SSE MARKET INDEX. Selection and Calculation Methodology

Transcription

1 SSE MARKET INDEX Selection and Calculation Methodology Effective for Portfolio Selection 2015

2 TABLE OF CONTENTS 1. Introduction Portfolio Selection Annual Portfolio Selection Selection Criteria Market Indices Capitalization-Weighted Indices Sector Indices Definition Number of Free-Float Adjusted Shares Outstanding Maintenance the Index Company Factor Divisor Adjustments for Corporate Actions Calculation of Total Return Corrections Policy Corporate Actions: Criteria and Methodology Updating Number of Outstanding Shares and Free-Float Adding/Deleting a Company Rights Issue Distribution of New Underlying Shares Optional Dividend Stock Dividend Dividends in Stock of Other Companies Stock Split / Reverse Stock Split Capital Distribution or Return of Capital Spin-Offs Mergers/Acquisitions of Companies APPENDIX 1: Key Concepts APPENDIX 2: Price Adjustments for Corporate Actions

3 1. INTRODUCTION The Santiago Stock Exchange's market indices ("SSE indices") are designed to reflect the performance of a portfolio of stocks listed on the exchange. In addition, because the SSE is Chile's main capital market, the indices are also a reflection of the Chilean economy. The SSE indices have been designed using international calculation standards and criteria so that the index constituents are weighted based on their free-float adjusted market capitalization, thus making the relative weight of each company on the index representative of the actual availability of shares on the market. In order to provide market indicators with a comprehensive market outlook, the SSE has three types of indices: Market: This type of index reflects market performance and classifies constituents based on the liquidity of their stocks in the market. Capitalization-Weighted: This type of index reflects market performance and classifies constituents based on their market capitalization. Sector: This type of index reflects market performance and classifies constituents based on their main industry. The following diagram illustrates the family of market indices built and maintained by the Santiago Stock Exchange: 3

4 There are two versions of each index: Without dividends: is a price return index, where the dividend reinvestments are not included in the index portfolio. With dividends: is a total return index, where dividend reinvestments are included in the index portfolio. This document is designed as a guide for understanding and tracking the SSE indices. It details the selection criteria and calculation methodology used in building and maintaining the indices, under supervision and review from the Santiago Stock Exchange. 4

5 2. PORTFOLIO SELECTION In order to ensure that the indices are representative of the market, the portfolios that make up the indices are valid for one year. At the end of each period, capitalization and liquidity criteria are applied in order to add, maintain or drop companies, as well as special criteria to ensure the continuity and representativeness of each index. The following section details when the portfolio rebalancing occurs and the criteria for adding or dropping companies from each index. 2.1 Annual Portfolio Selection The process for selecting the companies that make up each SSE index is conducted at market close on the last trading day of the year, using the market information available for each company as of that date. The newly selected portfolios will be implemented on the first Friday in February of the following year. 2.2 Selection Criteria For the portfolios of all SSE indices, only companies that meet the following criteria as of the time of selection will be considered: Their stock is currently and validly listed on the Santiago Stock Exchange. They are not involved in a special situation such as: o Bankruptcy: Legal state where all of the issuer's assets have been retained in response to obligations with its creditors. o Court Recovery: Court recovery is defined as when the company files a recovery plan agreed upon together with its creditors with involvement from an arbitrator. o Negative Equity: those companies with equity of less than zero at portfolio rebalancing based on the most recent financial statements filed. o Extended Suspension of Trading: Extended suspension is defined as any suspension during the year for more than 60 consecutive trading days. The selection criteria for determining the constituents of each portfolio are: 5

6 2.2.1 Market Indices For market indices, stocks that meet the following criteria will be considered: Companies for which the primary objective for purchasing their stock is not to use their facilities, such as: social clubs, sports clubs or schools, among others, that are exempt from the reporting requirements set forth in the third article of Law 18,045. Companies with a free float greater than or equal to 5%. Market presence as of the date of portfolio rebalancing greater than or equal to 5% 1. For the process of selecting the portfolio for each particular market index, the following criteria is considered: IGPA Inclusion Criteria: Companies with an annual traded volume on the Santiago Stock Exchange in excess of UF 10,000. Where traded volume is calculated as follows: This considers only transactions made in the trading system with t + 2 settlement conditions. It excludes share transactions without rights to capital benefits (ticker- SD). IPSA Inclusion Criteria: Stocks that are not eligible as investment instruments for chilean pension funds (AFP) are excluded from the group of stocks eligible for the IPSA index. Market capitalization greater than or equal to USD 200,000,000 (for currency conversion purposes, the observed dollar rate as of the date of portfolio rebalancing is used). For companies with more than one class of shares, each class will be considered independently and the class with the greatest liquidity will be selected for the index. For greatest liquidity means, greatest trading volume of the serie. The 40 companies whose stocks ranked from greatest to least Average Daily Trading Volume (ADTV) on the SSE that meet the following conditions will be selected: i. Belonging to the index's current portfolio and be within the first 45 positions on the ranking. ii. If fewer than 40 stocks are selected in the preceding point, the portfolio of stocks should be completed with the stocks in the first positions on the ranking that were not selected in the preceding point. 1 Starting with index rebalancing for December 2010, the selection criteria for the IGPA is modified from 5% simple market presence to 5% adjusted market presence. 6

