DSEX and DS30 Index

[source: https://www.dsebd.org/assets/pdf/DSEX_DS30.pdf]

The Dhaka Stock Exchange Limited launched the DSE Broad Index (“DSEX”) and the DSE 30 Index (“DS30”) in accordance with the ‘DSE Bangladesh Index Methodology,’ which was designed and developed by S&P Dow Jones Indices, effective from January 28, 2013. It should be noted that none of the DSE indices include mutual funds, debentures, or bonds. The “DSEX” serves as the Broad Index (Benchmark Index) of the Exchange, representing approximately 97% of the total equity market capitalization. The “DS30” comprises 30 leading companies and functions as the investable index of the Exchange, accounting for approximately 51% of the total equity market capitalization.

Eligibility Criteria

Market Capitalization

Float-Adjustment: A stock’s weighting within an index is determined by its float-adjusted market capitalization.

Liquidity

In addition, all eligible stocks for the DSE indices are required to trade at least half of normal trading days each month for the three months prior to the rebalancing reference date.

Financial Viability

Sector Classification

All listed DSE stocks are classified according to the DSE Industry Classification system.

Base Value

Base Date

The base dates of the DSE 30 Index (DS30) and the DSE Broad Index (DSEX) are January 17, 2008.

DSES Index

[source: https://www.dsebd.org/assets/pdf/DSES.pdf]

The DSEX Shariah Index (DSES) functions as a comprehensive market benchmark aligned with Shariah principles, gauging the performance of the Bangladeshi equity market. The index is derived from the DSE Broad Index (DSEX) and encompasses all stocks within the parent index that meet predefined rules-based criteria for Shariah compliance. An Index Committee has been established to oversee the maintenance of the index. The DSEX Shariah Index (DSES) offers extensive market coverage of Shariah-compliant equities listed on the Dhaka Stock Exchange (DSE), serving as a broad market benchmark. Eligibility for inclusion is extended to all domestically listed stocks that satisfy specified size and liquidity standards. Constituents are weighted according to float-adjusted market capitalization. S&P Dow Jones Indices provided consultancy services to the Dhaka Stock Exchange in developing the methodologies for the DSEX Shariah Index (DSES), the DSE Broad Index (DSEX), and the DSE 30 Index (DS30). Additionally, S&P Dow Jones Indices supplies the list of securities that pass Shariah-compliance screening during each monthly rebalancing, but does not participate in the governance or ongoing management of the indices.

Eligibility Criteria

The DSEX Shariah Index (DSES) employs the Shariah screening methodology and processes utilised by the S&P Shariah Family of Indices. S&P Dow Jones Indices has entered into an agreement with Ratings Intelligence Partners (RI) to provide the Shariah screening and to filter stocks based on these criteria. Ratings Intelligence Partners is a consultancy based in London and Kuwait, specializing in solutions for the global Islamic investment market. Its team comprises qualified Islamic researchers who collaborate directly with a Shariah Supervisory Board. The firm continually collaborates with regional banks to develop Shariah-compliant equity products and expand investment opportunities. RI works with a Shariah Supervisory Board, a panel of Islamic scholars responsible for interpreting business issues and advising on decisions related to the indices.

Sector-Based Screens

Business activities related to the following are excluded:

1. Advertising and Media, with the following exceptions:

• Media and advertising companies generating revenues in excess of 65% of total income from the GCC countries
• News Channels
• Newspapers
• Sports Channels

2. Alcohol
3. Cloning (Companies engaged in genetic cloning activities are generally excluded from inclusion in any S&P Shariah Index with the following exception: embryonic/adult stem cell research is permissible only if it is used for therapeutic/healing purposes and not for duplication of tissues or organs of humans and animals.)
4. Financials, except:

• Islamic Banks
• Islamic Financial Institutions
• Islamic Insurance Companies

Defined as a company having:

• Shariah Committee to supervise all activities
• All products are Islamic
• All investments of the company are Islamic
• Passes accounting based screens

5. Gambling
6. Pork
7. Pornography
8. Tobacсo
9. Trading of gold and silver as cash on deferred basis (“Trading of gold and silver as cash on a deferred basis” refers to a transaction where gold or silver (acting as “cash” or currency) is bought or sold, but the payment (cash) or the delivery of the metal, or both, are delayed to a future date. In conventional finance, this is common in futures or forward markets.)

