Version 1.5 September Corporate Actions and Events Guide for Market Capitalisation Weighted Indexes

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1 Version 1.5 September 2015 Corporate Actions and Events Guide for Market Capitalisation Weighted Indexes

2 TABLE OF CONTENTS 1.0 Purpose of the Guide 2.0 Index Event Treatment 2.1 Splits (sub-division) / Reverse splits (consolidation) 2.2 Scrip issues (Capitalisation or Bonus Issue) 2.3 Capital Repayments 2.4 Compulsory Partial Share Buy Back 2.5 Rights Issues/Entitlement Offers 2.6 Share Updates 2.7 Investability Weighting Changes 2.8 Mergers, Acquisitions and Tender Offers 2.9 Spin-Offs 2.10 Stock Conversion 2.11 Distribution In-Specie 2.12 Dividends 2.13 Special Dividends Total Return Indexes 2.14 Deletions 2.15 Suspended Companies 2.16 The use of Dummy lines in FTSE Indexes 2.17 Treatment of Tracker Stocks 2.18 Non-Ranking for Dividend Version 1.5 September

3 SECTION Purpose of the Guide This document sets out guidance for the treatment of corporate action and events and assumes the reader is already familiar with the basic concept of index calculation and treatment of share price adjustments caused by such developments. Because of the complexities involved in some cases, these guidelines should not be construed as definitive rules that will determine FTSE s actions in all circumstances. FTSE reserves the right to determine the most appropriate method of implementation for any corporate event which is not covered here or which is of a complex nature. FTSE defines a corporate action as an action on shareholders with a prescribed ex date, e.g. rights issue, special dividend, stock split. The share price and Indexes in which the company is included will be subject to an adjustment on the ex date. This is a mandatory event. FTSE defines a corporate event as a reaction to company news (event) that might impact the index depending on the index rules. For example, a company announces a strategic shareholder is offering to sell their shares (secondary share offer) this could result in a free float weighting change in the index. FTSE will decide whether there is an index adjustment or not and the timing of the change. FTSE will determine the appropriate treatment by reference to the Statement of Principles set out below, which summarise the ethos underlying FTSE s approach to index construction. The Statement of Principles is reviewed annually and any changes proposed by FTSE are presented to the FTSE Russell Policy Group for discussion before approval by FTSE Russell s Governance Board. The Statement of Principles can be accessed using the following link: This document should be read in conjunction with the ground rules of those index series to which this guide applies. 1.3 This document will be subject to regular review (at least once a year) by FTSE. 1.4 FTSE Indexes are recalculated whenever errors or distortions occur that are deemed to be significant. Users of the indexes are notified through appropriate media. For further information please refer to the FTSE Russell Recalculation Policy and Guidelines document which can be accessed using the following link: Version 1.5 September

4 2.0 TREATMENT OF INDEX EVENTS 2.1 Splits (sub-division) / Reverse splits (consolidation) A pro-rata distribution of shares (split) or a pro-rata consolidation (reverse split) of shares held by existing shareholders. No company market capitalisation change. Shares and share price adjusted according to terms. Event Type Index Divisor Adjustment Adjustment Factor Timing of application Split / Reverse Split No Number of shares held before issue Ex date Number of shares held after issue Example 1: Split (sub-division) Terms: 1 into 5 Current Price = 300p Shares in Issue = 100m Ex-Split Price = 60p Ex-Split Shares in issue = 500m Adjustment factor = 100/500 = 0.2 Example 2: Reverse Split (consolidation) Terms: 5 into 1 Current Price = 300p Shares in Issue = 100m Ex-Reverse Split Price = 1500p Ex-Reverse Split Shares in issue = 20m Adjustment factor = 100/20 = 5 Version 1.5 September

5 2.2 Scrip issues (Capitalisation or Bonus Issue) A scrip issue (also called a capitalisation or a bonus issue) is the issue of new shares to existing shareholders at no charge, pro rata to existing holdings. Event Type Scrip issue of same stock (See example 1) Scrip issue of different eligible stock Index Divisor Adjustment No (No Change in Market Capitalisation) No Adjustment Factor Number of shares held before issue Number of shares held after issue Price of company after deducting capital repayment Timing of application Ex date Ex date (See example 2) Scrip issue of different ineligible stock No See notes 1, 2 & 3 Price of company before capital repayment Price of company after deducting capital repayment Ex date Price of company before capital repayment Example 1: Scrip Issue of same stock Terms: 1 for 1 (equivalent to 2 for 1 US stock split) Current Price = 300p Shares in Issue = 300m Ex-Scrip Price = 150p Ex-Scrip Shares in issue = 600m Adjustment factor= 150/300 = 0.5 Example 2: Scrip Issue of different eligible stock Terms: 1 B share for 3 A shares Current Price A = 300p Current Price B = 120p Shares in Issue A = 300m New B Shares = 100m Ex-Scrip Price =[(3x300)-(1x120)]/3 = 260p Ex-Scrip Shares in issue = 300m Notes: 1. Where a valuation is available for the ineligible stock a price adjustment will be applied for the ex date. The ineligible stock will temporarily be added to FTSE indexes and subsequently deleted at market price after the second business day of trading. 2. Where no valuation is available for the ineligible stock and the stock is timetabled to list after the ex date, no price adjustment will be applied for the ex date. The ineligible stock will temporarily be added to FTSE indexes at zero value and subsequently deleted at market price after the second business day of trading. Where the date of listing for the ineligible stock remains unknown it will be deleted at zero value after 20 business days. 3. Where no valuation is available for the ineligible stock and the stock is to remain unlisted, no price adjustment will be applied for the ex date. The ineligible stock will not be added to FTSE indexes. Version 1.5 September

