The Stock Exchange Of Thailand Explains Effect Of New MSCI Index Methodology On Thai Stock Market

The Stock Exchange of Thailand says the local effect of MSCI’s adjusted methodology, using Free Float instead of Market Capitalization, to be incorporated at the end of next year, will depend on various organizations’ ability to increase market capitalization and liquidity in Thai Stock Market, as well as the measurements that the SET is currently implementing.

Mr. Vicharat Vichit-Vadakan, the SET President, revealed that Morgan Stanley Capital International (MSCI) announced a new methodology for calculating the MSCI Index. This new methodology will select securities, which give weight to the Free Float Adjusting Method, instead of the existing Full Market Capitalization Method. There will be two steps in this progression of adjusting MSCI Index according to this new formula: the first step, starting November 30, 2001, uses the Free Float Adjusting Method in the calculation of the investment weight. The second step, starting May 31, 2002, will increase the target market representation, from 60% of Total Market Capitalization to 85% of Total Free Float-Adjusted Market Capitalization. MSCI will announce the index constituents and their inclusion factors in June 2001.

“This adjustment of MSCI Index methodology may affect the Thai Stock Market. At the same time, however, it has created alternatives in ways to increase the securities’ market capitalization, along two main measurements: The first measurement is to increase market capitalization by increasing the number of large listed companies in the Exchange, encouraging the transformation of state enterprises to carry out share distribution to the public and to list them on the Exchange, and thus increase market capitalization. The second measurement is to increase the Free Float of listed securities, by encouraging share distribution of existing listed companies, especially state enterprises or listed companies with the public sector as the major shareholder, to the public and investors. This share distribution, according to the second measurement, should help increase Free Float to at least 15%, which is the criterion set by MSCI in the selection of securities for MSCI Index calculation. The more share distribution the companies carry out, the better it is for Thai stock market.

The Stock Exchange of Thailand will cooperate with related organizations to encourage the privatization of state enterprises, carry out share distribution and list them on the Exchange. Moreover, the Stock Exchange of Thailand will encourage more share distribution for existing listed companies to the public, in order to increase the Free Float of the companies’ shares. Furthermore, the SET will cooperate with MSCI to consider giving more investment weight to the liquidity of Thai Stock Market in the calculation of the MSCI Index by considering including the NVDR (Non-Voting Depository Receipt) in the calculation. NVDRs will soon be launched on the Exchange. If MSCI includes the NVDR in MSCI Index, it would be beneficial to the SET’s Market Capitalization methodology”, added Mr. Vicharat.

Free Float, according to MSCI, means the proportion of the shares that foreign investors can buy or hold, with no limitation on the Foreign Limit. It is calculated by deducting the total number of the company’s shares (100%) from the proportion of Strategic shareholdings, that is, the holding of shares with objectives other than to make profits. This would include holdings held by the public sector or related organizations, by other strategic partners, by the company’s executives or the Board, and by employees.