efficiency, historical and current published information are reflected and additionally, all investors have equal and real-time access to insider information.

Researchers found that Bursa Malaysia was semi-strong-form efficient. Hence, this lack of insider information not available to the public could have lead to this behavior. Institutional investors are not publicized and created a stock market structure which is uncompetitive and does not reflect economic fundamentals.

References

Schoenfeld, S.A. (2004): Active Index Investing. Hooboken, New Jersey: Wiley

Finding Fortune in Islamic Equities, http://www.islamicfinanceasia.com, Islamic Finance Asia (2009)

FTSE Bursa Malaysia KLCI Factsheet (http://www.ftse.com/Indices/FTSE_Bursa_Malaysia_Index_Series/Downloads/FTSE_Bursa_Malaysia_KLCI_Factsheet.pdf)

Majid, S. (2010) Are There Brighter Days Ahead for the Stock Market? New Straits Times Press, Ltd. Apr 16,2010.

Sivalingam, G. (2009) Explaining the Stock Market Anomaly. Malaysian Business, July 1, 2009.

Appendix

KLCI Calculation Methodology

1. Free Float

This differentiates FTSE Bursa Malaysia KLCI from KLCI. Companies are included as a percentage of their free float, with a minimum free float of 15%. Free float restrictions are calculated using available published info.

2. Share in issue

Shares in issue is systematically checked and updated on the ex-date for corporate events. Amendments are made only when the total shares in issue held within the calculation system changes by more than 10% on a cumulative basis.

Adjustments to reflect major change in the amount or structure are made before the start of the index calculation on the day of which the change takes effect.

Changes of shares in issue is not due to corporate actions, totaling less than 10% of the number of shares in issue but more than 1% will be made quarterly after the close of business on the 3rd Friday of Mar, June, Sept and Dec.

3. Liquidity

10% of companies’ free float adjusted shares in issue must be traded in past 12 months prior to the review month.

4. Index Calculation

FTSE KLCI has now increased the frequency of index calculation from every 60seconds to every 15 seconds, enabling closer tracking of the market with better efficiency.

5. ICB classification

Classification of constituents is determined by Industrial Classification Benchmark (ICB), jointly developed by FTSE Group and Dow Jones Indexes. This classification allows comparison across region and sectors.

There are four levels of classification but the system categorized companies into subsectors, based on the nature of business. In other words, the nature of business is the primary source of revenue.