During the selection process, each company’s latest financial statement is reviewed to ensure that the company is not involved in any non-Shariah compliant activities, regardless of whether the latest statement is a quarterly, semi-annual or annual statement. If the latest statement is available in all three of these frequencies, an annual statement will likely be used, as these are more likely to be audited. Those that are found to be non-compliant are screened out. The above industries are not considered Islamic and would not be appropriate for investment for observant Muslims.

Accounting-Based Screens

After removing companies with non-compliant business activities, the rest of the companies are examined for compliance in financial ratios, as certain ratios may violate compliance measurements. Three areas of focus are leverage, cash, and the share of revenues derived from non-compliant activities. All of these are subject to evaluation on an ongoing basis.

Such accounting-based screens are not applicable to companies that are run on a fully Shariah-compliant basis and are subject to Shariah Board approval, and such companies shall be considered Compliant irrespective of their leverage ratios. Such companies may be characterized by (the list below is indicative, non-exhaustive and reviewed on a case-by-case basis):

• Having a Shariah Supervisory Board
• All transactions (business and financial) are in accordance with Shariah principles
• Incorporated and managed in a fully Shariah-compliant manner.

Leverage Compliance

This compliance is measured as:

Debt/Market Value of Equity (36-month average) < 33%

The definition of debt includes the following (this list is non-exhaustive):

• Long-term interest-bearing debt as disclosed by the company’s management
• Short-term interest-bearing debt as disclosed by the company’s management
• Current portion of long-term interest-bearing debt as disclosed by the management
• Interest-bearing short-term liabilities such as overdrafts, bridge loans, etc.

It excludes:

• Short-term non-interest-bearing operational payables/liabilities such as gratuity payable, creditors for goods and services, provisions, etc.
• Long-/short-term Islamic debt
• Long-/short-term non-interest-bearing debt

The average market capitalization of X over n months is calculated by multiplying the moving average daily closing price of X over n months (must be adjusted for corporate actions) (Pavg) with the total number of shares outstanding for X.

For stocks that have multiple share classes, this is estimated as Pavg/Plast * M, where M is the current market capitalization and Plast is the last closing price of X (for Pavg and Plast, the figures for the main share class are used).

For companies that do not have a sufficiently long price history (e.g., recent IPOs), the figure Pavg is calculated as the moving average daily closing price of X over n days where n is the number of days X has been trading or the number of days that a daily closing price for X has been available.

Cash Compliance

There are compliances with reference to cash holdings. These are:

Accounts Receivables / Market value of Equity (36-month average) <49%;

The definition of accounts receivables includes the business/operational/trade and non-trade receivables.

(Cash + Interest-Bearing Securities) / Market value of Equity (36-month average) <33%

The definition of cash and interest-bearing securities includes the following (this list is non-exhaustive):

• Cash in hand
• Cash at bank
• Term deposits (three months)
• Short-term investments held for sale/trading
• Government bonds (if classified as short-term investments)
• Investments in mutual funds, other equity funds held for sale/trading

It excludes:

• Islamic investments

Revenue Share from Non-Compliant Activities

In certain cases, revenues from non-compliant activities can be tolerated, if they comply with the following threshold:

(Non-Permissible Income other than Interest Income) /Revenue < 5%

Dividend Purification Ratio

This ratio is provided to investors for purification purposes, it is calculated as:

Dividends * (Non Permissible Revenue /Total Revenue)

The dividend purification ratio is calculated as:

DP ratio = Non-Permissible Revenue/Total Revenue

Non-permissible revenue, in this context, includes all forms of revenue or income that are considered non-permissible from a Shariah perspective (e.g., alcohol sales, gambling revenue, etc.) and includes any income generated from interest.