6 2.3 Capital Repayments These are categorized as a return of capital to shareholders. Special Dividends are generally treated as capital repayments. Event Type Index Divisor Adjustment Adjustment Factor Timing of application Return of Capital Yes (Decrease in Market Capitalisation) Price of company after deducting capital repayment Price of company before capital repayment Ex date Example 1: Repayment of Capital Current Price = 100p Shares in Issue = 300m Terms: 20p capital repayment per share Ex-Capital Repayment Price = 80p Ex-Capital Repayment Shares in issue = 300m Adjustment factor = 80/100 = Compulsory Partial Share Buy Back A compulsory partial tender/buy back of shares at a set ratio and price. Example 1: Partial tender of 51 out of every 100 shares at 140p Pre-Tender Current Price Shares in Issue Market Capitalisation = 300p = 300m = 900m Shares Tendered = 153m [ ( ) x 51 ] Tender price = 140p Market Capitalisation = 214.2m Post Tender Adjusted Price = p (685.8m / 147m) Adjusted Shares in Issue = 147m (300m - 153m) Market Capitalisation = 685.8m (900m 214.2m) Version 1.5 September

7 2.5 Rights Issues / Entitlement Offers These are an entitlement or right to buy additional shares directly from the company in proportion to their existing holdings. FTSE will only adjust the index to account for a right if the subscription price of the rights is at a discount to the market price of the stock. Provided FTSE has been alerted to the rights offer prior to the ex-date, a price adjustment and share increase proportionate to the terms of the offer will be implemented before the open on the ex-date (example 1). Exceptions to the standard treatment are detailed below: Accelerated rights offers In certain markets, most commonly in Australia, accelerated rights offerings (e.g. RAPIDs) have become more frequent. During an accelerated rights offer, the ex-date is theoretical and typically not quoted by the exchange. Typically, the stock is halted on the theoretical ex-date, at which time the company begins a two tranche offer to shareholders in the form of an Institutional Offer followed by a Retail Offer. Shares are increased and a price adjustment is applied according to the terms of the offer, before the open on the day the security resumes trade. The subscription price is unknown prior to ex-date (example 2) Where the Rights Issue/Entitlement offer subscription price remains unconfirmed on the ex date, an estimated price will be used. FTSE will estimate the subscription price using the value being raised and the offer terms. Where there is a range of values the mid value will be used to estimate the subscription price. Where the value being raised and/or offer terms are unknown no adjustment will be made on the ex-date. If those details are subsequently announced, a price adjustment and share increase will be applied with appropriate notice, if the rights are being offered at a discount to the prevailing market price. Highly Dilutive Rights Issues (example 3) If the terms of a rights issue are greater than 10 for 1, FTSE will consider this highly dilutive. To facilitate replication, FTSE will include on the ex-date: 1) a separate temporary line to track the market value of the rights; and 2) a temporary line at a fixed value to reflect the subscription cash. The temporary lines are included within the index calculation until the end of the rights subscription period at which point they will be deleted and the new shares consolidated into the existing share line. The temporary rights line will be deleted at its last traded price and the opening price of the ordinary line will be adjusted to ensure there is no divisor change as a result of the consolidation of the temporary lines into the ordinary line. New shares are not entitled to the next dividend (example 4) Where the shares being issued are not entitled to the next dividend, FTSE will deviate from the standard index treatment and include on the ex-date: 1) a separate temporary line to track the market value of the rights; and 2) a temporary line at a fixed value to reflect the subscription cash. The temporary lines will be deleted and the rights shares will be aggregated with the ordinary shares as described below: If the dividend ex-date occurs prior to the end of the rights subscription period, the temporary lines will be deleted and the new shares assimilated into the ordinary line at the open on the dividend ex-date. Version 1.5 September

