S&P Dow Jones Indices Corporate Actions: Policies & Practices

July 2012 SampP Dow Jones Indices Index Methodology

SampP Dow Jones Indices Corporate Actions Policies amp Practices

SampP Dow Jones Indices Corporate Actions Policies amp Practices 1

Table of Contents

Table of Contents 1

Introduction 4

Rights Offerings (or ldquoRights Issuesrdquo) 5

Definitions 5

Terms 7

Life Cycle of a Rights Offering 9

SampP Indicesrsquo Calculation of Rights Offerings 10

Equal Weighted and Modified Market Cap Weighted Indices 12

Warrants Options Convertible Bonds 13

SampP Indices Treatment of Rights Offerings 14

Spin-Offs 17

Definitions amp Terms 17

Scenarios 20

Treatment of Spin-Offs in Certain Equal Weighted and Modified Market Cap Weighted Indices 23

Spin-Offs SampP Indices Treatment 25

Index Committee 27

Domiciles 28

Background 28

Issues 28

Policy 28

Share and IWF Updates 31

Summary 31

Policy 31

Rebalancing Guidelines 32

Multiple Share Classes 33

Investible Weight Factor (IWF) 33

Degree of Freedom 34

SampPTSX Canadian Indices An Exception 37


Mergers amp Acquisitions 38


Additions and Deletions 42


Dividends Stock Splits and Consolidation 48


Special Dividends 50

Hybrid Dividends 50

Scrip Dividends 51

Dividend Treatment for ADRs and GDRs 52

Regional Variations in the Treatment of Cash Dividends 52

Foreign Exchange Conversions for Dividends 54

Dividend Not Quoted Ex by the Exchange 55

Bonus Issues of Shares Not Entitled To Cash Dividend 56

Total Return and Net Return Indices 57

Unexpected Exchange Closures 58

Full Day Exchange Closure 58

Partial Day or Early Exchange Closure 58

Treatment of Corporate Actions 58

Rebalancing 58

Stock Suspensions 60

Long Term Stock Suspensions 60

Short Term Stock Suspensions 60

Error Correction 61

Error Correction Policy for SampP Equity Indices 61

Index Governance 63

Index Committee 63

Index Policy 64

Announcements 64

Appendix 65


SampP Contact Information 66

Disclaimer 67


Introduction This document covers corporate action treatment per SampP Dow Jones Indicesrsquo equity indices policies and practices To understand and successfully use indices for investment analyses it is important to know how adjustments are made when different kinds of corporate actions occur and SampP Dow Jones Indicesrsquo treatment of these events Our goal is to provide transparency and offer consistency in our global treatment of corporate actions to the greatest extent possible Please note however that local market practices may dominate major decisions so we will have general approaches with exceptions andor special rules that pertain to certain markets To the extent possible the implementation and timing is the same across all SampP branded indices


Rights Offerings (or ldquoRights Issuesrdquo) Definitions Rights Offering An event in which existing shareholders are given the right to buy a specified number of additional shares from a company at a specified price (lsquorightsrsquo or lsquosubscriptionrsquo price) within a specified time (lsquosubscription periodrsquo) A rights issue is offered to all existing shareholders individually and may be accepted in full accepted in part or rejected A right to a share is generally issued as a ratio to shares held (eg 13 rights issue meaning a right to buy one new share for every three shares owned) Rights issues may be underwritten The role of the underwriter is to guarantee that the company will raise a minimum amount of capital Typical terms of an underwriting require the underwriter to subscribe to any shares offered to but not taken up by shareholders Underwriters and sub-underwriters may be governments financial institutions stockbrokers major shareholders of the company or any other party

Open Offering Open offers have been most commonly recognized in the UK These are a type of UK equity placing where existing shareholders are offered the opportunity to buy shares at a discounted rate to the market price This is almost always accompanied by an equity placing available to all investors Open offers are lsquonon-renounceablersquo Shareholders must either take up the offer or let them lapse Once the offer has expired it no longer exists The shareholders have an entitlement rather than a tradable right to subscribe to new shares For this reason an open offer is sometimes referred to as an entitlement issue Any entitlement that is not taken up simply expires Open offers are not transferable (tradable) on the open market As in the case of rights open offer issues may or may not be underwritten

Renounceable Rights Offering The rights issued to an existing shareholder are transferable on the open market and are able to be sold separately from the share to other investors during the life of the right Renounceable rights are referred to as ldquotransferablerdquo in the US or ldquotradablerdquo in other markets All three of these terms ndash renounceable transferable and tradable ndash are used interchangeably throughout this document Non-Renounceable Rights Offering The rights issued as part of the offering cannot be traded Shareholders must either take up the rights or let them lapse upon expiration Once the rights have expired they no longer exist Also referred to as ldquonon-transferablerdquo or ldquonon-tradablerdquo


Accelerated RightsEntitlement Offering This is most commonly used in Australia but is also gaining popularity in Singapore and the UK This type of rights offering grants the issuer quick access to capital markets without disadvantaging smaller investors The institutional component of the offer is conducted during a trading halt and the company generally resumes trading on an ex-rightsentitlement basis within 3-5 trading days Retail investors generally have 2-3 weeks to decide to take up the offer Also known as Jumborsquos RAPIDS and AREOrsquos Features (some or all of the following features may be present)

bull The stock is suspended when the rights offering is announced bull The offer made to institutional holders typically occurs before retail holders ndash

institutional investors are asked to subscribe on the same day vs retail investors who are given more time to consider the issues (usually within two weeks of the original offering)

bull The offer can be conducted on a renounceable or non-renounceable basis bull A capital raising announcement may be combined with the offering

Pro-rata Accelerated Institutional Tradable Retail Entitlement Offering This type of entitlement offering grants the issuer quick access to capital markets It comprises an accelerated institutional entitlement offer and a tradable retail entitlement offer The institutional component of the offer is conducted as an AREO (see above) retail investors have the option to sell their entitlement on the open market take up the offer or let their entitlement lapse This is also known as a PAITREO Features (some or all of the following features may be present)

bull The stock is suspended when the entitlement offering is announced bull The offer made to institutional holders is conducted as an Accelerated RightsEntitlement

Offering during the trading halt period Any renounced rightentitlements are sold through a book building process

bull The offer made to retail holders is conducted as a Renounceable RightsEntitlement Offering whereby the rightentitlements are tradable

Poison Pill Rights These are commonly seen in US markets This is a defensive strategy used by companies faced with a hostile takeover The target company issues rights to existing shareholders to acquire a large number of common shares These rights can be exercised if anyone acquires more than a set amount of the target companys stock This dilutes the percentage of the target owned by the bidder and makes it more expensive to acquire control of the target Analysts can ignore poison pill rights We do not recognize these rights


In-the-money If the rights or open offer price represents a discount to the price of the stock following the close of trading on the day before the ex-date then the offer is said to be in-the-money Out-of-the-money If the rights or open offer price is greater than or equal to the stock price on the day before the ex-date then the offer is said to be out-of-the-money

Terms Ex-date The starting date where a security is traded without the previously declared rights After the ex-date a stock is said to trade ex-rights Ex-rights The shares no longer have the rights offering attached to them Expiration Date The end of the subscription period the last day that the rights can be exercised This is also known as the ldquorenunciation daterdquo in some markets Record Date The date that is used to determine the holders who are entitled to the offering Subscription Period The period during which it is possible to exercise the right by paying the subscription price Also renounceable rights are available for trading during the subscription period When the subscription period ends (on the ldquoexpiration daterdquo) those rights not yet subscribed will expire at zero value Subscription Price Also known as the ldquooffer pricerdquo or ldquorights pricerdquo This is the price at which existing shareholders can purchase the new shares Theoretical Ex-Rights Price (TERP) This is the theoretical price of a stock after a new rights issue This is also referred to as the ldquoAdjusted Pricerdquo throughout this document


Terms Used Interchangeably across SampP Indices We are attempting to standardize terms used in our documents However due to local market terminologies analysts might come across different regions or groups using different terms to describe the same item Here is a list of commonly used terms and their synonyms

COMMONLY USED TERM

INTERCHANGEABLE TERMS USED MEANING OF THE TERM

Adjusted Price TERP (Theoretical Ex-Rights Price) Ex-Rights Price Theoretical Open Price Next Day Open Price

Dividend Disadvantage Dividend Difference

Future dividend amount that new shares are not entitled to

Expiration Date Renunciation Date Market Value of the Stock Cum Price or Cum Rights Price This is the closing

price on the day before the rights ex-date Non-Renounceable Non-Tradable Non-Transferable Open Offer (in the

UK) Price Adjustment Factor (PAF)

Dilution Factor

Renounceable Tradable Transferable Rights Offering ndash broad term used to describe all kinds of rights (renounceable and non-renounceable)

Entitlement Offer (used in AU for non-renounceable rights) Open Offer (used in UK for non-renounceable rights)

Subscription Price Offer Price Rights Price (please note that in our Australian indices the price at which the additional rights line is added to the index for renounceable rights is referred to as the ldquoRights Pricerdquo) Application Money (in AU)

Underwritten Guaranteed (in North America) Value of the Rights Price Adjustment Price Adjustment Amount Implied

Rights Value


Life Cycle of a Rights Offering

Ex-date-1 At the close of the market registered shareholders are entitled to participate in the rights offering

Ex-date At the market open the stock is trading lsquoexcludingrsquo the right In most markets the subscription period usually begins on the rights ex-date

Subscription period At any time in the subscription period it is possible to exercise the right by paying the subscription price Also renounceable rights are available for trading during the subscription period

Expiration date The end of the subscription period If subscription payments have not been made by this time the right lapses

Expiration date +1 Shareholders who have subscribed to the offering are entitled to the new shares issued


SampP Indicesrsquo Calculation of Rights Offerings

STEP 1 Determine if the rights offering is in-the-money or out-of-the-money If the subscription price lt the stock closing price on the day before the ex-date then the rights offering is in-the-money If the subscription price ge the stock closing price on the day before the ex-date then the rights offering is out-of-the-money In several cases with rights offerings the new shares are not entitled to a future dividend If a future dividend is announced by the day before the ex-date of the rights the dividend amount has been confirmed and we are certain that the newly created shares as a result of the rights offering are not entitled to the dividend we use the following rule to determine if a rights is in-the-money or not If the subscription price + dividend lt the stock closing price on the day before the ex-date then the rights offering is in-the-money If the subscription price + dividend ge the stock closing price on the day before the ex-date then the rights offering is out-of-the-money STEP 2 If the rights is in-the-money apply the price and share adjustment SampP Indicesrsquo practice is to only recognize rights or open offers that are in-the-money The assumption is that our main clients are long-only indexers and as rational investors they will exercise any rights that are in-the-money to mimic the index and keep tracking error minimized Indexers will not exercise issues that are out-of-the-money as they are trading at a premium to the current market price If the rights offering is out-of-the-money then no action is undertaken to match the corporate action for index purposes as a rational investor would not subscribe to the rights issue This is valid even if the issue is underwritten or guaranteed rights offering Any subsequent shares issued are classified as a placement for index management purposes and adjusted after the end of the subscription period during the weekly share updates if the share change is greater than 5 For share changes less than 5 the adjustment is made at the quarterly rebalancing If the rights offering is in-the-money the share adjustment is made irrespective of whether it is greater than or less than 5 (since it is a corporate action driven event) The price adjustment is always applied on the ex-date using the following calculation