The DP ratio determines what portion of the dividends received must be purified (i.e., given to charity). As an example, a DP ratio of 0.10 (i.e., 10%) implies that 10% of the dividends need to be given to charity, while a DP ratio of 1.0 (i.e., 100%) requires all of the dividends received to be purified.

Index Eligibility

The stocks, first, must be constituents of the DSE Broad Index (DSEX). They are then screened for Shariah compliance. Only those stocks that are compliant remain in the DSEX Shariah Index (DSES).

For details on the eligibility requirements for the DSE Broad Index (DSEX) please refer to the DSE Bangladesh Indices Methodology.

Timing of Changes

The DSEX Shariah Index (DSES) will see additions and deletions on an ongoing basis due to corporate activity linked to changes in the parent index. Updates due to changes in compliance are applied once a month on the third Thursday of the month.

Additions are made to the DSEX Shariah Index (DSES) once a month, typically the third Thursday of the month after the addition to the parent index, if found compliant by the Shariah board.

Deletions will be done at the same time as the underlying index.

Additions

Once an announcement is made of an impending addition to the DSE Broad Index (DSEX), RI will screen it for compliance. If the stock is found to be compliant, after approval by the Shariah board, it will be added to the respective Shariah index. RI will also regularly monitor the existing non-compliant stocks of the underlying index. If any of these stocks become compliant because of changes in financial ratios or a change in business activity due to mergers or restructuring, it will be added to the Shariah index with notice to clients.

Deletions

All deletions from the parent index will be deleted from the Shariah-compliant index on the same day. RI will also conduct an ongoing review of existing Shariah index constituents for continued inclusion in the index.

Additions and deletions to the index which will occur due to ongoing reviews and changes in compliance are done on the third Thursday of each month with advance notice to clients.

• Is screening sector- or stock-based?

Stocks that are considered for inclusion in the S&P Shariah Indices are screened using a sector-based screening regime supplemented by a stock-based screening scheme. As a result, although certain sectors (e.g., hotels) are often classified as non-compliant, each stock is individually screened and the non-permissible revenues are determined using various methods that include consulting company statements, third-party sites (e.g., Bloomberg and Google Finance), and contacting the companies themselves. This method has the benefit of being more accurate than a simple sector-based screening, particularly in the case of conglomerates, where a single sector-based classification is unlikely to be representative of all the activities of the conglomerate.

• Why are defense stocks included?

The Ratings Intelligence/S&P Shariah Control Committee1 takes the view that weapons can be used for both permissible (e.g., self-defense) and non-permissible (e.g., unprovoked aggression) purposes. The weapons themselves are neutral. Hence, the manufacturing of weapons is considered permissible.

• How are companies with a large percentage of income generated through interest judged to be compliant?

The S&P Shariah Indices Methodology does not use interest income (as a percentage of total income) as a screening filter. The S&P Shariah Indices Methodology filters out non-permissible income excluding interest income as a percentage of the total revenues. Non-permissible income includes such things as alcohol sales, sales of products containing pork, etc.

The reason for this is to allow for investment in the shares of companies who are in the research and development phase (e.g., mining or energy companies). These companies often do not generate a sizable revenue (during the R&D phase) from operations, but have a market capitalization well in excess of the cash on their balance sheet2 based on the expectation of high future revenue and profits.3 However, they usually have a high dividend purification ratio (requiring purification at a high level) because any interest they may have received during the R&D phase appears exaggerated due to the small or non-existing revenue from operations.

Such stocks, if they pass all other Shariah screens, and if the cash balances plus any interest-bearing marketable securities (these are the sources of interest income) are within the Shariah limits with respect to the average market capitalization, are allowed for investment.