8 2.5 Rights Issues / Entitlement Offers If the dividend ex-date occurs after the expiration of the rights subscription period, the temporary rights and cash lines will be deleted after the close on the last day of the rights subscription period, and replaced by a temporary dummy line equal to the ordinary line close price minus the upcoming dividend. If an active non-ranking for dividend constituent exists, this will be temporarily included instead of a dummy line. On the open of the ex-dividend date, the dummy line (or NRD constituent) is deleted and the shares are aggregated with the ordinary line. Rights issue into a non-constituent In the event that the rights issue involves a non-constituent (inclusive of non-equity) and where the value of the right cannot be determined, there will be no adjustment on the exdate. If the rights line is not scheduled to trade, there will be no further action. If the rights are scheduled to trade, a rights line will be added to the index at zero value on the ex-date and will be deleted from the index at the market price when it commences trade, with the provision of appropriate notice. No cash temporary line will be included as the index will not subscribe to the rights. Late notifications Where a company announces an open offer (typically in the UK) or a rights issue with an exentitlement date on the same day, FTSE will apply an index adjustment either before the market-open on the ex-entitlement day or as an intra-day adjustment as soon as possible thereafter. The adjustment will be applied based on the previous day s closing price with the new shares included in the index weighting at the open offer price. The index may be temporarily held whilst the adjustment is being applied. FTSE will issue an intra-day notice and affected products will be re-issued so that clients are informed of the action having taken place together with the amended index divisors. Version 1.5 September

9 2.5 Rights Issues / Entitlement Offers Event Type Rights Issue / Entitlement Offer where subscription price is at a discount to the market price Rights Issue / Entitlement Offer where subscription price is equal to or at a premium to the market price Rights Issue where offer is considered highly dilutive (terms are greater than 10 for 1) Rights Issue / Entitlement Offer where subscription price is unknown before ex date Index Divisor Yes Yes Yes - on ex date open only. Yes Adjustment Factor Yes - shares and price adjusted in accordance with offer terms. No adjustment on the ex-date. Shares will only be included once they have been listed, concurrent with any investability weight change, and will be added at the prevailing market price. Yes on ex-date open to account for the rights offer, and again when the temporary lines are deleted to ensure zero divisor change. Yes - where the subscription price is unknown but a reasonable estimate can be calculated using the amount of cash to be raised relative to the offer terms. Timing of application Ex date On or after Listing date T+5 (subject to the share increment increase being greater than 10% or USD2bn in market capitalization) Temporary lines added and PAF applied on the exdate. Temporary lines deleted and PAF applied at the expiration of the subscription period. T+1 (applied at close of subscription price announcement date) Rights Issue / Entitlement Offer cancelled after ex date Yes Where a reasonable subscription price cannot be estimated, no adjustment will be applied on the ex-date. Upon subscription price discovery and subject to the subscription price representing a discount to the cum-price, an adjustment will be applied T+1 to the prevailing market price. Subsequent adjustment by removing new rights shares from company s shares in issue at the subscription price on a T+1 basis. T+1 Version 1.5 September

10 2.5 Rights Issues / Entitlement Offers Example 1: Standard Rights Issue Current Price = 300p Shares in Issue = 300m Terms: 1 for 4 at 260p Theoretical ex-rights = [ (4 300) + (1 260) ] 5 = 292p Price Adjustment factor = Ex-Rights Price/Cum-Rights Price = 292/300 = Example 2: Rights Issue where subscription price is unknown and has been estimated Current Price = 300p Shares in Issue = 300m Terms: 1 for 4 at unknown price; 200m being raised Estimated Price = [ (300m / 4 = 75m) ( 200m / 75m = 267p) Theoretical ex-rights = [ (4 300) + (1x267) 5 = 293.3p Price Adjustment factor = Ex-Rights Price/Cum-Rights Price = 293.3/300 = Ord line = 300m shares; 293.3p adjusted price Nil Paid line = 75m shares; 26.3p price (i.e p-267p) Following confirmation of the subscription price the Nil Paid line will be deleted and the new shares will be added to the ordinary line at the subscription price T+1. Version 1.5 September

