Dhaka bourse set for a new price index

A fresh index with a base point of 1,000 will be introduced to the Dhaka Stock Exchange early next year to replace the flawed existing indices.
A team from Standard and Poor's (S&P) arrived on Monday to conduct the final trial before the index goes live, the DSE officials said.
“The index's calculation methodology is now being tested. After that, it will be rebalanced and then tested for another week,” said Ahmad Rashid Lali, senior vice-president of the premier bourse.
“After successful completion of trials we will apply to the Securities and Exchange Commission for regulatory approval. We hope to launch the new index by the end of January next year.”
The existing indices, however, will not be eliminated right away after the introduction of the new one, he added.
“They [existing indices] will be taken off in phases once the investors have become accustomed to the new one,” he said.
The DSE has appointed S&P, one of the world's pre-eminent credit-rating agencies, a few months ago to design the new index to be based on the free-float methodology used by most of the world's major indices, including the Dow Jones Industrial Average and the S&P 500.
Under the free-float methodology, market capitalisation of an index's underlying companies is calculated by taking the equity's price and multiplying it by the number of shares available for trading.
The method provides an accurate reflection of market movement and is deemed to be a robust way of calculating market capitalisation.
Although the DSE was prescribed by the stockmarket regulator to introduce a new index by April this year, the prime bourse took its time to ensure that the index met international standards.
Furthermore, failure of many listed firms to provide information on the number of their tradable shares delayed the launch of the new index.
At present, the Dhaka bourse has three types of indices: the general index, DSE All Share Price Index and the DSE-20.
The call for a fresh index came in October 2010 from the media, following discovery that the Dhaka bourse did not follow the correct method of index calculation while incorporating new securities.
Later, the matter was acknowledged by SEC as well.
The DSE considered the total shares of a company in computing the impact of price movement -- up or down -- on the index, which yielded an inflated scenario.
Although the DSE has made some corrections in the index calculation methodology, the previous errors still remain.
Now, the DSE takes into account the free float or tradable shares of a listed company while calculating the impact of the stocks on the index.

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