7 ADTV is calculated as the average daily trading volume for the last six months for those companies that have been listed for more than six months. Otherwise, the average daily trading volume for the last three months is used. Companies listed more than six months ago = h h Companies listed less than six months ago = h h h h Where average daily trading volume is calculated as follows: This considers only transactions made in the Trading system with normal cash settlement conditions. It excludes share transactions without rights to capital benefits (ticker- SD). INTER-10 Inclusion Criteria: Companies that belong to the IPSA. Companies with ADRs (American Depositary Receipt) listed on international markets. The 10 companies with the greatest Average Daily Trading Volume (ADTV) listed on the SSE will be selected. ADTV is calculated as defined in the preceding point for selecting the IPSA. 7

8 2.2.2 Capitalization-Weighted Indices The portfolios that make up the Capitalization-Weighted Indices are a ranking of companies based on market capitalization. Constituents are determined by first selecting the companies that belong to the IGPA that meet liquidity and market presence criteria. This subset of the IGPA, defined as the Capitalization-Weighted Portfolio, is then classified as IGPA LARGE, IGPA MID or IGPA SMALL. Inclusion Criteria for Capitalization-Weighted Portfolio: Belonging to the IGPA Index. Having a market presence greater than or equal to 25%. If the same issuer has more than one class, only the class with the greatest liquidity is considered but the number of shares outstanding is the sum of all classes. Ranking by market capitalization: Rank the companies' market capitalizations from greatest to least and calculate the total market value of the Capitalization-Weighted Portfolio as the sum of the market capitalizations of the constituents. Calculate the cumulative market cap percentage for each company with respect to the total capitalization-weighted portfolio using the order indicated in the preceding point. Assign the company to the corresponding index, depending on the cumulative market cap percentage obtained up to that company: IGPA LARGE All companies with a cumulative market cap percentage between 0% and 70%. In other words, that together account for 70% of the total market capitalization of the Capitalization-Weighted Portfolio. IGPA MID All companies with a cumulative market cap percentage greater than 70% and less than or equal to 90%. In other words, all companies that together account for between 70% and 90% of the total market Capitalization- Weighted Portfolio. IGPA SMALL All companies that do not belong to either of the two above indices and complete the remaining portion until reaching 100% of the total value of the Capitalization-Weighted Portfolio. 8

9 2.2.3 Sector Indices These indices correspond to the following industry sectors 2 : BANKING, COMMODITIES, CONSTRUCTION & REAL ESTATE, FOOD & BEVERAGE, INDUSTRIAL, RETAIL and UTILITIES. Inclusion Criteria: Market presence greater than or equal to 25%. Free float greater than or equal to 5%. If the same issuer has more than one class, only the class with the greatest liquidity is considered but the number of shares outstanding is the sum of all classes. The resulting companies are assigned to the different industry sectors based on the industry in which 50% or more of their assets are concentrated. Once this has been done, the SSE verifies whether the given industry forms part of any of the existing sectors. Exclusion Criteria: In the event that two companies temporarily assigned to the same sector are related in such a way that the first company's investment in the second is equal to or greater than 50% of the first company's assets, the company with the lower free-float adjusted market capitalization is excluded from the sector index. 2 Starting with index rebalancing for December 2011, the daily calculation is eliminated for the COMMUNICATION AND TECHNOLOGY sector index. 9

10 3. CALCULATION METHODOLOGY 3.1 Definition The SSE indices are weighted mathematical indices, weighted based on the market capitalization of each company belonging to the index. The value of the index represents the market value of the entire portfolio at a given time compared to its base value. The daily value of the index is calculated by dividing the market value of the portfolio (market capitalization of all index constituents) by a given divisor. The divisor is an arbitrary number selected as of the start date of the index to set its value. Based on these definitions, the following formula has been defined for calculating all SSE indices: =!"#$!% & &'( )&*&+," = $-,+&./"&0 & $,2%!34!0," &'( & (6.(.() )&*&+," Where: : Value for index x at date t, for a portfolio of n companies. $-,+&./"&0 & : Closing price of company i at date t. $,2%!34!0," & : Number of freely available shares (in tens of millions) of company i at date t, based on the following formula: $,2%!34!0," & = 9,!-:;2<"=>!"+?;+!&. & (@ A 4"4-,! & (%) (6.(.C) )&*&+," : Weight used to adjust the index x each time constituents are added or dropped, based on the following calculation formula: )&*&+," = $-,+&./"&0 & D!+)! D!+)! $,2%!34!0," &'( & (6.(.6) D!+)! Where base date is the date of the last change of portfolio for the index, which has been defined in Section 2 of this document. For setting the divisor at the index start date, the following values were used as the base value for the index: IPSA and IGPA Indices: For the IPSA, a base of 1,000 points as of December 30, 2001, and for the IGPA, a base of 100 points as of December 30,