Price adjustment calculation Value of the Rights = Market Value of the Stock ndash (Subscription Price + Dividend) (Number of Rights required to purchase 1 share + 1) Price Adjustment Factor = (Market Value of the Stock - Value of the Rights) Market Value of the Stock Adjusted Price or Theoretical Ex-Rights Price (TERP) = Market Value of the Stock Price Adjustment Factor = Market Value of the Stock ndash Value of the Rights Please note that the Market Value of the Stock is the previous dayrsquos closing price (previous day to the rights ex-date) This is also referred to as Cum Rights Price in some markets If there is no upcoming dividend or newly added shares are entitled to a future dividend the ldquoDividendrdquo amount in the formula is zero If the new shares are not entitled to the dividend we add the dividend amount to the subscription price This applies to regular and special dividends When new shares from the subscription of rights are not entitled to the next dividend we add the dividend amount to the subscription price for the rights issue calculation This leads to a lower calculated value for the rights and thus a higher price adjustment factor On the dividend ex-date we recognize the full amount of the dividend based on the post-rights issue number of shares For market-cap weighted indices the index underperformance on the rights ex-date will be cancelled out by the index over-performance on the dividend ex-date Example 1 SP AUSNET (SPNAX) For SPNAXrsquos (May 2009) rights offer the full AU$ 005927 distribution (AU$004603 cash dividend + AU$ 001324 capital return) was used in the TERP calculation of SPNAX We added this amount to the SPNAX rights subscription price of AU$ 078 We did not dilute the cash dividend and capital return on the dividend ex-distribution date Example 2 A 75 rights offering (ie the right to buy seven new shares for every five shares owned) at a subscription price GBP 150 and the market value of the stock on previous dayrsquos close is GBP 334 no future dividend has been announced Value of Rights = 334 ndash (15 + 0) (57) + 1 = GBP 107333333 Price Adjustment Factor = (334 ndash 107333) 334 = 067864271 Adjusted Price or TERP = 334 067864271 = GBP 226666667 OR Adjusted Price or TERP = 334 ndash 107333333 = GBP 226666667


Example 3 A 75 rights offering at a subscription price of GBP 150 and the market value of the stock on previous dayrsquos close is GBP 334 a future dividend for the amount GBP 050 is declared but the new shares are not entitled to this dividend Value of Rights = 334 ndash (15 + 05) (57) + 1 = GBP 078166667 Price Adjustment Factor = (334 ndash 078166667) 334 = 076596806 Adjusted Price or TERP = 334 076596806= GBP 25583333 OR Adjusted Price or TERP = 334 ndash 078166667 = GBP 25583333 Note To determine if the rights offering is in-the-money and for the calculation of the price adjustment amount we need to know if the new shares from the rights are eligible for the dividend If these shares are not eligible for the dividend then the calculation involved is shown above To determine whether or not the rights are in-the-money we should always add the dividend amount to the subscription price and check if that is greater than or less than the closing price of the stock on the day before the ex-date However we add a caveat that the dividend needs to be added to the subscription price for calculating the value of the rights only if the new shares will be in the index on (or before) the dividend ex-date For example Rights Offer ex-date July 27 2011 Share Increase date July 27 2011 Dividend ex-date August 12 2011 The action does require the dividend to be added to the subscription price because the new non-eligible shares will be in the index on the dividend ex-date

Equal Weighted and Modified Market Cap Weighted Indices When a stock trading in an equal weighted index has a rights or open offering there are no market cap changes between the close and adjusted close files (ie the weight of the company stays the same per index methodology) So either the IWF or the AWF will be adjusted to offset any potential market cap changes bringing the security back to its weight before the rights offering Certain Strategy indices follow the modified market cap weighted methodology For such indices in the event of a rights offering the treatment is exactly the same as the one for equal weighted indices The price adjustment is accompanied by an index shares change so that the companyrsquos weight remains the same as its weight before the rights offering No divisor adjustment is made


Refer to the individual index methodology for more information on the specific treatment for a particular index

Warrants Options Convertible Bonds We do not add securities like warrants options or convertible bonds to our equity indices In certain instances depending on the offer terms we might recognize warrants options convertible bonds and rights to subscribe to other securities If all the information to calculate the price adjustment for warrants options convertible bonds loan stocks or other securities is available we make the price adjustment on the rights ex-date The share increase where applicable is done at a later time when information is available and has been reviewed Warrants and rights are both issued by the company and sometimes trade on the market separately from the companyrsquos stock The main difference lies in their lifespan Rights usually expire after a few weeks while warrants typically continue for several years


SampP Indices Treatment of Rights Offerings For all markets - Developed Emerging amp Frontier - irrespective of whether the rights are renounceable or not or fully underwritten or not

bull Price adjustments are applied at the opening of the rights ex-date as per the calculations shown earlier in this document

bull Share changes are also applied at the full rights ratio at the opening of the rights ex-date bull If the rights are undersubscribed or oversubscribed the corresponding share adjustments

are made at the next quarterly share rebalancing if the change is less than 5 If the change in float-adjusted shares is greater than 5 these changes might be made sooner at SampP Indicesrsquo discretion with a 3-5 daysrsquo notice

bull If the new shares are not entitled to a future dividend which has been announced and where the amount is known the price adjustment calculation will reflect the dividend (we will add the dividend amount to the subscription price) This applies to both ordinary and special dividends Please see calculations shown earlier in this document

Exceptions to this rule Australia For this market SampP Indices follows the local practice for renounceable and non-renounceable accelerated and traditional rights offerings as described below (i) Renounceable Rights (Traditional)

bull Adjust the headline stock price on the ex-date bull Add the rights class to the index with new shares at the Theoretical Ex-Rights Price

(TERP) of the headline stock minus the Subscription Price bull When the rights class converts to fully paid ordinary shares drop the rights class and

increase the shares in the headline stock at the last trade price (ii) Renounceable Rights (Accelerated)

Institutional investors are able to renounce the offer during the trading halt and the entitlement is then sold through a bookbuild process There is no additional stock line created It is essentially treated the same as a non-renounceable accelerated offer bull Price adjustment ndash on the ex-date bull Share change ndash on the ex-date applying the rights ratioterms

(iii) Non-Renounceable Rights (Traditional)

Less frequent in the Australian markets bull Price adjustment ndash on the ex-date bull Share change ndash on the ex-date applying the rights ratioterms


(iv) Non-Renounceable Rights (Accelerated) The most common type of rights offerings seen in Australia bull Trading halts when the rights offering is announced bull There is an institutional and retail component of the rights Institutional investors

typically have one day during the trading halt to exercise their rights Retail investors are given an extended period of time

bull Ex-date is the date that trading resumes bull Price adjustment ndash on the ex-date bull Share change ndash applied on the ex-date applying the rights ratioterms

Accelerated Rights Offering Accelerated Rights may come in two parts ldquoinstitutionalrdquo (accelerated) and ldquoretailrdquo (traditional) For all purposes the index is adjusted on the ex-date at the full rights ratio If there is an over allocation in the index a share adjustment is made to bring shares back into line at the next quarterly share rebalancing Current treatment is as follows

bull Known Price If the subscription price is known in advance we adjust price and shares on the ex-date

bull Unknown Price If the price is determined in a bookbuild or some other facility and released after the ex-date we treat this as a placement (secondary offering) Shares increase at the full ratio with a 3-5 day notice with no price adjustment

US Transferable Rights For US transferable rights SampP Indices uses the when-issued trading price for the rights line to determine the price adjustment amount The value of the right is determined by using the market value of the right if available We use the when-issued price of the rights trading line and subtract that amount times the ratio from the underlying to get the new price of the underlying If there is no market value available we calculate the value of the rights as discussed earlier in this document Price Adjustment Hierarchy (1) Market price inputs (when issued prices are used to calculate price adjustment for transferable rights) (2) Our calculation published earlier in this document (for non-transferable rights) UK Open Offers Open Offers are a type of UK equity placing where existing shareholders are offered the opportunity to buy shares at a discounted rate to the market price These rights are non-renounceable Open offers are often accompanied by an equity placing available to all investors at the same discounted price preferentially available to existing shareholders Both events are normally announced on the ex-date of the open offer


SampP Indices recognizes that there is no additional value to being a shareholder prior to the offer as there is equal value available to other market participants Our treatment of UK Open Offers is to not apply a price adjustment for such transactions We apply the share change after the end of the subscription period as part of our weekly share changes (refer to chapter on Share amp IWF Updates) if the share change is greater than 5 For share changes less than 5 the adjustment is made at the quarterly rebalancing Subscription price is not known until after the ex-date In certain markets the subscription price is not known on the ex-date and sometimes provided well after the ex-date has passed In Singapore for example in some instances a subscription price range is provided instead of a fixed subscription price and there is no definite subscription price at the market close of the day before the rights ex-date We have come across similar cases in Chile and other emerging markets In the US there have been instances where the subscription price and ratio were not known until the ex-date had passed In all such cases we treat this as a book buildplacement issue and apply a share change to the full extent of the rights ratio at the opening of the first business day following the expiration date The share change is applied only if the rights is in the money when the terms are disclosed No price adjustment is made Other In instances where high profile banks or companies are involved or the Government is underwriting shares we reserve the right to alter the general treatment with sufficient notice to clients


Spin-Offs Definitions amp Terms Spin-off When a corporation divests a subsidiary or division to create a new independent company The spun-off company takes assets intellectual property technology andor existing products from the parent organization and forms its own private or publicly listed company Shares of the new organization are distributed to the equity shareholders of the parent organization at a ratio established by the parent to keep or sell at their discretion The new company formed by this divestiture is called the ldquospun-offrdquo entity Spin-offs may also be referred to as ldquodemergersrdquo

Carve-out This is also referred to as a ldquopartial spin-offrdquo In the case of a carve-out the parent company sells a minority stake in a subsidiary to the public through an IPO Example In 2001 Phillip Morrisrsquo equity carve-out of a portion of its ownership in Kraft Foods resulted in one of the largest initial public offerings in US history Kraft was wholly owned by Phillip Morris prior to this IPO Subsequent to the carve-out Phillip Morris owned less than 50 of Kraft Split-off In a split-off the existing shareholders of the parent company must relinquish their shares in the parent company to receive shares in the subsidiary The key difference between a spin-off and a split-off is that in the case of the latter the shareholders need to act ndash either opt in for the split-off and give up their shares in the parent company to receive shares in the subsidiary or do nothing and keep the shares of the parent company In a spin-off existing shareholders in the parent company do not need to trade or take any action (unless they choose to) They automatically receive shares in the subsidiary