11 2.5 Rights Issues / Entitlement Offers Example 3: Highly dilutive Rights Issue (i.e. ex-price/cum-price < 0.5) Current Price = 224p Shares in Issue = 100m Terms: 13 for 1 at 43p Theoretical ex-rights = [ (1 224) + (13x43) ] 14 = 55.9p Price Adjustment factor = Ex-Rights Price/Cum-Rights Price = 55.9/224 = Ord line = 100m shares; 55.9p adjusted price Nil Paid line = 1,300m shares; 12.9p price (i.e. 55.9p-43p) Call (dummy) line = 1,300m shares; 43p fixed subscription price In order to include the newly enlarged capitalisation of the company (on a fully paid basis) it is necessary to include the new shares on a separate line (together with the value of the outstanding rights call price) until they trade on an equivalent basis to the existing ordinary line. This is expected to occur at the end of the subscription period, after which the nil paid line will be deleted (together with the fixed call) and consolidated into the ordinary line. Please note: Where the Nil Paid line trades as a lot (e.g. each right representing 13 shares as opposed to each right representing 1 share) then the shares represented by the Nil Paid line will be adjusted accordingly. For illustration purposes, using the example above: Ord line = 100m shares; 55.9p adjusted price Nil Paid line = 100m shares; 167.7p price Call (dummy) line = 1,300m shares; 43p fixed subscription price Example 4: Rights Issue where new shares are not entitled to the next dividend Current Price = 300p Shares in Issue = 300m Next dividend = 16.5p Terms: 1 for 4 at 260p Theoretical ex-rights = [ (4 300) + (1x260) + (1 16.5) ] 5 = 295.3p Price Adjustment factor = Ex-Rights Price/Cum-Rights Price = 295.3/300 = Ord line = 300m shares; 295.3p adjusted price Nil Paid line = 75m shares; 18.8p price (i.e p-260p-16.5p) Call (dummy) line = 75m shares; 260p subscription price In order to include the newly enlarged capitalisation of the company (on a fully paid basis) it is necessary to include the new shares on a separate line (together with the value of the outstanding rights call price) until they trade on an equivalent basis to the existing ordinary line. This is expected to occur once the existing ordinary shares trade ex dividend, after which the nil paid will be deleted (together with the fixed call) and consolidated into the ordinary line. Version 1.5 September

12 2.6 Share Updates The number of shares in issue for each constituent security is expressed to the nearest share and, to prevent a large number of insignificant weighting changes, the number of shares in issue for each constituent security is amended only when the total shares in issue held within the index system changes by more than 1% on a cumulative basis. Changes will be made quarterly after the close of business on the third Friday of March, June, September and December. The data for these changes will be taken from the close of business on the third Wednesday of the month prior to the review month. If accumulated changes in the number of shares in issue add up to 10% or more, or when an accumulated share change represents USD 2bn of a company s total market capitalisation, they are implemented between quarters. WM/Reuters Spot Rates will be used to convert the market capitalisation into USD. The USD 2bn threshold may be adjusted in December. If an adjustment is made, it will be applied for the first time at the next semi-annual review in March. Event Type Share update resulting in a change of 10% / USD2bn or more Share update resulting in a change greater than 1% but less than 10% or USD2bn Notes: Index Divisor Adjustment Yes (Adjustment to shares) Yes (Adjustment to shares) Timing of application T+5 See notes 1,2,3 & 4 After the close of business on the third Friday of March, June, September and December (in line with index reviews) 1. Any related Investability Weighting Change will be effective at the same time. 2. If a corporate action is applied to an index constituent which involves a change in the number of shares, the change in shares will be applied simultaneously with the corporate action. 3. In the event that T+5 falls after the announcement date of index review changes but before the index review effective date, the implementation of the share update will normally be delayed to coincide with the index review effective date. However, in exceptional circumstances FTSE may use its discretion to reduce the notice period to the minimum T In the event that T+5 falls shortly after the index review effective date, FTSE may use its discretion to reduce the standard notice period to a minimum T+2 in order to apply the change in line with the index review. Version 1.5 September

13 2.7 Investability Weighting Changes Free float represents the availability of stock in the market for public investment. Each FTSE constituent weighting is adjusted to omit restricted shareholdings to ensure an accurate representation of investable market capitalisation. Free float restrictions will be calculated using available published information. Following the application of an initial free float restriction, a constituent s free float will only be changed if its rounded free float moves to more than 3 percentage points above or below the existing rounded free float. Where a company s actual free float moves to above 99%, it will not be subject to the 3 percentage points threshold and will be rounded to 100%. A constituent with a free float of 15% or below will not be subject to the 3 percentage points threshold. The timing of free float changes is illustrated below: Implementation Date Corporate Events Free Float Impact 3% buffer breached Effective date T + 5 (See notes 5 & 6) Quarterly Review Government sale of shares Yes Yes Yes Government bail out Yes Yes Yes Secondary Placing Yes Yes Yes Foreign ownership restriction changes for specific constituents Yes Yes Foreign ownership restriction changes at industry sector or country level Yes Yes Takeover / Merger (inclusive of any resulting constituent share increase) See note 3 Yes Yes Yes Share change > 10% shares Yes Yes Yes Expiry of lock in agreements See note 2 Yes Yes Yes Share change > 10% and FF change following review of shareholder structure Yes Yes Yes Share change < 10% resulting in FF change (e.g. dilution of restricted holder) Yes Yes Yes FF change only, not related to a corporate event Yes Yes Yes Version 1.5 September