11 Sector Indices: The base value for the sector indices is 2, points as of December 29, 2006, which was the value of the IPSA as of that date. Capitalization-Weighted Indices: The base value for the capitalizationweighted indices is the value of the IGPA as of December 31,

12 Example of daily calculation of index at date t. STEP 1 Calculate the company factor of each constituent at the start date. TICKER No. of Outstanding Shares Free Float Company Factor A 61,443,000, ,101, B 22,579,000, ,895, C 9,229,000, ,061, STEP 2 Calculate the market index at the start date. TICKER Company Factor Price Market Cap A 430,101, ,127,270, B 112,895, ,301,475, C 83,061, ,403,048, ,831,793, STEP 3 Set the base value of the index at 100 STEP 4 Calculate the divisor DIVISOR = Total Market Cap Base Value of Index = 264,831,793, = 2,648,317, STEP 5 Calculate the index at date t TICKER Company Factor Price Market Cap A 430,101, ,718,583, B 112,895, ,382,260, C 83,061, ,492,645, ,593,488, STEP 6 Calculate the value of the index at date t INDEX = Total Market Cap Divisor = 266,593,488, ,648,317, = Then: Index Value at Base Date = at Date t =

13 3.2 Number of Free-Float Adjusted Shares Outstanding The SSE indices are price return indices weighted by free-float adjusted market cap. Free float is defined as the percentage of shares subscribed and paid that are available to be acquired by the market (i.e. the portion of the company that is not owned by the controlling shareholders). The objective of adjusting the number of shares by the free-float in the index calculations is to distinguish between strategic shareholders (controllers), whose interest lies in holding shares to maintain control of the company instead of in its economic situation, and shareholders whose interest lies in the company's stock price and future projects. The free float will be updated annually when the new portfolio of companies is determined for each year, as well as quarterly when the number of outstanding shares for each company is updated. The information used will be provided directly by the listed companies. 3.3 Maintenance the Index Maintaining the indices involves making adjustments to their factors so that their value does not reflect any variations in the number of outstanding shares, corporate actions or additions/deletions of stocks from the index. Adjustments are made to the company factor and the divisor for the index to which the company belongs. Any modification that alters the market capitalization of a company when its price is held constant requires an adjustment in the company factor of that company. Likewise, any modification of the companies within an index that alters the market portfolio when the stock price is held constant requires the divisor to be adjusted. The following section describes the adjustment procedure for each of the cases described above. Section 3.4 details the adjustments to be made by type of corporate action Company Factor Upon altering the number of outstanding shares of a company as a result of a corporate action, whether or not the company's market capitalization remains constant or not will depend on the action. When a stock's market capitalization remains constant, the company factor must be adjusted using the following formula. $,2%!34!0," & EF;+ =$,2%!34!0," &?"&.&!- $-,+&./"&0 & <G," 2,* $-,+&./"&0 &!G" 2,* (6.6.() 13

14 Example of company factor adjustment ACTION: Number of shares before the movement = 61,443,000, Number of shares after the movement = 76,803,750, Closing price before the movement = STEP 1 Calculate the ex-price of stock A for the corporate action based on equal capitalizations: Num.Shr. before movement x Price before movement = Num.Shr. after movement x Ex-price Ex-price= Num.Shr. before movement before movement x Price after movement Num.Shr. Ex-price = 61,443,000, x 265,00 76,803,750, Ex-price = STEP 2 Calculate the adjusted company factor Adjusted factor= Original factor x Closing price Ex-price Adjusted factor= 430,101, Adjusted factor= 537,626,250.00

15 When a stock's market capitalization does not remain constant, the company factor must be adjusted using the following formula. $,2%!34!0," EF;+ & =$,2%!34!0,"?"&.&!- & :;2=>"?;!G" 2,* & <G," 2,* :;2=>"?; & (6.6.C) Example of company factor adjustment CORPORATE ACTION: Number of shares before the movement = 61,443,000, Number of shares after the movement = 76,803,750, Closing price before the movement = STEP 1 Calculate the ex-price of stock A for the corporate action based on type of adjustment: Ex-price = STEP 2 Calculate the adjusted company factor Adjusted factor= Original factor x Num.Shr. after Num.Shr. before Adjusted factor= 430,101, ,803,750, ,443,000, Adjusted factor= 537,626,

16 3.3.2 Divisor When the market capitalization of an index varies as a result of making changes to a stock's company factor or modifying the composition of an index's portfolio, the divisor must be adjusted. Since the value of the index must be equal before and after the corporate action, the adjusted calculation of the divisor is: H I JKLMNK OMPK =H I QLRKN OMPK ST UV I JKLMNK OMPK I JKLMNK OMPK = ST UV I QLRKN OMPK I QLRKN OMPK!G" )&*&+," 2,* =!"#$!%!G" 2,* <G," 2,*!"#$!% )&*&+," <G," 2,* (6.6.W) 16