Example 1 Kraft Foods split-off its Post cereal business in August 2008 into a separate company Cable Holdco which then immediately merged with Ralcorp Holdings (NYSE RAH) Holders of Kraft stock had the option of exchanging any or all of their Kraft shares for shares in the new Ralcorp at the exchange ratio Example 2 Procter amp Gamble split-off its Folgers coffee assets which were merged with JM Smucker (also in 2008)


When-Issued Trading When-issued trading is the trading of securities that takes place before the securities are issued When-issued markets a short form of ldquowhen as and if issuedrdquo are active in price discovery for new securities The term refers to a conditional security that is authorized for issuance but not yet actually issued All ldquowhen issuedrdquo transactions occur on an ldquoif and whenrdquo basis and are settled if and when the actual security is issued Regular Way Trading Trading after a security has been issued

In-Specie This term is Latin for ldquoin its actual formrdquo and is used often in spin-off related discussions It implies that the distribution of an asset will be in its actual form rather than in cash or other forms In-Specie distribution is made when cash is not readily available and allocating the physical asset is the better alternative A stock dividend is an example of an in-specie distribution Spin-off Ratio Also referred to as the ldquoDistribution Ratiordquo This is the ratio of new shares in the spun-off entity to the existing shares in the parent company For instance a 23 (or 2 per 3) spin-off ratio implies that existing shareholders will receive two shares in the spun-off entity for every three shares they hold of the parent company Distribution Date In the context of a spin-off this is the date on which the spun-off entity shares are distributed This is sometimes referred to as the ldquopayable daterdquo Ex-Distribution date The date on which the parent security is first traded without the right to receive the distribution Shareholders who own the parent security prior to the ex-date will receive shares in the spun-off entity Investors who purchase the parent stock on or after the ex-date will not receive shares in the spun-off entity In most but not all cases the ex-distribution date will be the day after the payable date Record Date The date that is used to determine the holders who are entitled to a distribution or offering Settlement Date The date that the securities must be delivered and paid for to complete a transaction Form 10-12B Most US domiciled spin-offs file a Form 10-12B with the SEC This is a security registration form related to securities created as a result of a spin-off There are three major portions of the 10-12B form ndash (a) Letter to Shareholders from Parent Company This provides a history of the parent company their reason for the spin-off and other relevant information


(b) Information Statement This section contains all the relevant information for shareholders and other investors Occasionally portions of this section will be left blank and amended (with 10-12BA filings) at a later time and (c) Financial Information This section contains all the financial information including pro-forma statements These statements show what the financials would look like if the spun-off division were its own company in the past


Scenarios For index calculation purposes spin-offs present two decisions Firstly does the spin-off have a market determined price and secondly does the original company the spun-off company both or neither retain membership in the index To answer the first question we begin by drawing a distinction between the scenarios that we have identified

Corporate Action Treatment Decision

Scenario 1 Company A spins off company B Company B trades and has a market price

Since Company B has a price Company Arsquos price is adjusted to reflect the capitalization of Company B being divested

Scenario 2 Company A spins off company B Company B has no market price but is listed to trade either on the ex-date or shortly after

Company B is added to the index at a price of zero nothing changes with Company A at this time Once Company B trades the actions announced as part of the index membership decision will be enacted

Note If the spin-off has no market price and is not going to be listed in the short-term or will be a privately held company we will not recognize this event or make any index adjustments unless the company or the exchange explicitly provides us with a price estimate


Decision Table Listed below are the most commonly observed cases with spin-offs using the definitions of Scenario 1 and Scenario 2 on the prior page An attribute index is one in which the constituents are drawn from a headline index through a screen This relationship is also often referred to as a parent and child index A is the parent company and B the spun-off entityhellip

Scenario Announcement Schedule Headline Index Treatment

Attribute Indices Treatment (GICS ValueGrowth etc)

A remains in the index B is deemed ineligible for inclusion

3-5 days prior to the expected ex-date

Scenario 1 Price adjustment for A drop in index market capitalization and change in divisor Scenario 2 No price adjustment for Company A Company B enters the index at zero price amp capitalization no divisor change Once Company B trades it is removed from the index at the last traded price There is a divisor change at this point in time

Same treatment as the headline index in both scenarios

A remains in the index B is deemed eligible for inclusion


Scenario 1 Price adjustment for Company A Company B is added to the index any previously announced removals to allow for the inclusion of Company B are enacted Scenario 2 No price adjustment for Company A Company B enters the index at zero price amp capitalization with no divisor change

Scenario 1 As with the headline index Scenario 2 Once Company B trades it is removed from any relevant Company Arsquos attribute indices and is added to Company Brsquos attribute indices


Scenario

Announcement Schedule

Headline Index Treatment


A remains in the index B is already a member of the index

Shortly after the spin-off is announced

Scenario 1 Price adjustment for Company A change in share andor IWF for Company B Depending on the terms of the spin-off an overall adjustment in the divisor Scenario 2 NA ndash market price exists

Scenario 1 Decrease in capitalization amp divisor adjustment for Company Arsquos relevant attribute indices Increase in capitalization amp divisor adjustment for Company Brsquos relevant attribute indices Scenario 2 NA

A is deemed ineligible to remain in the index however B is deemed eligible for inclusion


Scenario 1 Company A is removed from the index at its closing price after the market close on the day prior to the spin-off ex-date Company B is added to the index at its market price there is a change in index market capitalization amp a change in the divisor Scenario 2 No price adjustment for Company A Company B enters the index at zero price amp capitalization no divisor change Once Company B trades Company A is removed from the index at that dayrsquos closing price with a divisor change

Scenario 1 Company A is removed from its attribute indices and Company B is added to its attribute indices which may differ from Arsquos Scenario 2 As with the headline index

Neither A nor B are eligible to be in the index

As soon as possible after SampP has determined ineligibility

Scenario 1 Remove the company prior to the spin-off becoming effective and replace it with another more eligible company Scenario 2 Remove the company prior to the spin-off becoming effective and replace it with another more eligible company



Treatment of Spin-Offs in Certain Equal Weighted and Modified Market Cap Weighted Indices SampP Indices defines a modified market cap weighted index as one where the final weight of an index component is derived with some consideration of the actual market capitalization of the company but there is some form of maximum market capitalization criterion embedded in the index methodology which may result in the redistribution of weights across constituents For modified market cap weighted and equal weighted indices we keep both the parent and spin-off companies in the index until the next index rebalancing regardless of whether they conform to the theme of the index When there is no market-determined price available for the spin the spin is added to the index at zero price at the close of the day before the ex-date No price adjustment is applied to the parent and there is no divisor change All indices undergo a full review with the next rebalancing However if

(i) the next index rebalancing is more than three months away and (ii) either the parent company or the spin-off company is clearly not eligible for the particular

index then the spin-offs are reviewed on a case-by-case basis by the Index Committee and the appropriate treatment will be preannounced to clients In such cases and when achievable clients are provided with at least 2-5 daysrsquo notice to drop either the parent or child company (as applicable in the situation) in a market situation where regular-way trading is available for both the parent and child

o If a decision is made to keep the spin-off company and drop the parent because of a determination that the spin-off company is within the theme of the index while the parent no longer meets such requirements the weight of the parent stock is (1) distributed proportionately across the rest of the index for a modified market cap weighted index or (2) added to the spin-off stockrsquos weight in an equal weighted index

o Alternately if a decision is made to drop the spin-off company and keep the parent

because it has been determined that the parent company is within the theme of the index while the spin-off does not meet such requirements the weight of the spin-off company is (1) distributed proportionately across the rest of the index for a modified market cap weighted index or (2) added back to the parent stockrsquos weight in an equal weighted index

Affected Indices All modified market cap weighted (including dividend yield weighted) and equal weighted indices except for those that are based on another fixed count index where the adds and drops follow the parent exactly or it is known that the spin-off will not meet the theme of the index at the next rebalancing (for example the SampP 500 Equal Weighted Index and the SampP 500 Dividend Aristocrats) These indices will continue to follow the adddrop policy of the parent


For the avoidance of doubt refer to the individual index methodologies for more information on the specific treatment for a particular index


Spin-Offs SampP Indices Treatment Using our earlier descriptions of the two scenarios SampP Indices treatment follow (1) A market-determined price is available for the spin-off These are instances when the

spin-off is already trading regular-way or when-issued In these cases the price adjustment for the parent is calculated as the (price of the spin-off) (ratio of the spin-off shares to the parent shares) This is most commonly seen in US markets

(2) No market-determined price is available for the spin-off This is commonly observed in

most non-US markets where there is no when-issued trading for spin-offs so there is no price discovery mechanism performed by the market In the when-issued market in the US it is very easy to find a good estimate for the price of the spun-off company For most other markets this is often very difficult If a company is spinning off a division as a new company both the parent company and the spin are kept in the index until the market has determined a price This market price can be used for the index adjustment if either the parent or the spin-off is being deleted from the index

Essentially we add the spun-off company to all the indices of which the parent is a constituent at a zero price at the market close of the day before the ex-date (with no divisor adjustment) and then remove it at the close of the ex-date at its trading price (with a divisor adjustment) A fund manager tracking the index should sell the spin-off at the close on the ex-date and be able to match the index In some markets there is a delay between the ex-date and when the spin-off begins to trade In these cases the spin-off is in the index during this time Since it had not yet traded it is carried at a zero price until trading begins Using this approach it is usually possible to announce the index adjustment five days in advance even though the spin-off price is not known until the ex-date This approach is also used with equal-weighted or modified market-cap weighted indices with adjustments to account for those indicesrsquo calculation methodologies What if scenarios Q What are the implications (or not) on indices with a fixed number of stocks A Indices with fixed number of stocks will carry an extra stock for a day or more Q What if for example the parent is a constituent of the SampP Global Water index and the spin does not fall in the ldquowaterrdquo category A We will still add the spin in the SampP Global Water Index at zero price for a day (or until it begins trading) and then drop it perhaps waiting until the next rebalancing as described in the earlier section


Q What if the spin-off doesnrsquot trade for a few days or weeks A We hold the spin-off in the index at zero price until trading begins

Q What if the spun-off entity trades on an ineligible exchange like the AIM in the UK for example A This will depend on the market and Committee decisions For certain markets we might decide to not add the spin-off to the index and either put in an estimated price adjustment for the parent or not recognize the spin-of at all For US OTC markets we will likely still add the spin-off for one day and then remove it once price discovery is known Decisions will be made on a case-by-case basis and announced to clients with ample lead time when possible

Q Will there be infinite returns reported in our data files for the spun-off stock on the close of the ex-date if we add it at zero price at the close on the day prior to the ex-date and drop it at market price at the close of the ex-date How will the return of the parent be treated A Where a stock is included at zero price and then trades its return on the day is mathematically infinite SampP Indices adjusts the returns field in the constituent (SPC) files to make it zero for the day Similarly since the closing price of the parent is not being adjusted downward as of the next dayrsquos open to account for the spin-off the return on the parent for that day could be understated SampP Indices calculates the return on the parent stock on that day by dividing the total closing index market cap of the parent stock and the spun-off stock by the closing index market cap of the parent stock on the day prior to spin-off This gives a total return on the combined position of the parent and spin-off stock and since the return on the spun-off stock is treated as zero for the day this ensures that the single stock returns presented can be aggregated into the total index return