14 2.7 Investability Weighting Changes Notes: 1. Free float data is continuously monitored and any non-corporate event changes will be updated in line with the periodic index reviews. 2. Free Float changes resulting from the expiry of a lock-in will be implemented at the next quarterly review subsequent to there being a minimum of 20 business days between the lock-in expiry date and the Tuesday before the first Friday of the review month. If the previously locked-in shares are sold by way of a corporate event (such as a secondary offering), any change to the free float will be applied T+5 following completion and therefore will not be subject to the minimum 20 business day rule. 3. Following a takeover or merger involving one or more index constituents any free float restriction will be based on restricted holdings in the successor company. For the avoidance of doubt, any holding or holdings which are treated as restricted in the index because they exceed 10% in any party to the takeover or merger will continue to be treated as restricted unless such holding or holdings fall below 7% in the successor company. 4. In the event that a company is subject to a takeover or merger offer, any change in free float restriction will be implemented when the offer has completed (or lapsed) unless it directly reflects a corporate action independent of and not conditional on the takeover or merger completing or lapsing. 5. Greenshoes (over allotment option): those shares potentially to be offered as a greenshoe will not be included in the initial calculation of the free float of a company offering shares to the market. Following the offering, if the greenshoe option is exercised, any change to the free float will be applied at the next quarterly review. 6. In the event that T+5 falls after the announcement date of index review changes but before the index review effective date, the implementation of the float update will normally be delayed to coincide with the index review effective date. However, FTSE reserves the right to use its discretion to reduce the notice period to the minimum T In the event that T+5 falls shortly after the index review effective date, FTSE may use its discretion to reduce the standard notice period to a minimum T+2 in order to apply the change in line with the index review. Version 1.5 September

15 2.8 Mergers, Acquisitions and Tender Offers Mergers and acquisitions (M&A) activity may result in changes to index membership as well as to the shares included within the index. Adjustments due to mergers and acquisitions are applied to the index after the action is determined to be final, with provision of appropriate notice. To avoid unnecessary delays, FTSE may consider merger & acquisition transactions 'final', prior to shareholder approval, or prior to a delisting notice. FTSE will consider prevailing shareholder sentiment, board/director recommendations, exchange notification, expected completion date, and stock price versus offer value when making this decision. Acquisition of an index constituent for cash The target company is deleted from the index at the last traded price. In the absence of an active market at the time of index implementation, e.g. the target company has halted, the target company will be deleted from the index using the cash terms. Merger between index constituents for stock The target company is deleted from the index and the shares of the acquiring stock are increased, according to the offer terms. FTSE effects the action after it has considered the transaction as final with the provision of a minimum two days notice. In the absence of an active market for the target company at the time of index implementation, the target company will be deleted from the index using a synthetic price based on the default offer terms (i.e. the synthetic deletion price will be based on what a holder will receive for nonelection). Merger between index constituents for cash or stock, or a combination thereof The target company is deleted from the index and the shares of the acquiring company are simultaneously increased per the election results and the announced number of shares being issued (adjusted to account for FTSE s current float factor of the target). If the terms are cash and stock (no option); then the shares of the acquirer will be increased per the offer terms. In the absence of an active market for the target company at the time of index implementation, the target company will be deleted from the index using a synthetic price based on the default offer terms. Reverse takeover Where a company has been acquired by a non-constituent for shares, or a combination of cash and shares, the acquiring company will be included in the target s index provided it is eligible in all other respects. If the acquiring company has a different nationality assignment, it will be transferred to the appropriate country index, with suitable notice after the listing of the new shares. Only the shares received as a result of the acquisition will be included in the index on the effective date; any shares previously attributed to the non-constituent will be added subsequently in accordance with the shares in issue update policy (see Section 2.6). The new company will be added to the index on the effective date using the offer terms (e.g. last close of the target company multiplied by the offer terms). Version 1.5 September

16 2.8 Mergers, Acquisitions and Tender Offers Tender offers The target company will be removed from the index with appropriate notice when: The offer period completes (initial, extension or subsequent); and Shareholders have validly tendered, not withdrawn, and the shares have been accepted for payment; and All pertinent offer conditions have been reasonably met; and FTSE has concluded that the acquirer will finalize the acquisition via a short-form merger, squeeze-out, top-up option or any other compulsory mechanism. For constituents of the UK Index Series, the qualifying announcement is that the offer has been declared wholly unconditional. A minimum notice period of T+2 is generally provided. FTSE may, on occasion, implement a free float change based on the reported acceptance results at the expiration of the initial, subsequent, or final offer period. Dividend Implications Where a company involved in an acquisition or merger is paying a dividend to its existing shareholders immediately ahead of or on completion of a merger, FTSE will account for the dividend in one of the following ways: If the company in question has been suspended pending the acquisition or merger becoming effective, a synthetic ex-dividend adjustment (concurrent with the index application of the dividend) will be made to its last cum-price and that price will be maintained in the index until the new shares begin trading. If the company has not been suspended ahead of the acquisition or merger becoming effective, and the newly issued shares have not been explicitly classed as Non-Ranking for Dividend (NRD), FTSE will create a synthetic dummy NRD line which will be included in the index on the effective date of the merger only and then merged with the ordinary line (now ex-div) effective for the next trading day. If the new merger shares are not entitled to the next dividend and an active Non- Ranking for Dividend (NRD) line exists, this will be added to the index on the effective date of the merger per the offer terms and retained until the ordinary line trades ex-div; at which time the NRD line will be deleted and aggregated with the ordinary line. Please note: the previous practice of applying pro-rata dividends has been discontinued except for certain headline indices as index families with different weighting schemes require different pro-ration. Version 1.5 September