17 Example of adjusted divisor calculation STEP 1 Calculate the market index before the adjustments TICKER Company Factor Price Market Cap A 430,101, ,718,583, B 112,895, ,382,260, C 83,061, ,492,645, ,593,488, STEP 2 Calculate the market index after the adjustments TICKER Company Factor Price Market Cap A 537,626, ,266,840, B 112,895, ,382,260, C 83,061, ,492,645, ,141,745, Because the capitalizations are different in steps 1 and 2, the index will not have the same value before and after the corporate action adjustments if the divisor is not adjusted also. STEP 3 Adjust divisor Adjusted divisor = Original divisor x Market Cap after Market Cap before Adjusted divisor = x 275,141,745, ,593,488, Adjusted divisor = 2,733,235, STEP 4 Check continuity of index INDEX before = Market Cap before INDEX after = Market Cap after Divisor before Adjusted divisor = = 266,593,488, = 275,141,745, ,648,317, ,733,235, = =

18 3.4 Adjustments for Corporate Actions There are several types of corporate actions ranging from adjustments in the number of shares outstanding to mergers or spin-offs. The table below lists the corporate actions that trigger modifications to indices, either to the company factor of the company involved or to the index's divisor. Adjustment Action Company Factor Divisor Updating number of shares outstanding and/or special free-float Yes Yes Adding/deleting a company -- Yes Rights issue with ex-price Yes Yes Distribution of new underlying shares Yes No Optional dividend Yes No Stock split / reverse stock split Yes No Capital distribution or return of capital Yes Yes Spin-off: the new stock is added to the index. No company is deleted from the -- No index. Spin-off: the new stock is added to the index. One company is deleted from the -- Yes index. Spin-off: the new stock is not added to the index. One company is deleted from -- Yes the index. Merger Yes Yes The criteria and methodology for making adjustments is detailed in Section 4 of this document. Likewise, the price adjustment to be made based on the type of corporate action is described in APPENDIX Calculation of Total Return A total return index represents the total return obtained from the prices of the stocks belonging to the index portfolio and from reinvesting dividends back into the entire index, not just in the stock that pays the dividend. Variations in a total return index thus reflect variations in stock price and from reinvesting dividends. For the purpose of providing comprehensive information to the market, the SSE calculates and maintains two values for each index: With Dividends : total return index. Without Dividends : price return index. Total return indices are adjusted by the value of the dividends declared by each company belonging to the index on the ex-date for the action. To do this, the company factor must be adjusted based on theoretical effect that the dividend payment will have on the stock price. 18

19 The adjustment is made in the divisor using the procedure defined in Section where the stock price is adjusted by the dividend value on the ex-dividend date: / & 9>,"&0!- =/ & $-,+&. )&*& & (6.Y.() Example of daily calculation of total return index STEP 1 Calculate the theoretical ex-dividend price of each company TICKER Price Dividend Theoretical Price A B STEP 2 Calculate market cap after the movement TICKER Company Factor Theoretical Price Market Cap After A 430,101, ,847,734, B 112,895, ,470,817, C 83,061, ,403,048, ,721,600, STEP 3 Calculate divisor after the movement DIVISOR after movement = Market Cap after movement before movement x DIVISOR before movement Market Cap DIVISOR after movement = 262,721,600, ,648,317, ,831,793, DIVISOR after movement = 2,627,216, STEP 5 Calculate the value of the index at ex-dividend date before movement INDEX = Market Cap after movement DIVISOR = 264,831,793, ,627,216, = Then: Index Value Ex-date:

20 3.6 Corrections Policy In order to maintain a high level of integrity in calculating the SSE indices, a series of procedures have been implemented to guarantee accuracy and consistency. However, in exceptional situations such as transactions with price errors, incomplete information from the issuer regarding capital variations in its stocks, etc., the accuracy of the information used in calculating the index cannot be ensured and an error may occur in calculating the value of an index. As a result, and in order to maintain data consistency and market transparency, the following procedure has been established in the event of an error: Data correction must take place as soon as possible once the error has been detected. must be informed of the data correction. Data correction must take place when application is feasible as indices are calculated in real time. 20