Q What happens if the spin-off trades in a different country from the parent The spin could be trading in a different currency different time zone and belong to a different country index as well A We will still add the spin-off at zero price for a day (or until it starts trading) to all the indices of which the parent is a constituent and remove it at the end of the first trading day from those indices

Q What if we decide to keep the spin-off in the index A Based on the spin-off policy above and each indexrsquos individual methodology we announce the treatment to clients with a two-to-five advance notice whenever possible We add the spin-off after the market close on the day before the ex-date at zero price to all indices of which the parent is a constituent If we decide to keep the spin-off we also make any related adjustments to all sector and attribute indices


Exception The only exception to the treatments above is when the spin-off is accompanied by a reverse split This is very commonly seen in South Korea when companies undergo restructuring and sometimes in the UK In South Korea holding companies often have a reverse split accompanying a spin-off of its operating entity As a general policy for spin-offs accompanied by reverse splits where the spin-off is generally the operating entity and larger than the parent SampP branded indices add the operating entity as a separate company and drop the parent (holding company) if the methodology so dictates Essentially if a decision is made to keep the operating entity (spin-off) in the index and drop the parent (holding company) the steps involved are

bull Parent stock is dropped from the index bull Spin-off is added to the index with post-spin shares and prices

If a decision is made to keep the holding company in the index

bull Parent stock receives a reverse split and price adjustment and remains in the index

Index Committee SampP Index Committees reserve the right to make exceptions in the treatment if the need arises Announcements are made to clients with sufficient notice should we decide to make an exception to the general rules stated in this document We might occasionally come across situations where there is no market-determined price available for the spin However the exchange or the parent company itself might provide an estimated value for the spin In such cases the Committee makes a decision regarding the use of either the zero price method or the estimate published by the exchange or company in question If liquidity in the when-issued market is a concern we will make an announcement in advance if we propose to use any other pricing In some cases the spun-off entity might not trade on the ex-date and we hold it at zero price until it begins trading In some situations (to be reviewed on a case-by-case basis) we might decide to hold the spin in the index at an estimated price until it trades In any scenario where the treatment differs from this document clients will receive sufficient notice whenever possible


Domiciles

Background Domicile does matter Investors are concerned about which country a company is in and often allocate their portfolios on a country-by-country basis Companies care where they are placed when an index is constructed because it determines how they are perceived by investors and what companies are considered their peers Countries also care and may place restrictions on foreign investorsrsquo holdings

Issues Traditionally index providers (including SampP) analysts and investors had relied on incorporation or registration as the primary determinant of a companyrsquos nationality This determines a companyrsquos tax status the legal structure it follows and usually affects its corporate structure and governance Difficulties arise when a company uses its domicile for purposes other than simple legal registration such as minimizing its taxes or adjusting shareholder rights This often leads to registrations in domiciles of convenience such as Bermuda the Cayman Islands the Channel Islands Liberia or Panama Another source of difficulty is companies in emerging or frontier markets which seek developed market legal and tax systems ndash examples include Chinese companies incorporated in Hong Kong or Bermuda When a domicile of convenience is chosen additional criteria are needed Some of the others considered include headquarters location stock exchange primary listing opinions of security analysts and investors geographic sources of revenues and location of fixed assets or employees

Policy Given these issues the following is SampPrsquos domicile policy 1 Unless a companyrsquos legal incorporation or registration is a ldquodomicile of conveniencerdquo the incorporation and registration determines its country of domicile Domiciles of convenience are listed below in the notes 2 Where the incorporationregistration is in a domicile of convenience if a companyrsquos principal corporate offices and its primary stock exchange listing are in the same country and security analysts consider the company to be in the same country that country will be chosen as the companyrsquos country of domicile


3 Where the factors in paragraph 2 do not agree the decision will be referred to the Index Committee

4 Please note that while a company is assigned a country of domicile based on this policy individual index methodologies may have other criteria that would exclude it from a headline country index Please refer to the index methodologies for such additional criteria

5 This review includes exceptions for China Russia and Israel A large number of companies based in China are incorporated andor listed and traded in other places such as Hong Kong Singapore Bermuda (incorporation) or the US (listings) because the Chinese equity markets are not completely open to global investors These companies have been and will continue to be considered Chinese Numerous Russian companies are similarly incorporated and traded in London though headquartered in Russia Israeli companies are sometimes listed on NASDAQ and incorporated in domiciles of convenience Notes Domiciles of Convenience Bermuda Channel Islands (as in British Channel) Gibraltar Islands in the Caribbean (Anguilla Antigua and Barbuda Aruba Bahamas Barbados British Virgin Islands Cayman Islands Dominica the Dominican Republic Grenada Haiti Jamaica Montserrat Navassa Island Netherlands Antilles Puerto Rico St Barthlemy St Kitts and Nevis St Lucia St Martin St Vincent and Grenadines Trinidad and Tobago Turks and Caicos the Virgin Islands) Isle of Man Luxembourg Liberia Panama Lately we have seen companies being reincorporated in certain European countries such as Cyprus Ireland the Netherlands and Switzerland for tax purposes We do not include these European countries in our ldquodomiciles of conveniencerdquo list however other factors are considered before determining a country of domicile in such cases (refer to 2 and 3 above) Note that some of the domiciles of convenience have domestic stock exchanges so a company can be placed in one of these countries if it is incorporated registered there This policy is generally applied to new index additions because that is when we review a companys domicile to assign it to a country index However there have historically been quite a few companies that have been under debate and with no clear consensus throughout the market In such cases the SampP Index Committee does reserve the right to review companies on a case-by-case basis Our goal is to be more transparent in how we assign companies to countries particularly going forward


Headquarters vs Principal Corporate Offices In some cases a companyrsquos headquarters is required to be in the country of incorporation If that country is a domicile of convenience the nominal headquarters are there and the real headquarters are someplace else Such cases will be taken under Committee advisement as stated in 3 above


Share and IWF Updates

Summary In keeping with our goal to provide transparency and offer consistency in our global treatment of corporate actions to the greatest extent possible the share update IWF (Investable Weight Factor) update and 5 rule policies are standard across most SampP branded indices methodologies However since we do recognize cases where local market practices may relax these rules please refer to individual methodologies for any deviation from this policy

Policy (1) The timing of adjustments to share counts or investable weight factors depends on the event

causing the change the public availability of source data local market practices and whether the change is larger than 5 of the float-adjusted share count

(2) Changes of less than 5 of the float-adjusted shares are accumulated and made quarterly on

the third Friday of March June September and December (3) Changes to an index constituentrsquos float-adjusted shares of 5 or more

o Changes due to mergers or acquisitions of publicly held companies are implemented when the transaction occurs even if both of the companies are not in the same headline index and regardless of the size of the change The share change is applied so that it coincides with the deletion date of the target company if both the acquirer and the target are in SampP branded indices At SampPrsquos discretion de minimis merger and acquisition share changes may be accumulated and implemented with the quarterly share rebalancing

o Changes due to secondary public offerings (also known as placements) tender offers

Dutch auctions exchange offers bought deal equity offerings or prospectus offerings are done as soon as reasonably possible after the data are verified All share changes are pre-announced on a best efforts basis with at least two-to-five trading daysrsquo notice when possible For the SampP Composite 1500 secondary offerings involving new share issuance can be made effective at the close on the same day it is announced The SampP BMI US index provides a minimum two day notice


o Other changes of 5 or more (for example due to company stock repurchases private placements redemptions exercise of options warrants conversion of preferred stock notes debt equity participations at-the-market stock offerings or other recapitalizations) are made weekly and are announced after the market close on Wednesdays for implementation after the close of trading the following Wednesday (one week later)

If a 5 or more change in shares outstanding causes a companyrsquos IWF to change by 5 percentage points or more the IWF is updated at the same time as the share change IWF changes resulting from partial tender offers are considered on a case-by-case basis Exception when total shares outstanding increase by more than 5 but the new share issuance is directed to a strategic or major shareholder it implies that there is no change in float-adjusted shares However in such instances SampP Indices will implement a total shares outstanding and resulting IWF change regardless of whether the float-adjusted shares change by more than 5

Rebalancing Guidelines A share freeze is implemented during each quarterly rebalancing The timing is between 12 business days before and three business days after the quarterly rebalancing effective date These are general rebalancing guidelines for our global indices The US markets however do have some differences For US indices rebalancing guidelines please refer to the SampP US Indices Methodology document

o MampA activity is implemented when the target company is deleted Corporate actions such as stock splits (or bonus issues or stock dividends) reverse splitsconsolidations rights offerings and certain share dividend payable events are implemented on their actual effective dates irrespective of the share freeze

o Unless otherwise announced traditional secondary public offerings (placements) tender

offers Dutch auctions or exchange offers are implemented as stated above Changes that are effective during the week of the quarterly share rebalancing are accumulated and announced as part of the weekly share change announcement on the first Wednesday after the rebalancing effective date for implementation at the close of the second Wednesday following the rebalancing effective date

o No weekly share change announcements are made during the entire share freeze period

All weekly share changes are accumulated during the 5 - 12 business days prior to the quarterly share rebalancing effective date to be implemented with the quarterly share rebalancing Immediately after the rebalancing all the accumulated weekly share changes starting from the week of the rebalancing are announced on the first Wednesday following the rebalancing and implemented after the close on the second Wednesday following the rebalancing

During the annual reconstitution of the SampP BMI Index Series (the 3rd Friday in September for developed and emerging markets and the 3rd Friday in December for frontier markets) the weekly


share change freeze might occur sooner Please refer to the annual reconstitution calendars for the most updated information For the SampPTSX indices we use 5-basis-points of the SampPTSX Composite market value in place of 5 of the float-adjusted share count

Multiple Share Classes Companies issue multiple share classes in some instances The treatment of multiple classes of stock varies across SampP indices depending on local market custom and conditions Typically we come across of one of these three broad treatments US In SampP US indices (including the SampP BMI US) each company is represented only once Multiple classes are combined into one class with an adjusted share count The stock price is based on one class usually the most liquid class and the share count is based on the total shares outstanding To determine the available float for companies with multiple classes of stock SampP Indices calculates the weighted average investable weight factor for the stock using the proportion of total company market capitalization of each share class as the weights The result is reviewed to assure that when the weighted average IWF is applied to the class included in the index the shares to be purchased are not significantly larger than the available float for the included class SampP Global BMI ex US These equity indices use all classes of a stock that are eligible and use the true shares outstanding for each A separate IWF is calculated for each class and the class is included providing it meets eligibility criteria and foreign investors may hold shares in the class In the SampP Global BMI classes with no float have no weight in the index They are however included for the purpose of determining a companyrsquos total capitalization and consequently its assignment to either large-cap mid-cap or small-cap indices Latin America As seen mainly in Brazil and Mexico for companies that have more than one class of shares we retain individual share classes if all those share classes are eligible to be part of the index Each class is then float-adjusted individually If not multiple share classes are combined into one class or more Unlisted shares are included in determining a companyrsquos total market capitalization and in the total shares outstanding Please note the exception for the SampPTSX Canadian Indices at the end of this chapter