17 2.8 Mergers, Acquisitions and Tender Offers Event Type Constituent acquired for cash Index Treatment Target company deleted from indexes at last traded price (if trading) or at offer price (if not trading) Index divisor adjustment Constituent acquired by another constituent for shares or a combination of cash and shares Target company deleted at last traded price (if trading) or at default offer terms (if not trading) Shares of acquiring company increased in accordance with the announced transaction results No divisor adjustment only if target is acquired for shares and deleted at offer terms Constituent acquired by a quoted non-constituent for shares or a combination of cash and shares Target company deleted at last traded price (if trading) or at default terms (if not trading) Shares of acquiring company received as a result of the transaction added to the same indexes as the target company in accordance with the offer terms provided the acquiring company is eligible in all other respects Shares of the acquiring company will be updated subsequently as per the shares in issue update policy (Section 2.6). If acquiring company has a different nationality, it will be transferred to the appropriate country classification with appropriate notice. Version 1.5 September

18 2.9 Spin-offs If a constituent company is split and forms two or more companies by issuing new equity to existing shareholders, then the resulting companies may be eligible to continue as constituents in the same FTSE Indexes as their predecessor company (refer to Index Series ground rules for specific conditions). FTSE recognises two distinct scenarios which will be implemented as follows: Spin-off of an eligible security The spin-off entity will be added to the same indexes as the parent company, per the terms, on the ex-date of the distribution. The spin-off company will be retained in the same index until the next quarterly review, where it will be re-ranked or deleted, if below the exit threshold. If it has not commenced trading after 20 business days, the suspended companies rule will apply (refer to section 2.15). Note: the ICB classification and Free Float of the spunoff entity will initially mirror that of the parent. Any subsequent required change to either the parent or the spun-off entity will be applied with the appropriate notice period. Spin-off of an ineligible security The spin-off entity will be added to the same indexes as the parent company, per the terms, on the ex-date of the distribution. It will remain in the index for two business days and then deleted at market price. If the ineligible security does not trade on the ex-date it will remain in the index until it commences trading and then deleted after two business days at market price. If it has not commenced trading after 20 business days, the suspended companies rule will apply (refer to section 2.15). If when-issued trade exists prior to the ex-date, the spin-off will not be added and a price adjustment only will be implemented. Spin-off Valuation FTSE will assign an estimated price to the spin-off company on the ex-date open using the following valuation hierarchy, listed in order of preference: A When-Issued price will be used where available (child or parent); If no When-Issued price is available, a primary exchange estimate will be used; If a primary exchange estimate is unavailable, a company valuation will be used; If a company valuation is unavailable, a broker estimate will be used; If a broker estimate is unavailable, the spin-off will be added at zero. Providing an active market exists for the spin-off company on the ex date, FTSE will make no further adjustments, regardless of the actual trading price of the spin-off company. If the spin-off company does not trade on the ex-date, and the estimated value is incorrect by >10% of the parent s value as measured at open, the spin-off valuation will be updated intraday to set the value equal to the change in parent s value. This will be measured by parent s cum-date close minus ex-date open. FTSE product files will be reissued to reflect this change. Version 1.5 September

19 2.9 Spin-offs Event Type Index Divisor Adjustment Timing of application Existing constituent is split and forms two or more companies by issuing new equity to existing shareholders No A price adjustment will be applied to the parent company on the ex date by way of a capital repayment. Spun off entity is initially included in the same benchmarks as the parent company. Ex date Version 1.5 September

20 2.10 Stock Conversion Event Type Index Divisor Adjustment Timing of application Company converts existing constituent share class B into existing constituent share class A No Assuming full conversion: Market capitalisation of share class A will be increased by the market capitalisation of share class B Ex date Notes: Where the lines of stock are on different free floats, an initial theoretical free float is calculated to ensure there is no divisor change. If subsequent to the event the free float requires revision (based on an updated shareholder structure), then this change will be applied at the next quarterly review. Where the conversion involves a non-constituent share class converting into a constituent share class, the share total will only be increased with T+5 notice where the change is greater than 10%/USD2bn. Where less, the share total will be increased at the next quarterly review. Where only a proportion of constituent share class B is being converted, the increase to the market capitalisation of constituent share class A will reflect that proportion only Distribution In-Specie Event Type Index Divisor Adjustment Timing of application Ex date Existing constituent distributes its shareholding in another constituent company to its own shareholders Yes An adjustment will be applied to the parent company by way of a capital repayment. Note: An adjustment in free float may also be required in the constituent stock being distributed. Version 1.5 September