21 4. CORPORATE ACTIONS: CRITERIA AND METHODOLOGY In order to provide the market with transparent and consistent indices, this section describes in detail the criteria and methodology used for addressing corporate actions in the SSE indices. The use of the indices as an investment analysis tool requires knowledge and understanding of the adjustments made, the type of corporate actions and the timing of the adjustments. This section describes the criteria and methodology used for addressing corporate actions in the SSE indices. 4.1 Updating Number of Outstanding Shares and Free-Float In order to ensure that the SSE indices are representative of the market, adjustments are made as a result of variations in the number of constituents' outstanding shares. Likewise, in order to avoid insignificant adjustments within the index, the SSE has defined a policy of immediately adjusting companies in cases where the change in the number of shares outstanding involves a variation of more than 5% in the company's adjusted market capitalization. There will also be periodic, scheduled updates of the number of outstanding shares and free-float for index constituents in order to reflect minor variations in these factors. These scheduled updates will take place as of market close on the third Friday of the months of March, June, September and December. When the number of shares outstanding involves a variation of more than 5% in the value of the company's adjusted market capitalization, the market will be informed that this company's products will be updated and the adjustment will be made to the corresponding indices as of close of the third business day after publishing the notice. The number of outstanding shares of a company will be modified based on the information reported by the issuer to the SSE. In short, the process consists of: 1. Identifying whether the variation in shares outstanding reported by the issuer involves a change of more than 5% in the company's market capitalization. 2. If the variation is greater than 5%, informing the market that a change will be made in the index. On the third day after announcing the change, adjusting the divisor of the index or indices to which the stock belongs. 3. If the variation is less than 5%, taking no immediate action and waiting until the next periodic scheduled update to adjust the number of shares outstanding. 21

22 4.2 Adding/Deleting a Company During the year, an index portfolio may be altered by adding and/or dropping one of its constituents. This can occur for several reasons: Mergers and acquisitions: in a merger and/or acquisition where the absorbed company belongs to the index, it must be dropped from the index. In a merger, if the merged companies must be dropped from the index, whether or not the new company is added to the index will depend on its capital structure. The SSE will inform the market of that action and will modify the portfolio of the affected indices as of market close on the third business day after publishing the notice. Delisting of a stock: when a stock is delisted from the SSE, it will be dropped from the indices to which it belongs. The SSE will inform the market of that action, including the day on which the stock will stop trading, and will modify the portfolio as of market close on that same day. Bankruptcy: when a company has been declared bankrupt, the stock will be dropped from the indices to which it belongs. The SSE will inform the market of that action, including the day on which the stock will stop trading, and will modify the portfolio as of market close on that same day. Suspensions: The SSE will immediately drop from the indices those companies whose stocks have been suspended for more than 60 consecutive trading days. It will inform the market of that action and will modify the portfolio of the affected indices as of market close on the third business day after publishing the notice. Addition due to deletion: when a stock has been dropped from an index that has a fixed number of constituents, such as the IPSA and the INTER-10, another stock that meets the inclusion conditions must be added to the index. Using the selection methodology defined in Section 2.2, the next stock on the ADTV ranking as of the last date of selection will be added to the IPSA and INTER- 10. The SSE will inform the market of that action and will modify the portfolio of the affected indices as of market close on the third business day after publishing the notice. Addition of a new stock: addition of a new stock will be at the discretion of the SSE. The SSE will inform the market of that action and will modify the portfolio of the affected indices as of market close on the third business day after publishing the notice. In short, the process consists of: 1. Adding/dropping the stock from the affected index or indices. If a stock is added, calculating its company factor based on the most recent reports from the company. The price will be as of market close on the day on which the stock is added. 2. Calculating the market index or indices whose portfolios have been modified. 3. Adjusting the divisor of the affected index or indices. 22

23 4.3 Rights Issue A rights issue is a financing alternative for corporations where the company issues a new number of shares and offers them to its shareholders at a price (subscription value) for a given period (subscription period). The shareholders may or may not exercise this right (stock subscription right). The SSE will adjust its indices based on the subscription value: If the subscription value is less than the closing stock price on the cut-off date, the issue is said to be in-the-money. In this scenario, it is assumed that all shareholders will buy the additional shares and, therefore, the price is adjusted in proportion to the greater number of shares that a shareholder will hold as a result of the increase in the company's capitalization. If the subscription value is greater than the closing stock price on the cutoff date, the issue is said to be out-of-the-money. In this scenario, when the subscription value is equal to the closing stock price, it is assumed that the shares will not be bought and, therefore, the price is not adjusted because there will be no increase in the market capitalization. Consequently, the following procedure is used for rights issues: 1. Determine whether the issue is in-the-money or out-of-the-money. 2. If the issue is out-of-the-money, no adjustment is made because it is assumed that the capital increase will not take place. If the issue is in-the-money, then: i. Calculate the ex-price of the stock* 3. ii. Adjust the company factor in proportion to the variation in the number of shares outstanding resulting from the issue. iii. Calculate the market index or indices using the adjusted company factor and price. iv. Adjust the divisor(s) of the indices affected by the corporate action. The adjustments are made at the beginning of the ex-date based on information reported by the issuer and are communicated to the market by the SSE on the cut-off date. If the subscription value of the issue is unknown before the cut-off date because the price will be determined through an auction, or for any other reason, then the adjustments will be made once the subscription period ends. 3 (*) APPENDIX 2 contains the formulas for determining price adjustments as a result of corporate actions. 23