Investible Weight Factor (IWF) The Investible Weight Factor or IWF is the percentage of shares outstanding that is readily available to investors for a given company Investors who own shares with the intention of maintaining control are said to be investors of a ldquostrategicrdquo nature and are not included in the IWF calculation


IWF changes can be made on their own or in conjunction with a share issuance Similar to share issuances an IWF change can either be an increase or decrease of a companyrsquos available ldquofloatrdquo IWF decreases will typically be the result of a private placement (to a strategic investor) whereas an IWF increase will typically be the result of a block of strategic shares becoming available Mergers amp acquisitions may also cause an IWF change Please refer to the SampP Float Adjustment Methodology for a more detailed description of float adjustment and the SampP Investable Weight Factor (IWF) Degree of Freedom The Degree of Freedom (DOF) is a statutory limit restricting foreign ownership in a given company Case-by-case research is done to assess the impact of large foreign holdings within a foreign ownership restriction SampP Indices final Investable Weight Factor (IWF) is calculated based on the larger of the sum of all strategic holdings or the statutory foreign ownership limit Indices designed to be used by foreign investors such as the SampP Global BMI and the SampP Frontier BMI use DOF in its calculation of the IWF Indices like the SampP 500 the SampPTSX 60 and the SampPASX 200 are considered ldquodomesticrdquo indices designed to be used by local investors hence the DOF is not used in the calculation of the IWF The first test of a stockrsquos investability is determining whether the market is open to foreign institutions SampP determines the extent to which and the mechanisms foreign institutions can use to buy and sell shares on local exchanges and repatriate capital capital gains and dividend income without undue constraint Countries like Venezuela which implemented drastic constraints on foreign investors a few years ago making it difficult to repatriate capital are deleted from market coverage entirely Once it is determined that a market is open to foreign investors SampP investigates each security that may be a candidate for inclusion in the SampP Global BMI the SampP Frontier BMI the SampP GCC Composite index and other related indices Each share class is reviewed to determine whether there are any corporate by-law corporate charter or industry limitations on foreign ownership of the stock Foreign investors may face limits on the amount of a companyrsquos capital they may hold individually and separate limits on the amount they may hold collectively SampP considers the total amount of capital that foreign institutions may own collectively as the basis for determining a stockrsquos degree of freedom SampP Indices takes the DOF into consideration in its calculation of a stockrsquos IWF


Examples of Restrictions on ldquoOpennessrdquo bull Special classes of shares such as A and B classes in China where foreign investors are

restricted to B-class only

bull Sector restrictions most commonly limiting foreign ownership of airlines defense energy producers financial institutions print and broadcast media and public utilities

bull Single foreign shareholder limits on general classes of shares such as Brazilrsquos rule of no

more than 5 of the voting classes or 20 of aggregate capital or Colombiarsquos 10 limit per foreign investor For example in Colombia foreigners may own up to 100 of most listed companies although no single foreigner may own more than 10 In such a case SampP uses the aggregate amount which foreigners as whole might acquire and thus considers 100 of the shares as available

bull Company statutes that impose limits which differ from national law In such cases SampP

uses the most restrictive limit For example if the national limit on foreign ownership is 49 but a companyrsquos articles of incorporation set a limit of 25 SampP uses a DOF of 25 for that companyrsquos capital

The basic formula to calculate IWF considering DOF is

IWF = min 1-(Σ strategic holders) or the DOF

Example Major shareholders for Security ABC

bull Private Investors ndash Board of Directors Founders = 18 bull Corporate Holder ndash Company ZXC = 10 bull Government - Government Agency = 15

Major shareholders own collectively = 18 + 10 + 15 = 43 Amount left in the market (100 - 43) = 57 Foreign Investment limit (DOF) = 49 Note When comparing the smallest amount available to foreign investors 49 (DOF) or 57 (available in the market) the IWF is 49 Pan Arab Indices SampP Indicesrsquo Pan Arab indices have further rules While the concepts are exactly the same the GCC markets use two different sets of DOFs Saudi Arabia is excluded from the Investable series due its limited availability to foreign investors


Bahrain Kuwait Oman Qatar and the UAE 1 One set of DOFs the most restrictive are used for all foreign investors Foreign investors are defined as all investors who are not nationals of the GCC region This would include investors from Brazil Egypt France Hong Kong US Vietnam etc This set is used for the calculation of the SampP Frontier BMI and the GCC Investable indices 2 The second set of DOFs which are less restrictive are used for investors residing within the GCC region These DOFs are used for the calculation of the GCC Composite indices Domestic Indices In the domestic index versions of Bahrain Kuwait Oman Qatar Saudi Arabia and the UAE there is no DOF considered in the IWF calculation These indices are designed for domestic investors only similar to the SampP 500 the SampPASX 200 and the SampP TSX 60


SampPTSX Canadian Indices An Exception The SampPTSX methodology states that shareIWF changes are applied if they result in a change of 5 basis points or more to the SampPTSX Composite and not the 5 rule stated above The SampPTSX indices also aggregate multiple listed shares and do not account for unlisted shares Please refer to the SampPTSX Canadian Indices methodology for a more detailed description of the treatment in these indices


Mergers amp Acquisitions Definitions amp Terms Acquisition An acquisition is an event in which a company buys most if not all of the target company in order to assume control The acquisition could be done via a cash offer stock swap or a combination of both For the purposes of SampP branded indices an acquisition will result in the deletion of the target company as well as a possible share issuance and IWF change to the acquirer if the purchase was funded with acquirer shares At-the-market Offerings This is a registered offering of securities by a publicly traded issuer periodically over time at the prevailing market price This is done through a placement agent or designated broker-dealer The issuer has control over when the securities are sold the amount sold and the minimum price at which they may be sold The issuer may stop the offering at any time The broker-dealer is paid a commission on the securities sold Bankruptcy A legally declared inability or impairment of ability of an individual or organization to pay their creditors Bankrupt companies will typically be delisted by the exchange on which their shares are traded Book building This is a price-discovery process wherein an underwriter accepts and records investor demand for shares and the price they are willing to pay This information is then used by the underwriter to determine an issue price when the book building is closed Bought Deal Equity Offering A new share issuance by a company which is taken up in its entirety usually by a few underwriters to be resold later to investors Shares are offered to underwriters at a discounted price and payment is made up front Cash Offer Shareholders of the target company are offered cash by the acquirer for the stocks they own in the target company Degree of Freedom (DOF) The statutory limit restricting foreign ownership in a given company


Delisting This refers to the removal of a listed security from the exchange on which it trades The stock is removed from the exchange because the company is not in compliance with the listing requirements of the exchange Delisting could be a voluntary action taken by the company or involuntary This typically occurs when a company has become private after a mergeracquisition declares bankruptcy or no longer satisfies the listing rules of the stock exchange

Dutch Auction This is also referred to as the ldquodescending price auctionrdquo or ldquoclock auctionrdquo The bidding process starts with a high asking price which is then lowered until a participant accepts the auctioneerrsquos price or a pre-determined minimum acceptable price set by the seller In the US Treasury Bills (T-Bills) are sold through this process The Treasury accepts higher bids first and continues to accept progressively lower bids until an issue is completely sold IPOs may also be sold through Dutch Auction Exchange offers An exchange offer takes place when a company exchanges its securities for a different series that it has issued or for securities of another company (as seen with split-offs) This should not be confused with the conversion of preferred stocks or bonds to common stock FDIC Receivership In the US this is the process by which the Federal Deposit Insurance Corporation takes over the operations of a failed banking institution and arranges for the liquidation of its assets Float-Adjusted Shares Total number of shares held by the public and available for trading These are the shares outstanding adjusted for any restricted shares or strategic holdings Initial Public Offering (IPO) A privately held company or unit selling stock to the public for the first time Typically IPOs are issued by smaller companies in a bid to raise capital for expansion however larger privately owned firms can also enter the IPO market if they seek to trade publicly Investable Weight Factor (IWF) The percentage of shares outstanding that is readily available to investors for a given company Investors who own shares with the intention of maintaining control are said to be investors of a ldquostrategicrdquo nature and are not included in the IWF calculation Merger A merger is the combination of two (or more) companies into one larger company involving a stock swap andor cash payment to the shareholders of the target company If both companies are in an SampP index one company identified as the ldquotarget companyrdquo is deleted from the index and the acquirer or surviving company may see a share IWF and name change depending on the terms of the deal


Multiple share classes Companies might choose to issue multiple classes of common stock such as Class A and Class B shares For example Berkshire Hathaway Inc has two classes of common stock designated Class A and Class B Generally one class of shares will have more voting rights andor conversion privileges compared to the other These shares are listed and priced separately China Multiple Share Classes

A-shares are shares in companies incorporated in mainland China A-shares are issued in China governed by Chinese law trade in the local currency and are listed on the local Shanghai or Shenzhen stock exchanges Only Chinese nationals and select Qualified Foreign Institutional Investors (QFII) are allowed to trade A-shares B-shares are local shares issued by companies in mainland China quoted in Hong Kong dollars (on the Shenzhen exchange) and US dollars (on the Shanghai exchange) and available to foreigners and certain classes of domestic investors H-shares trade in Hong Kong in Hong Kong dollars The companies are registered in mainland China N-shares are shares of Chinese companies listed in the United States (as ADRs) These trade in US dollars and follow the GAAP accounting system Similarly L-shares J-shares and S-shares are Chinese companies listed on the London Stock Exchange Tokyo Stock Exchange and Singapore Exchange respectively

Private Placement This involves direct placement of new shares to a select group of investors Private placement of shares does not have to be registered with the Securities and Exchange Commission (in the US) and is done without any underwriters being involved Prospectus Offering A means by which companies raise capital by selling shares to underwriters at a pre-determined price The underwriters act on a ldquobest effortsrdquo basis and assume no risk if the stock cannot be sold A prospectus offering will list the number of shares selling price commission rate optional overallotment (also called a ldquogreenshoerdquo) and a closing date Recapitalization A change in the companyrsquos capital structure which often involves altering the asset allocation between equity and debt