• How are investments in mutual funds by companies treated? Is the income derived from these investments considered compliant?

Investments in mutual funds are generally considered to be non-compliant unless the funds in question are Shariah-compliant Islamic funds. There are, however, occasions where regional or circumstantial assumptions may be employed (e.g., having observed that around 50% of the investible universe in India comprises Shariah-compliant stocks, 50% of the income from a mutual fund based in India may be considered compliant).

• How are consolidated statements used? Are any unconsolidated balance sheets used?

In certain regions (e.g., Japan and India), companies often publish separate consolidated and unconsolidated balance sheets and income statements. However, Ratings Intelligence (S&P’s Shariah screening partner) has observed that these companies usually are large conglomerates having a large number of subsidiaries, often with a less than 100% holding in each subsidiary. In such cases, using a consolidated company statement often results in the Shariah ratios being distorted (e.g., debt/equity ratios of 200% or above). Because of this, Ratings Intelligence and S&P Dow Jones Indices have sought and obtained Shariah Committee authorization to use unconsolidated balance sheets by default and calculate pro-rata figures by taking into account the parent company’s holding in each subsidiary.

Are there any differences in treatment by market?

The properties of the S&P Shariah Indices Methodology are market-independent in that stocks in all markets are treated with the same rules.4

• When does the monthly Shariah review process occur?

During the week of the first and second Fridays of the month, the Shariah screening of the underlying index members occurs. Values may be fixed (subject to Shariah Control Committee approval) at any point during this time, but this usually happens on the Tuesday of the week of the second Friday of the month, with the moving average market capitalizations corresponding to the three years immediately preceding the Tuesday of the week of the second Friday of the month.

During the week of the second and third Fridays of the month, Shariah committee authorization is obtained.

S&P Dow Jones Indices announces changes to the S&P Shariah Indices on the third Friday of the month.

Changes to the Shariah indices take effect at the start of business on the Monday immediately following the third Friday of the month.

Notes

1. The Ratings intelligence/S&P Shariah Control Committee is made up of prominent scholars who are very experienced in the application of Shariah to financial products and services. Ratings Intelligence is a consulting firm focused on Islamic Finance.
2. Shariah law promotes the development of businesses and fair trade.
3. If a company only has cash on its balance sheet, with no prospect of future revenues, the equity market will likely see through this, ensuring that its market capitalization will generally be less than the value of its cash holdings. As a result, the stock will fail the cash compliance screens and so be non-compliant.
4. During the meeting held on March 31, 2010 in Dubai, the Shariah Committee recommended that media and advertising companies generating revenues in excess of 65% of total income from the GCC (Gulf Cooperation Council) countries may be allowed for investment while most other advertising and media companies are not allowed (except for newspapers, news channels and sports channels). However, this rule applies to companies originating from any market (i.e., it is not limited to the GCC region). The rule itself is related to the fact that globally-used media (versus that media used only in the GCC region) typically includes images and/or advertising/media language that is inappropriate from a Shariah perspective.

Algorithm of DSE Indices

 [source: https://www.dsebd.org/dse_algorithm.php]

Index Calculation Algorithm (according to IOSCO Index Methodology):

                                 Yesterday’s Closing Index X Current M.Cap
Current Index = ————————————————————————
                    Opening M.Cap

                               Yesterday’s Closing Index X Closing M.Cap
Closing Index = ————————————————————————-
                    Opening M.Cap

Current M.Cap = ∑ ( LTP X Total no. of indexed shares )
Closing M.Cap = ∑ ( CP X Total no. of indexed shares )

Abbreviations and Acronyms
M.Cap – Market Capitalization
DSE – Dhaka Stock Exchange
IOSCO – International Organization of Securities Exchange Commissions (IOSCO)
LTP – Last Traded Price
CP – Closing Price