24 4.4 Distribution of New Underlying Shares A company distributes new underlying shares when it must distribute profits but lacks the necessary liquidity to do so. This action decreases the stock price because the company's capital remains constant and is distributed among a greater number of shares. The adjustments are made at the beginning of the ex-date for the action based on information reported by the issuer and are communicated to the market by the SSE on the cut-off date. In short, the process consists of: 1. Calculating the ex-price of the stock. 2. Adjusting the company factor in proportion to the variation in the stock price. 4.5 Optional Dividend The company gives shareholders the choice of receiving the dividend in cash or in stock. The calculation procedure is similar to a bonus issue since it is assumed that all shareholders will chose to receive the dividend in stock (i.e. stock dividend). The adjustments are made at the beginning of the ex-date for the action based on information reported by the issuer and are communicated to the market by the SSE. In short, the process consists of: 1. Calculating the ex-price of the stock. 2. Adjusting the company factor in proportion to the variation in the stock price. 4.6 Stock Dividend The company increases the number of shares outstanding and makes a payment to its shareholders in stock of its own company instead of in cash. This action is treated similarly to a stock split because while the number of shares outstanding grows, the price must decrease, thus holding market capitalization constant. The adjustments are made at the beginning of the ex-date for the action based on information reported by the issuer and are communicated to the market by the SSE on the cut-off date. In short, the process consists of: 1. Calculating the ex-price of the stock. 2. Adjusting the company factor in proportion to the variation in the stock price. 4.7 Dividends in Stock of Other Companies The company makes a payment to shareholders in stock of another company. This action is treated differently than a stock dividend because the company does not increase the number of shares outstanding but the stock price must be adjusted as

25 a result of the payment. Therefore, a price adjustment must be made. This affects the market indices to which the company belongs, which in turns leads to an adjustment in the divisor. In short, the process consists of: 1. Calculating the ex-price of the stock. 2. Adjusting the divisor of the affected index or indices. 4.8 Stock Split / Reverse Stock Split The company reduces or increases the number of shares outstanding by increasing or decreasing the par value of the stock. This action either increases or decreases the stock price because the company's capital remains constant and is distributed among a new number of shares. The adjustments are made at the beginning of the ex-date for the action based on information reported by the issuer and are communicated to the market by the SSE on the cut-off date. In short, the process consists of: 1. Calculating the ex-price of the stock. 2. Adjusting the company factor in proportion to the variation in the stock price. 4.9 Capital Distribution or Return of Capital When a company undergoes liquidation, capital distributions are made to its shareholders. The price decreases in proportion to the distribution made. This action involves a variation in the market company, which produces a variation in the market index or indices to which it belongs. The adjustments are made at the beginning of the ex-date for the action based on information reported by the issuer and are communicated to the market by the SSE on the cut-off date. In short, the process consists of: 1. Calculating the ex-price of the stock. 2. Calculating the market index or indices using the adjusted price. 3. Adjusting the divisor(s) of the affected index or indices. 25

26 4.10 Spin-Offs A company can be divided into two or more companies depending on its objectives. The new company is formed as a result of dividing the capital of the first company. As a result, the number of shares for both companies is held constant, but the price is adjusted in proportion to the decrease in the market capitalizations. The adjustments to be made to the indices will depend on the impact that the division has within the index. In other words: If company A is divided into A and B: Scenario Effect on Index Procedure A and B remain on the index Only A remains on the index Neither A nor B remain on the index Incorporate B to the portfolio of the index or indices to which A belongs. index remains constant. The composition of the portfolio remains constant. index does not remain constant. A is dropped from the portfolio. index changes. 1. Calculate the ex-price of each company. 2. Calculate the market capitalization for A with the adjusted price. 3. Calculate the market capitalization for B using its company factor and exprice. 4. Add B to the index. 1. Calculate the ex-price of each company. 2. Calculate the market capitalization for A with the adjusted price. 3. Calculate the market index. 4. Adjust the divisor of the index. 1. Delete A from the index. 2. Calculate the market index without A. 3. Adjust the divisor of the index. The adjustments are made at the beginning of the ex-date for the action based on information reported by the issuer and are communicated to the market by the SSE on the cut-off date. 26

27 4.11 Mergers/Acquisitions of Companies Mergers and acquisitions are a combination of two or more companies, either by mutual agreement or through a hostile takeover bid. An acquisition is when one company takes control of another and the absorbed company ceases to exist. A merger is when a new company is created by combining two or more companies, all of which cease to exist. For these actions, the procedure for indices will depend on whether the companies belong to the index and whether they are going to continue to belong. Acquisition: Company A acquires company B. Both are on the index. Scenario Effect on Index Procedure A remains on the B is deleted from the 1. Calculate the ex-price of A. index. Index index. without 2. Adjust the company factor of A in restrictions on proportion to the increase in its the number of number of outstanding shares. constituents A remains on the index. Index with restrictions on the number of constituents A is deleted from the index. Index without restrictions on the number of constituents A is deleted from the index. Index with restrictions on the number of constituents index remains constant. B is deleted from the index. Another stock is added to the index. index changes. A and B are deleted from the index. index does not remain constant. A and B are deleted from the index. Another two stocks are added to the index. index does not remain constant. 3. Calculate the market capitalization for A with the adjusted company factor and price. 4. Delete B from the index. 1. Calculate the ex-price of A. 2. Adjust the company factor of A in proportion to the increase in its number of outstanding shares. 3. Calculate the market capitalization for A with the adjusted company factor and price. 4. Add the new company to the index. 5. Calculate the adjusted index. 6. Adjust the divisor of the index. 1. Delete A and B from the index. 2. Calculate the adjusted market index. 3. Adjust the divisor of the index. 1. Delete A and B from the index. 2. Add the two stocks that meet the inclusion requirements. 3. Calculate the adjusted market index. 4. Adjust the divisor of the index. 27