Restricted Shares These are shares acquired in unregistered private sales from the issuer to the investors Investors generally receive these shares through private placement offerings as consideration in mergers and employee incentive or compensation plans A holding period is associated with these shares In the US the sale of restricted shares requires a filing with the SEC (Securities and Exchange Commission) in most cases These shares are also referred to as ldquoUnregistered Sharesrdquo Reverse Takeover This is the acquisition of a publicly traded company by a privately held company A private company might choose to go public using this route over an IPO to bypass the complex process involved with an initial public offering Scrip Offer This term is commonly used in some markets to refer to an all-stock takeover offer The acquirer offers its shares to the target company shareholders as the consideration instead of cash Secondary Offering This is the issuance of shares to the public after an initial public offering has already been made Secondary offerings can take one of the following forms (a) the company can issue new shares to the public thereby increasing the shares outstanding of the issuing company and diluting the ownership of existing shareholders or (b) existing shareholders might sell a portion of their holdings and reduce their stake in the company The latter does not increase the shares outstanding as no ldquonewrdquo shares are issued however this may lead to a change in IWF Underwriters are involved in the process of placing these existing shares to the public Share Placement The issuance of new shares for sale to the public The term is used interchangeably with ldquosecondary offeringrdquo in many markets

Share RepurchaseBuyback Companies buy a portion of their outstanding shares to reduce the number of shares on the market These repurchased shares could either be retired by the company or retained as treasury stock to be reissued at a later date SampP Indices does not make any price adjustments for offers at a premium Shares Outstanding This is the total number of shares issued by a company that is currently held by investors Shares that have been repurchased by the company are not considered outstanding Tender Offers These are offers made by a prospective acquirer to purchase shares of a company usually at a premium to the market price Cash or other securities may be offered to the target companyrsquos shareholders Tender offers might be friendly or hostile A friendly offer is when the bidder informs the companyrsquos board of directors of its intent and if the board approves


they would recommend that the shareholders accept the offer A hostile offer is when the target companyrsquos management is either not informed in advance or unwilling to accept the offer yet the bidder continues to pursue it The term ldquopartial tender offerrdquo refers to an invitation for tenders for less than all of the outstanding shares of the target company This is done by specifying a maximum number of shares that will be accepted Tracking Stock Also known as ldquotargetedrdquo stock this is a type of common stock that tracks the financial performance of a specific business or operating unit instead of the company as a whole Tracking stocks trade as separate securities A tracking stock typically has limited or no voting rights Companies with diversified operations might choose to issue tracking stocks in addition to their traditional common stock Treasury Stock These are shares issued by a company that have been reacquired by the issuing company Treasury stock is not included in the shares outstanding calculations These are held by the company and can be reissued at any point of time in the future These shares do not pay dividends and have no voting rights

Additions and Deletions Addition and deletions of stocks to indices can occur due to a number of reasons For indices that do not have a fixed number of constituents additions and deletions are not linked to one another For indices with a fixed number of constituents whenever there is a deletion from an index a pre-approved replacement is added to the index preferably on the same day In some instances a stock might need to be dropped immediately and there isnrsquot enough time to provide sufficient notice to our global clients about the replacement stock In such cases the addition to the index might lag the drop by a few days Initial Public Offerings IPO additions to the index typically take place quarterly on the share rebalancing dates Please refer to individual index methodologies for IPO inclusion criteria Spin-Offs Spin-offs from current index constituents are eligible for index inclusion if the spun-off issue has met the eligibility requirements for the index under consideration Spin-offs are effective on their ex-dates Mergers amp Acquisitions These usually result in the deletion of the target company and a possible weight change for the acquirer in an all-stock offer or a combination of a cash-and-stock offer assuming the purchase was funded with the acquirerrsquos shares In an all-cash takeover SampP drops the target from our indices All-cash takeovers generally become effective on the date of the takeover We might not necessarily wait until the delisting date of the target for its deletion


from the index Deletions are made using the closing price of the stock on the date of the deletion where deletions are made using the tender offer price an announcement is made in advance to clients The change in weight of the acquirer and the deletion of the target company are effective the same day Bankruptcy The removal of a bankrupt stock is done at the same time with the same closing price in all SampP branded indices

bull Announcements are made such that minimum of one day notice is given to clients For example if the bankruptcy filing is on Monday the announcement is published on Monday evening with the removal on Tuesday after the market close

bull Same day removals for bankruptcy are not done

bull If the stock is trading on its usual or primary exchange at the close of the day it is removed that price is used If the stock is halted on or delisted from its usual exchange a price of zero is used

bull FDIC Receivership This refers to the process by which the Federal Deposit Insurance

Corporation (in the US) takes over the operations of a failed banking institution and arranges for the liquidation of its assets Companies that have been placed in FDIC receivership are dropped from all indices at the earliest reasonable date

Delisting We will generally drop a stock from all our indices on or around its expected delisting date Where the delisting is due to an MampA event the target company might be dropped once an offer to acquire the stock has been deemed unconditional We may not wait until the delisting date to drop the company from SampP indices The weight adjustment for the acquirer if any and the deletion of the target company are done at the same time If a stock is being dropped from an index after it has been delisted from the exchange most SampP indices will remove the stock at a zero price The exception being the US TMI (Total Market Index) for which the practice is to remove the stock at the OTC price if no primary price is available Index Methodology Every index methodology has its own guidelines and thresholds that determine what gets added to or dropped from their indices and the timing of these actions Please refer to individual index methodologies for further clarity on the timing of changes to indices

Mergers amp Acquisitions A merger is the combination of two (or more) companies into one larger company involving a stock swap or cash payment to the shareholders of the target company or a combination of both A merger results in the deletion of the target company as well a likely name change andor weight change (share issuance andor IWF change) to the acquirer also referred to as the lsquosurviving companyrsquo in a merger


An acquisition is an event in which a company buys most if not all of the target company in order to assume control of the target company An acquisition will result in the deletion of the target company as well as a possible weight change (share issuance andor IWF change) to the acquirer if the purchase was funded with acquirer shares We have three scenarios where MampAs are concerned

(i) Target company is in the SampP indices and the acquiring company is not

(ii) Target company is not in the SampP indices but the acquiring company is

(iii) Target and acquiring companies are both in SampP indices SampP Indices follow the same treatment for MampAs for all three scenarios above Only in certain situations at SampPrsquos discretion de minimis merger and acquisition share changes may be accumulated and implemented with the quarterly share rebalance All deletions are made using the closing price of the stock on the date of deletion Deletions might be made using the tender offer price in certain markets for cash takeovers Clients are notified if any price other than market close prices are used to drop stocks from SampP indices Depending on the market(s) in question information available and the particular MampA situation at hand the implementation of the deletion (of the target) and the weight change if any (for the acquirer) could take place at any of these times

(i) end of the offer period (ii) takeover date or the merger effective date (iii) delisting date or last trading day of the acquired entity (iv) when the offer is declared unconditional and has met all shareholder regulatory

or court approvals (v) for rules-based indices when certain thresholds for eligibility to remain in the

index (per index methodologies) are crossed (vi) on the date that the new shares issued for the acquisition are listed on the

exchange Depending on markets (countries) some of the dates listed above could coincide For instance in the US and many other developed markets the merger effective date and the delisting date of the acquired company are usually the same date or the takeovermerger effective date is the date when the offer is declared unconditional and has met all shareholder and regulatory approvals Sometimes there is no uniformity even within the same country If the delisting date is still unknown but all necessary approvals have been received we normally do not wait for the delisting to be finalized before dropping the stock and increasing the weight of the acquirer (if necessary)


Each MampA event is followed closely and reviewed carefully by SampP index analysts and treated on a case by case basis Clients are notified well in advance regarding our treatment Type of MampA SampP Announcement Implementation SampP Indices Treatment (1) All-Cash TakeoversCash Offers


Ex-date is usually the takeover effective date which in some markets could be the delisting date for the target In some cases this is implemented when the transaction is deemed irreversible and all exchange shareholders regulatory and court approvals are met In some markets the actual delisting of the target company stock does not take place until a much later point in time We will not wait for the delisting date to remove such acquired stocks from our indices as the liquidity of the stock will become too low Property companies tend to be removed from our indices on the tender offer close date

On the opening of the ex-date the target company is dropped from all SampP branded indices There is no change made to the acquirer The tender offer price might be used to remove stocks in certain markets Clients are notified if anything other than market close prices are used

(2) All-Stock TakeoversScrip Offers


Determined on a case- by-case basis

Target company is dropped from all SampP branded indices Acquirer will have a share change and a possible IWF change


Type of MampA SampP Announcement Implementation SampP Indices Treatment (3) Cash amp Stock Takeovers




(4) Merger 3-5 days prior to the expected ex-date

Determined on a case-by-case basis

Target company is dropped from all SampP branded indices A surviving entity is identified The surviving entity will likely have a name change identifier changes and a weight change (share issuance andor IWF change)

(5) Partial Acquisitions


Typically right after the tender offer results are confirmed SampP will send out an announcement to clients with the implementation date

The IWF for the target company is adjusted Depending on whether this partial acquisition was funded through cash or an issuance of shares the acquirer will either have no change (all cash acquisition) or a share change andor an IWF change (stock acquisition)

(6) Cross-border MampAs



The target company is dropped from SampP branded indices and any corresponding changes are made to the acquirersurviving company all on the implementation (ex-)date

Ideally we want to drop the target company on the same day as we increase the share capital for the acquirer Sometimes there is a lag between the two events in the market (delisting date of the target and the listing date of new shares issued by the acquirer) An example of our treatment of the Cadbury takeover by Kraft February 2 2010 the offer was declared unconditional in all respects February 16 2010 listing of the new Kraft shares issued to former Cadbury shareholders who had tendered their shares March 8 2010 delisting of Cadbury shares


Our treatment Cadbury was dropped from our indices on the opening of February 16 2010 and the share change for Kraft was put through on the same date


Dividends Stock Splits and Consolidation Definitions amp Terms Regular Dividend A regular dividend is a distribution of a portion of a companys earnings to its shareholders Regular dividends typically follow a quarterly semi-annual or annual cycle and are most often quoted in terms of the payment amount each share receives (dividends per share) For index calculation purposes a regular dividend will only have an effect on the Total Return (TR) and Net Total Return (Net TR) indices and not on Price Return indices Special Dividend Special dividends are those dividends that are outside of the normal payment pattern established historically by the corporation Special dividends are typically larger than regular dividends and are quoted in terms of the payment amount each share receives (dividends per share) Generally speaking there are no patterns for these events and they may simply be one-time payments Special dividends are treated as corporate actions with price and divisor adjustments For index calculation purposes a special dividend results in a stockrsquos price being adjusted (reduced) by the payment amount at the opening of the effective date Withholding Tax This is the amount withheld by the company making a dividend payment to be paid to the taxation authorities In our context this refers to the tax that non-residents are subject to when the country in which the company paying the dividends is incorporated is not where the shareholder resides In most countries domestic shareholders are not required to pay this tax Tax treaties between countries may reduce the amount of withholding tax required Scrip Dividend A scrip dividend is a dividend paid by the issue of new shares in lieu of cash Stock Split A stock split is a corporate event which increases the number of a companyrsquos shares while simultaneously reducing its per share price such that the market capitalization of the company remains the same before and after the event Stock splits are quoted in terms of shares received to shares held The shares of a company are increased (multiplied) by the stock split adjustment factor (greater than one) while the price is decreased (divided) by this same factor