21 2.12 Dividends Declared dividends are used to calculate the FTSE Standard Total Return Indexes. All dividends are applied on the ex dividend date. A series of net of tax Total Return Indexes are also calculated based on the maximum withholding tax rates applicable to dividends received by institutional investors who are not resident in the same country as the remitting company and who do not benefit from double taxation treaties. The underlying tax rate information and the FTSE Withholding Tax Guide are available from FTSE by contacting [email protected]. Dividend Type Capital Index Divisor Adjustment Total Return xd Adjustment Cash - Ordinary No Yes See note 1 & 5 Cash Extraordinary Same as Cash - Ordinary Yes See note 2 Cash -with Scrip option Same as Cash - Ordinary Yes See note 3 Scrip with a cash option Same as Cash - Ordinary Yes See note 3 Stock - Scrip only No No Adjustment to shares / price by ratio (i.e. Applied as Bonus Issue) Special - cash Yes - See note 4 No Special cash plus Scrip proportional distribution Adjustment to price (i.e. Applied as Capital Repayment) Yes - See note 6 Adjustment to price (i.e. Applied as Capital Repayment) No Version 1.5 September

22 2.12 Dividends Notes: 1. If the company subsequently announce a retraction (i.e. dividend is no longer being paid), FTSE will apply a negative adjustment to the Total Return Index with T+1 notice. 2. Extraordinary cash dividends are generally understood as resulting from a change to a company s reporting timetable (e.g. following a merger or reorganisation). 3. For treatment of any additional shares resulting from a cash dividend with scrip option or scrip dividend with a cash option, see share update section. 4. Special cash dividends are generally understood as resulting from a one-off or unplanned repayment of surplus cash to shareholders (e.g. following a sale of an asset). However, in cases where a company pays a special cash dividend out of regular profits on more than 3 consecutive occasions, FTSE will normally consider any further such cash distributions as ordinary dividends. 5. Where dividends that have been confirmed or estimated by the company prior to the XD date, the confirmed or estimated value is applied on the XD date. Where the dividend remains undetermined on the XD date, FTSE will apply the dividend amount paid from the same period in the previous year (adjusted by any capital change) on the XD date. If there was no dividend paid from the same period in the previous year, a dividend value of zero will be used. For dividends that are confirmed or estimated by the company after the XD date, a further positive or negative XD adjustment will be applied on the next business day following the receipt of data. Clarification for Korean companies - For those Korean companies that have not provided advanced notice of their ex-dividend date, FTSE will assume that such companies will follow the general practice in Korea of using an ex-date of two business days prior to the fiscal year end (e.g. 29 December 2014). 6. For US index constituents converting to a REIT structure, a capital repayment representing the value of the cash and stock distribution will be applied to the index constituent on the effective date of the cash and stock distribution. Concurrently a separate stock distribution dummy line will be added to the same indexes as the index constituent to reflect the stock proportion of the distribution until the stock distribution ratio is confirmed, at which point the stock distribution dummy line will be deleted and the shares in issue of the index constituent will be increased by the stock distribution ratio. Version 1.5 September

23 2.13 Special dividends Total Return Indexes FTSE generally treat special cash distributions as a capital repayment with no adjustment for withholding tax. This results in a divisor change to the Capital Index. The special cash distribution is not reinvested in the Total Return Index. However, where the special cash distribution is 10% or greater against the share price, and subject to FTSE identifying that there are withholding tax implications, a compensating negative XD adjustment will be applied to provide the correct return net-of-tax. FTSE withholding tax rates are used to calculate the adjustment. Therefore the special cash distribution is treated as a capital repayment resulting in a divisor change to the Capital Index but there is also an associated adjustment to the Total Return Index to reflect the tax liability. Example Special Cash Dividend of 61p (subject to 25% withholding tax) Capital Repayment o Current Price = 112p o Shares in Issue = 300m o Ex-Capital Repayment Price = 51p o Ex-Capital Repayment Shares in issue = 300m o Adjustment factor = 51/112 = 0.45 Negative XD adjustment o Withholding Tax = 25% o Tax liability = 15.25p o Net special dividend = 45.75p o Compensating negative XD adjustment = [15.25 / (1-0.25)] = 20.33p 2.14 Deletions A stock will be deleted as a constituent if it is delisted from its stock exchange, becomes bankrupt, files for bankruptcy protection, is insolvent or is liquidated, or where evidence of a change in circumstances makes it ineligible for index inclusion. Version 1.5 September