28 Acquisition: Company A acquires company B. Only A is on the index. Scenario Effect on Index Procedure A remains on the index. capitalization of A does not remain constant. 1. Calculate the ex-price of A. 2. Adjust the company factor of A in proportion to the increase in its number of outstanding shares. A is deleted from the index. Index without restrictions on the number of constituents A is deleted from the index. Index with restrictions on the number of constituents index does not remain constant. A is deleted from the index. index does not remain constant. A is deleted from the index. Another stock is added to the index. stock decreases and, as a result, so does the index's market capitalization. 3. Calculate the market capitalization for A with the adjusted company factor and price. 4. Calculate the adjusted capitalization of the index. 5. Adjust the divisor of the index. 1. Delete A from the index. 2. Calculate the market capitalization of the index. 3. Adjust the divisor of the index. 1. Delete A from the index. 2. Add another stock that meets the inclusion requirements. 3. Calculate the adjusted market index. 4. Adjust the divisor of the index. 28

29 Acquisition: Company A acquires company B. Only B is on the index. Scenario Effect on Index Procedure A is added to the index. B is deleted from the index. A is added to the index. 1. Calculate the ex-price of A. 2. Adjust the company factor of A with the most recent updated data, incorporating the action. A is not added to the index. Index without restrictions on the number of constituents A is not added to the index. Index with restrictions on the number of constituents index does not remain constant. B is deleted from the index. index does not remain constant. B is deleted from the index. Another stock is added to the index. index does not remain constant. 3. Calculate the market capitalization for A with the new company factor and adjusted price. 4. Delete B from the index. Add A. 5. Calculate the adjusted capitalization of the index. 6. Adjust the divisor of the index. 1. Delete B from the index. 2. Calculate the adjusted market index. 3. Adjust the divisor of the index. 1. Delete B from the index. 2. Add another stock that meets the inclusion requirements. 3. Calculate the adjusted market index. 4. Adjust the divisor of the index. 29

30 index. Merger: Companies A and B merge, forming company C. Both are on the Scenario Effect on Index Procedure C is added to the A and B are deleted index. Index without from the index. C is added to the index. restrictions on the number of constituents C is added to the index. Index with restrictions on the number of constituents C is not added to the index. Index without restrictions on the number of constituents C is not added to the index. Index with restrictions on the number of constituents index remains constant. B is deleted from the index. Another stock is added to the index. index does not remain constant. A and B are deleted from the index. index does not remain constant. A and B are deleted from the index. Another two stocks are added to the index. stock decreases and, as a result, so does the index's market cap. 1. Calculate the price of C. 2. Calculate the company factor for C based on the merger data. 3. Calculate the market capitalization of C. 4. Delete A and B from the index. 1. Calculate the price of A. 2. Calculate the company factor for C based on the merger data. 3. Calculate the market capitalization of C. 4. Add C and the new company to the index. 5. Calculate the adjusted capitalization of the index. 6. Adjust the divisor of the index. 1. Delete A and B from the index. 2. Calculate the adjusted market index. 3. Adjust the divisor of the index. 1. Delete A and B from the index. 2. Add the two stocks that meet the inclusion requirements. 3. Calculate the adjusted market index. 4. Adjust the divisor of the index. 30

31 index. Merger: Companies A and B merge, forming company C. Only one is on the Scenario Effect on Index Procedure C is added to the index. C is not added to the index. Index without restrictions on the number of constituents C is not added to the index. Index with restrictions on the number of constituents capitalization of A does not remain constant. index does not remain constant. A is deleted from the index. index does not remain constant. A is deleted from the index. Another stock is added to the index. index does not remain constant. 1. Calculate the price of C. 2. Calculate the company factor for C based on the merger data. 3. Calculate the market capitalization of C. 4. Delete A from the index. 5. Calculate the adjusted capitalization of the index. 6. Adjust the divisor of the index. 1. Delete A from the index. 2. Calculate the market capitalization of the index. 3. Adjust the divisor of the index. 1. Delete A from the index. 2. Add another stock that meets the inclusion requirements. 3. Calculate the adjusted market index. 4. Adjust the divisor of the index. 31