In a 5-for-1 stock split the adjustment factor is 5 so the shares outstanding is multiplied by 5 while the price is divided by 5 Stock Dividend Stock dividends work exactly like stock splits except these are quoted in terms of the percentage of shares received to those held A 5 stock dividend is the same as a 105 for 1 stock split with an adjustment factor of 105 Bonus Issue A bonus issue is quoted in terms of shares received to shares held like stock splits or quoted in percentages like stock dividends Stock splits stock dividends and bonus issues are similar terms They essentially imply the same action the only difference is in the way the terms are quoted So a 1-for-20 bonus issue is the same as a 2120 stock split which is the same as a 5 stock dividend Consolidation This is also referred to as a ldquoReverse Stock Splitrdquo and is the exact opposite of a stock split In a reverse split the shares of a company are decreased while its per-share-price is increased by the adjustment factor (less than one) Also like a stock split the overall market capitalization of the company remains unchanged by this event Reverse splits are quoted in terms of shares received to shares held The shares of a company are decreased (multiplied) by the adjustment factor while the price is increased (divided) by this same amount The adjustment factor for a reverse split is determined just like in a stock split (shares receivedshares held) Hybrid Dividend These are dividends that are paid out by companies as a combination of cash and stock dividends The cash dividend can be regular or special These are observed more commonly in the US markets and with Real Estate Investment Trusts (REITs)


Special Dividends Special dividends are those dividends that are outside of the normal payment pattern established historically by the corporation Whether a dividend is funded from operating earnings or from other sources of cash does not affect the determination of whether it is a special dividend Special dividends are treated as corporate actions with price and divisor adjustments A dividend is considered ldquospecialrdquo and not ldquoregularrdquo or ldquoordinaryrdquo if

1 The company describes it as a ldquospecialrdquo ldquoextrardquo ldquoirregularrdquo ldquoreturn of capitalrdquo or some similar term in the dividend announcement Companies may also use the terms of ldquoa distribution from reservesrdquo either from capital contribution or share premium accounts

2 The analyst covering the stock determines that it does not follow the companyrsquos normal pattern of dividend issuance

3 The withholding tax treatment indicates whether the dividend is treated as regular or

special Dividend payments not subject to a withholding tax are treated as special however we will still consider large and out-of- pattern payments as ldquospecialrdquo even if they are subject to a withholding tax

Note

bull When an ordinary dividend is increased or decreased it is still ordinary not special

bull When a dividend is paid the first time it is ordinary unless the companyrsquos release specifically states otherwise

Hybrid Dividends Hybrid dividends payable in cash amp stock are treated as follows in SampP branded indices For hybrid dividends considered to be regular dividends SampP applies the full amount of the dividend on the ex-date (using the cash equivalent amount) and then increases the shares on the payable date regardless of whether the share increase is greater than 5 For hybrid dividends considered to be special dividends by SampP a price adjustment is applied for the full amount of the dividend after the close of trading on the day before the ex-date and a share increase is made on the payable date regardless of whether the share increase is greater than 5 Note We sometimes see unusual corporate events in Spain classified as ldquorightsrdquo but not with all the features of a rights offering Generally shareholders are offered three options for the ldquorightsrdquo received ndash (1) the company pays cash for the rights (2) the shareholders can convert the rights to new shares or (3) the shareholders can sell it in the market Shareholders can combine the above


options One of these is typically listed as the default option for the shareholders who do not make an election Each option also has different withholding tax implications SampP Indicesrsquo treatment of these corporate actions is determined by the stated default option If the default option is receiving new shares then this is treated as a stock dividend if the default option is cashing in the rights it is treated as a cash dividend

Scrip Dividends Scrip dividends are seen in certain Asia Pacific markets The treatment for this is the same as outlined for hybrid dividends in the section above


Dividend Treatment for ADRs and GDRs For most ADRs (American Depository Receipts) and GDRs (Global Depository Receipts) cash dividends are declared in the local currency While the dividend ex-date for an ADRGDR is known ahead of time the depositary bank usually provides only an estimated dividend amount in the trading currency of the ADRGDR based on the foreign exchange rates at that time The final dividend amount calculated using the latest forex rates is not available until closer to the payable date For the sake of consistency and transparency SampP branded indices use the dividend treatment outlined below

(i) if the dividend ex-date is known and the actualexact amount is known we enter this amount on the dividend ex-date

(ii) if the dividend ex-date is known and we have the estimated dividend amount

we enter the estimated dividend amount (usually provided by the depositary bank in the trading currency of the ADRGDR based on the forex rates at that time) on the dividend ex-date

(iii) if the information regarding the dividend amount is available only after the ex-

date has passed then we recognize this dividend when we find out the amount (giving our clients 1-2 daysrsquo notice) We will not wait for the payable date which could be months away in some instances

We check for share changes between the ex-date and the date we are recognizing the dividend and pro-rate the dividend amount to account for the share changes if any This is applicable for market-cap weighted indices only For equal weighted indices the dividend amount is determined on a case-by-case basis

Regional Variations in the Treatment of Cash Dividends UK Cash dividends reported in the UK are net dividends which is the amount we use for our index calculation purposes UK dividends are taxed at the source ndash from company profits after corporation tax has already been paid Property Income Distributions (PIDs) PIDs are a special kind of dividend related to REITs (Real Estate Investment Trusts) and are taxed at a rate of 20 REITs might declare dividends that are solely PIDs solely ordinary dividends or a combination of the two Example Segro Plc declared a dividend for the ex-date 28 August 2009 This consisted of a regular dividend of GBP 0031 and a PID component of the dividend of GBP 0015 taxed at 20 rate So for our index calculation purposes the dividend amount for Segro Plc was GBP 0043 Dividend = GBP 0031 + GBP 0015 (1-02) = GBP 0043


Korea The majority of dividends are not announced prior to their ex-date SampP Indices recognizes these dividends on the pay date instead of the ex-date Taiwan When there is a suspension in trading that we are aware of we recognize the event on the date trading resumes Examples (1) The reverse split for 2887TW was recognized on February 3 2010 the pay date after the stock came out of its trading suspension instead of January 19 2010 which was the ex-date

(2) The return of capital with the reverse split for 2412TW was recognized on February 8 2010 the pay date after the stock resumed trading instead of its ex-date January 21 2010 Japan The majority of dividends are given in estimated amounts on their ex-date SampP Indices uses the estimated amount on the ex-date For companies that do not provide estimates and there is a historical pattern of paying dividends we use the previous yearrsquos figures adjusted for any splitbonus between last yearrsquos ex-date and the current date as estimates If there is a reason for not providing an estimate such as the unusual circumstances seen during the March 2011 earthquake and tsunami the Index Committee reserves the rights to make exceptions to this policy In such instances clients are informed in advance via an announcement Canada SampPTSX Canadian Indices have a minimum 4 of price threshold to recognize a dividend as special ie if the dividend is over 4 of the price of the stock it is deemed to be a return of capital and the price of the underlying security is reduced by the dividend amount prior to the ex-date In Canadian markets we also see a few special dividends from income trusts The mandate in their charter is to distribute all their excess cash to unit holders Periodically they distribute this extra cash via a small special dividend often with the same payment schedule (ex-date record date pay date) as a regular dividend SampP Indicesrsquo treatment is to add them together and treat it as a regular dividend China A Share Currently special dividends are not paid for A Shares Asia (ex Japan) If a company announces a dividend as a special dividend it is treated as a special dividend with a price adjustment However if a stock repeatedly pays special dividends in patterns that resemble regular dividends either in timing or amount then the special dividend is treated as a regular dividend In cases where these special and regular dividends occur on the same day the two amounts are added together


Australia If a company announces that a dividend being paid is a special dividend it is treated as a special dividend with a price adjustment Where a company does NOT announce it as a special dividend but the ASX or vendors do the treatment will still match that announced by the company It is uncommon for ASX listed stocks to repeatedly pay special dividends in patterns that resemble regular dividends

Franking Australia has a tax structure where profits are only taxed once at either the company level or shareholder level ie Australian companies pay out profits as dividends either before or after tax The ldquofranking raterdquo is what tracks whether or not the tax was already paid on the cash dividend If the tax was already paid at the company level then the dividend amount is fully franked (100 franked) If taxes were not paid on the cash distribution then the dividend is 0 franked Note that the franking rate can also be in between 0 and 100 Conduit Foreign Income (CFI) CFI is foreign income received by a foreign resident via an Australian corporate tax entity The tax relief for CFI ensures that those amounts are not taxed in Australia when distributed by the Australian corporate tax entity to its foreign owners The Conduit Foreign Income removes any withholding tax liability for non-resident shareholders in relation to the CFI component of dividends received

Foreign Exchange Conversions for Dividends When companies declare dividends in currencies other than their stock trading currency we follow these rules for the dividend currency conversion

bull If the company provides a converted dividend amount we use that amount bull In case the company does not provide a converted amount then the dividend currency is

converted using the WM close forex rate of the day prior to the ex-date for regular cash dividends Special dividends are converted using the forex rate on the day prior to the ex-date (or two days prior for Asia Pacific) Please refer to individual index methodology documents to check which foreign exchange rates they are using for index calculation purposes


Dividend Not Quoted Ex by the Exchange At times when companies declare a conditional dividend (contingent upon some event taking place ndash say a merger or Board approval etc) SampP Indices might still decide to recognize it In such cases clients will be notified in advance


Bonus Issues of Shares Not Entitled To Cash Dividend In certain global markets such as Turkey we observe cases where bonus issues of shares are not entitled to a dividend effective at a later date (i) If this is known in advance our treatment is as follows

bull Calculate the adjusted price (next day open) incorporating this bonus share and take the difference as a price adjustment

bull Add the second line to the relevant indices bull Drop this second line and increase current shares number on the dividend ex-

date Since this is a market-cap neutral event at the time of bonus shares issuance P0 S0 = (Px S0) + [(Px ndash D) Sb] Hence solving for the adjusted price

Px = ( [ P0 S0 ] + [ D Sb ] ) [ S0 + Sb ]

where P0 = closing price before the ex-date S0 = shares before the ex-date D = dividend amount Sb = bonus shares Px = calculated next day adjusted price

The difference between the original shares and the bonus shares is that the bonus shares are not entitled to the next dividend Therefore the calculated closing price before the ex-date for the bonus line should be equal to the adjusted price calculated above minus the dividend

Pb0 = Px ndash D

where Pb0 = calculated closing price of the bonus line before the ex-date

(ii) If we find out about this with very little notice (often the case with emerging and

frontier markets) then our treatment is bull Apply the bonus issue on the ex-date bull Adjust the dividend effective at a later date accordingly (ie decrease the

dividend amount in order to adjust it over the new number of shares including those resulting from the bonus issue)


Total Return and Net Return Indices Gross and net total return indices are calculated for most SampP branded indices Cash dividends are generally applied on the ex-date of the dividend (market exceptions are noted in this document) Net return indices reflect the return to an investor where dividends are reinvested after the deduction of a withholding tax The tax rate applied is the rate to non-resident institutions that do not benefit from double taxation treaties Data on tax rates are sourced primarily from information provided by stock exchanges in SampP Indicesrsquo Global Survey of Stock Exchanges and local correspondents and are verified with other independent data sources including the Worldwide Corporate Tax Guide published annually by Ernst amp Young