24 2.15 Suspended Companies If a constituent is suspended, FTSE will determine its treatment as follows: If a constituent is declared bankrupt without any indication of compensation to shareholders, the last traded price will be adjusted down to zero value and it will subsequently be removed from the index. If there is no accompanying news when a constituent is suspended, FTSE will normally allow it to remain in the index for up to 20 business days at its last traded price before determining whether to delete it at zero value or allow it to remain in the index. If a constituent is temporarily suspended but expected to recommence trading pending a restructuring or a corporate event, for example a merger or acquisition, it may remain in the index at its last traded price for up to 20 business days. If it continues to be suspended at the end of that period, it will be subject to review and a decision will be taken to either allow the constituent to remain in the index for a further period of up to 20 business days or to remove it at zero value. This procedure will be repeated at successive 20 business day intervals thereafter until either trading recommences or a decision is taken to remove it from the index. If a constituent has been removed from the index and trading is subsequently restored, it will be treated as a new issue for the purposes of index eligibility The use of Dummy Lines in FTSE Indexes Dummy lines are non-tradable instruments which have been temporarily created by FTSE in order to reflect a corporate event. The use of dummy lines is normally determined on an ad hoc basis and typically results from complexities surrounding a corporate event. Where the use of dummy lines is necessary FTSE provides advance notification either via an Informative Notice published on the FTSE website or through . Dummy lines are generally used in order to ensure the index reflects the investor experience or in order to facilitate index replication by index funds. Version 1.5 September

25 2.17 Treatment of Tracker Stocks Definition of Tracking Stock A line of stock issued to track the fortunes of a particular division, business unit, subsidiary or group of assets of the issuing company (the parent ), commonly called a Tracking Stock. Tracking Stocks may be included in the Index if the Tracking Stock meets all the Ground Rules used to determine individual stock eligibility after considering the points below: Tracking Stocks will not be reviewed as a multiple line of stock of the parent company but as a separate line of stock of the business unit. The business unit will be treated as a distinct company for the purposes of determining shares in issue, free float and industry classification. A Tracking Stock s shares in issue, used by FTSE to determine ranking by market capitalisation and other related variables, will be the total number of shares imputed to the business unit by virtue of the economic interest retained by the parent company after the issue of tracking stocks. Free float of tracking stocks will be determined as for the free float of any stock, using the imputed total number of shares in issue as the base. The principles used to determine a business unit s imputed shares in issue, and the tracking stock s free float, are illustrated below: Example 1: Parent issues 100 tracking shares, representing 20% of its economic interest of the business unit. The remaining 80% economic interest remains in the hands of the Parent, but no securities representing that interest are formally issued. Tracking shares legally in issue =100 Imputed total shares in issue = 100/0.2 = 500; Free float is 20% (100/500). Example 2: Parent issues 100 tracking shares, 50 to the public and 50 to a strategic investor, representing 20% of the economic interest of the business unit. The remaining 80% economic interest remains in the hands of the Parent, but no securities representing that interest are formally issued. Tracking shares legally in issue = 100 Imputed total shares in issue = 100/0.2 = 500; Free float is 10% (50/500). Version 1.5 September

26 2.18 Non-Ranking For Dividend In the event that an existing index constituent issues new shares which do not rank for the next dividend, FTSE may include these in the index on a separate temporary non-ranking for dividend line. Where the non-ranking for dividend line ceases trading on or before the ex dividend date, the temporary line will be deleted from FTSE indexes on the open of the ex dividend date and the new shares consolidated into the main line. FTSE will also make a adjustment to the declared dividend in order to reflect that only the existing shares were entitled to the dividend. Where the non-ranking for dividend line ceases trading after the ex dividend date, the temporary line will be deleted from FTSE indexes at close of the ex dividend date and the new shares consolidated into the main line. As a result no adjustment to the declared dividend is necessary. Version 1.5 September

27 FURTHER INFORMATION A Glossary of Terms used in FTSE Russell s Ground Rule documents can be found using the following link: For contact details please visit the FTSE website or contact FTSE client services at [email protected]. Website: London Stock Exchange Group companies. All rights reserved. London Stock Exchange Group companies includes FTSE International Limited ( FTSE ), Frank Russell Company ( Russell ), MTS Next Limited ( MTS ), and FTSE TMX Global Debt Capital Markets Inc. ( FTSE TMX ). All rights reserved. FTSE, Russell, MTS, FTSE TMX and FTSE Russell and other service marks and trademarks related to the FTSE or Russell indexes are trade marks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX and Russell under licence. All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication. Neither the London Stock Exchange Group companies nor any of their licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the Indexes or the fitness or suitability of the Indexes for any particular purpose to which they might be put. The London Stock Exchange Group companies do not provide investment advice and nothing in this document should be taken as constituting financial or investment advice. The London Stock Exchange Group companies make no representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the London Stock Exchange Group companies. Distribution of the London Stock Exchange Group companies index values and the use of their indexes to create financial products require a licence with FTSE, FTSE TMX, MTS and/or Russell and/or its licensors. The Industry Classification Benchmark ( ICB ) is owned by FTSE. FTSE does not accept any liability to any person for any loss or damage arising out of any error or omission in the ICB. Version 1.5 September