32 APPENDIX 1: KEY CONCEPTS ADTV Closing Price : Average daily trading volume : Price set by the Santiago Stock Exchange at close of trading. Company Factor : Factor that represents the number of shares of a company that are freely-available to the market, equivalent to the number of shares outstanding multiplied by the company's free float. Cut-off Date Divisor Eligible Shareholders Ex-date Ex-price : Date used for determining the eligible shareholders for the corporate action. : Calculation factor for index that enables the index to remain consistent and provides comparability over time. : Shareholders that have rights in a given corporate action for each of the company's shares that they hold. : Date on which the parameters are updated as a result of the corporate action. It corresponds to the trading day after the cutoff date. : Adjusted stock price as a result of a corporate action. Free Float Market Capitalization of the Company Market Capitalization of the Index Payment Date : The percentage of subscribed and paid shares that are available to be acquired by the market (i.e. the portion of the company that is not owned by the controlling shareholders). : The company's market capitalization, which is calculated by multiplying the number of shares by the market price of that company. : The total market index portfolio, equivalent to the sum of the market capitalizations of all constituent companies on the index. : Date on which the payment resulting from the corporate action takes place. Stock Exchange Presence : Parameter indicative of liquidity whose value includes a tax benefit. As established in article 4 Bis of Law 18,045, the adjusted presence of a security for a given day shall be calculated by: a) Determining the number of days during the 180 trading days prior to the day of calculation on which the total daily market transactions have reached a minimum equivalent in Chilean pesos to 1,000 Unidades de Fomento (UF), based on the value of the UF on each of those days. b) Dividing that number by one hundred eighty and then multiplying the resulting quotient by one hundred to give a percentage. 32

33 Subscription Expiration Date Subscription Start Date : Applicable to rights issues. It is the end of the period during which eligible shareholders can exercise the option to subscribe the new shares. : Applicable to rights issues. It is the start of the period during which eligible shareholders can exercise the option to subscribe the new shares. Subscription Value : Applicable to rights issues. It is the value for which the shareholders of a company registered as of the cut-off date can subscribe a new share. Theoretical Price : Market price of stock adjusted for the dividend payment. Total Return Index : A price return index whose value is adjusted to include dividend payments by constituents assuming the dividend received is reinvested in the total portfolio. UF (Unidad de Fomento) : Is a unit of account used in Chile, indexed according to inflation. Its ISO 4217 code is CLF. 33

34 APPENDIX 2: PRICE ADJUSTMENTS FOR CORPORATE ACTIONS New Underlying Shares : This occurs when a company decides to distribute new company shares to current shareholders. This action decreases the stock price because the company's capital remains constant and is distributed among a greater number of shares. Z [/] :Z_ ` Z ai/] :b V_ c [/] :d` h ` c ai/] :d` h Z ai/] = c [/] Z [/] c ai/] Rights Issue : A rights issue is a financing alternative for corporations where the price is adjusted in proportion to the greater number of shares that a shareholder can hold. Z [/] :Z_ ` Z ai/] :b V_ e:e`_v _h h c [/] : d` h ` c ]f/] :d` h Z ai/] = gc [/h Z [/] i+gc ]k/] ei c [/] +c ]f/] Optional Dividend : The company gives shareholders the choice of receiving the dividend in cash or in stock. The calculation procedure is similar to a bonus issue since it is assumed that all shareholders will chose the stock dividend. Stock Dividend : The company distributes a payment to its shareholders in stock of its own company. Z [/l :Z_ ` V Z ai/l :b V_ V c [/l :d` h ` V c ai/l :d` h V Z ai/l = c [/l Z [/l c ai/l 34

35 Dividends in Stock of Other Companies : The company distributes a payment to its shareholders in stock of another company. Z [/m :Z V ` V Z h/m :U V_ h _V Z ai/m :b V_ V c [/m :d` h _V V c h/m :d` h h _V Z ai/m = c n/m Z [/m c h/m Z h/m c [/m Stock Split / Reverse Stock Split : The company reduces or increases the number of shares outstanding by increasing or decreasing the par value of the stock. Z [/ko :Z_ ` V Z ai/ko :b V_ V c [/ko :d` h ` V c ai/ko :d` h V Z ai/ko = c [/ko Z [/ko c ai/ko Capital Distribution or Return of Capital : When a company undergoes liquidation, capital distributions are made to its shareholders. The price decreases in proportion to the distribution made. Distributions are also made of companies undergoing liquidation that distribute profits received from other companies. Z [/lj :Z_ ` ` Z ai/lj :b V_ ` `:` V h p Qqr :b `T Z ai/lj =Z [/lj s1 ` p Qqr u Where: c:d` h 35

36 vc:vw _V UZH:UZH V h p Qqr = vc x1+uzh 100 z c Spin-offs : A company can be divided into two or more companies depending on its objectives. The new company is formed by dividing the equity of the first company. Z [/km :Z_ ` V Z ai/km :b V_ V Z [/km :Z h _T ` V Z ai/km :Z h _T V Z ai/km = Z ai/km Z ai/km Z ai/km 36