Unexpected Exchange Closures Full Day Exchange Closure If an exchange fails to open due to unforeseen circumstances such as natural disasters inclement weather outages or other events the index uses the prior dayrsquos closing prices If all exchanges fail to open SampP Indices may determine not to publish the index for that day Partial Day or Early Exchange Closure In situations where an exchange is forced to close early due to unforeseen events such as computer or electric power failures weather conditions or other events SampP Indices calculates the closing price of the indices based on (1) the closing prices published by the exchange or (2) if no closing price is available the last regular trade reported for each stock before the exchange closed In all cases the prices are from the primary exchange for each stock in the index Treatment of Corporate Actions (i) Full-day closure occurs on the corporate action effective date All market driven actions

(splits bonuses rights cash dividends spinoffs etc) are moved to the next trading date This involves the reposting of all affected files of each index to which each stock belongs However we follow the exchangersquos lead in such situations If the exchange moves the corporate action ex-date SampP Indices does the same Adds and drops to the index and shareIWF updates remain unchanged as trading was completed at the close before the effective date

(ii) Partial closure occurs on the corporate action effective date All market driven actions (splits

bonuses rights cash dividends spin-offs etc) take place at the opening of the ex-date Adds and drops to the index and shareIWF updates remain unchanged as trading was completed at the close of the day before the effective date

(iii) Full-day or partial closure occurs on the day before the corporate action effective date Adds

and drops to the index and shareIWF updates are moved to the close of the next trading date and use the closing prices of that day All market driven actions scheduled for the opening of the next day are unaffected by an exchange closure on the day before the ex-date

Rebalancing If an exchange is fully or partially closed on the day before the rebalancing effective date and we are unable to obtain market-on-close or official closing prices that day then all the rebalancing related adds drops share and IWF changes are moved to after the close of the next trading date using the closing prices of that day when it first trades


If it is a multi-market multi-currency index and one of the markets has an exchange closure on the day before the opening of the rebalancing effective date we delay the rebalancing in the closed market to the close of the next trading day but proceed with the rebalancing in the other markets as scheduled If an exchange is fully or partially closed on the effective date and an index rebalancing is scheduled for the opening of the effective date all the rebalancing related adds drops share and IWF changes take place per schedule as trading should have been completed at the close before the effective date The rebalancing treatment listed above is our general policy The Index Committee will review each situation on a case-by-case basis and the appropriate treatment will be preannounced to clients


Stock Suspensions Long Term Stock Suspensions Suspended stocks are reviewed for possible deletion after five trading days for Developed Markets 10 trading days for Emerging Markets and 20 trading days for Frontier Markets This review is conducted independently of rebalancing schedules

Short Term Stock Suspensions If we know in advance that the stock will be suspended from trading we do not recognize any corporate actions (even if it is quoted ex by the exchange) until trading resumes However if we do not have prior information of a stock being suspended and have recognized a corporate action for that day we will implement the market driven actions for the ex-date and carry the adjusted prices until trading resumes


Error Correction

Error Correction Policy for SampP Equity Indices

Types of Errors 1 Closing price of a stock on a given day is incorrect 2 Missed corporate event 3 Missed index methodology event (deviation from what is stated in the methodology document) 4 Late announcement

TYPE OF ERROR TREATMENT IN SampP BRANDED INDICES Closing Price bull Bad closing prices due to an SampP error are always corrected and

reposted bull Bad closing prices due to a vendor or exchange error are only

corrected and reposted if SampP receives the new information within a reasonable time

bull Best available prices at market close are used for index calculation bull Agreements are established with exchanges price sources for cutoff

times for corrections used in our index calculations

Missed Corporate Event Index Methodology Event

Errors are corrected amp reposted provided the error is identified within two trading days If a decision is made to fix the error retroactively all affected indices are recalculated all files reposted and clients are informed

Late Announcement Does not impact divisor Late information that does not impact divisors are applied at the earliest opportunity SampP Indices becomes aware of the event Dividends requiring foreign currency conversions use the official WM rates of the day before the date we apply this to the index Stock splits (or bonus issues or stock dividends) and reverse stock splits are applied on the correct ex-date If these are announced on the same day (either that this is taking place or that a previously announced event is being postponed or cancelled) they are applied on the correct ex-date and we will not repost files Same day corporate actions are included in the current day files so we will not repost the previous day files If these are announced after the ex-date (known to happen occasionally) then we will apply it on the correct ex-date and recalculate and repost files Divisor-impacting information results in a correction and reposting within two trading days


bull All errors due to SampP mistakes (data entry methodology misapplication etc) are corrected amp reposted provided the error is identified within two trading days

bull SampP follows the same rules for all indices bull SampP follows the same rules for all markets ndash developed emerging and frontier bull If SampP reposts for one index due to a constituent event then we repost for all indices that are

affected by the correction bull All clients are notified of files being reposted


Index Governance Index Committee Questions of interpretation or possible exceptions to rules are considered by the Index Committee responsible for the indices in question Please refer to individual index methodologies


Index Policy Announcements For all treatments listed above local markets follow their standard procedures for announcing the treatment of the corporate action typically with two-to-five days advance notice We send out TBA notices at least five days in advance with as much information as possible in instances where full details are still unavailable Announcements of additions and deletions for our headline equity indices are generally made at 517 PM Eastern Time Press releases are posted on the Web site wwwindicesstandardandpoorscom and are released to major news services Index methodology is constantly under review for best practices and any changes are announced well ahead of time via the Web site and email to all clients For reposting guidelines due to late announcements or analyst errors please refer to the Error Correction Policy section in this document


Appendix The sections related to Domiciles and Share and IWF Updates will be effective for Dow Jones equity indices with the September 2012 rebalancing


SampP Contact Information Index Management David M Blitzer PhD ndash Managing Director amp Chairman of the Index Committee david_blitzerstandardandpoorscom +12124383907 Maureen Maitland ndash Vice President Index Management and Production maureen_maitlandstandardandpoorscom +12124381178 Gouri Seetharam ndash Director Index Committee Management and Analysis gouri_seetharamstandardandpoorscom +12124388642

Media Relations David Guarino ndash Communications dave_guarinostandardandpoorscom +12124381471

Index Operations amp Business Development

index_servicesstandardandpoorscom US +12124382046 EMEA +442071768888 China +861065692905 Japan +81345508564 Australia +61292559802 Canada +14165073200 Dubai +97143727131 India +91-22-26598359


Disclaimer

This document does not constitute an offer of services in jurisdictions where Standard amp Poorrsquos or its affiliates do not have the necessary licenses All information provided by Standard amp Poorrsquos is impersonal and not tailored to the needs of any person entity or group of persons Standard amp Poorrsquos receives compensation in connection with licensing its indices to third parties Any returns or performance provided within are for illustrative purposes only and do not demonstrate actual performance Past performance is not a guarantee of future investment results It is not possible to invest directly in an index Exposure to an asset class is available through investable instruments based on an index Standard amp Poorrsquos and its affiliates do not sponsor endorse sell promote or manage any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any Standard amp Poorrsquos index There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns Standard amp Poorrsquos is not an investment advisor and Standard amp Poorrsquos and its affiliates make no representation regarding the advisability of investing in any such investment fund or other vehicle A decision to invest in any such investment fund or other vehicle should not be made in reliance on any of the statements set forth in this document Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle Inclusion of a security within an index is not a recommendation by Standard amp Poorrsquos or its affiliates to buy sell or hold such security nor is it considered to be investment advice These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable No content (including ratings credit-related analyses and data model software or other application or output therefrom) or any part thereof (Content) may be modified reverse engineered reproduced or distributed in any form by any means or stored in a database or retrieval system without the prior written permission of Standard amp Poorrsquos The Content shall not be used for any unlawful or unauthorized purposes Standard amp Poorrsquos its affiliates and any third-party providers as well as their directors officers shareholders employees or agents (collectively SampP Parties) do not guarantee the accuracy completeness timeliness or availability of the Content SampP Parties are not responsible for any errors or omissions regardless of the cause for the results obtained from the use of the Content or for the security or maintenance of any data input by the user The Content is provided on an ldquoas isrdquo basis SampP PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE FREEDOM FROM BUGS SOFTWARE ERRORS OR DEFECTS THAT THE CONTENTrsquoS FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION In no event shall SampP Parties be liable to any party for any direct


indirect incidental exemplary compensatory punitive special or consequential damages costs expenses legal fees or losses (including without limitation lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages SampP keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities As a result certain business units of SampP may have information that is not available to other SampP business units SampP has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process In addition SampP and its affiliates provide a wide range of services to or relating to many organizations including issuers of securities investment advisers broker-dealers investment banks other financial institutions and financial intermediaries and accordingly may receive fees or other economic benefits from those organizations including organizations whose securities or services they may recommend rate include in model portfolios evaluate or otherwise address Copyright copy 2012 SampP Dow Jones Indices All rights reserved Redistribution reproduction andor photocopying in whole or in part is prohibited without written permission STANDARD amp POORS and SampP are registered trademarks of Standard amp Poors Financial Services LLC (SampP) Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (ldquoDow Jonesrdquo)

Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction

Rights Offerings (or ldquoRights Issuesrdquo)

Terms Used Interchangeably across SampP Indices

Spin-Offs

Domiciles


Mergers amp Acquisitions

Dividends Stock Splits and Consolidation

UK Cash dividends reported in the UK are net dividends which is the amount we use for our index calculation purposes UK dividends are taxed at the source ndash from company profits after corporation tax has already been paid

Unexpected Exchange Closures

Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix

SampP Contact Information

Index Management

Media Relations


Disclaimer


Table of Contents

Table of Contents 1

Introduction 4


Definitions 5

Terms 7

Life Cycle of a Rights Offering 9

SampP Indicesrsquo Calculation of Rights Offerings 10

Equal Weighted and Modified Market Cap Weighted Indices 12

Warrants Options Convertible Bonds 13

SampP Indices Treatment of Rights Offerings 14

Spin-Offs 17


Scenarios 20

Treatment of Spin-Offs in Certain Equal Weighted and Modified Market Cap Weighted Indices 23

Spin-Offs SampP Indices Treatment 25

Index Committee 27

Domiciles 28

Background 28

Issues 28

Policy 28


Summary 31

Policy 31

Rebalancing Guidelines 32

Multiple Share Classes 33

Investible Weight Factor (IWF) 33

Degree of Freedom 34

SampPTSX Canadian Indices An Exception 37









Hybrid Dividends 50

Scrip Dividends 51











Rebalancing 58




Error Correction 61


Index Governance 63

Index Committee 63

Index Policy 64

Announcements 64

Appendix 65



Disclaimer 67






















COMMONLY USED TERM








Dilution Factor





Rights Value








































































Scenario













































Domiciles




























































































































Note
































Px = ( [ P0 S0 ] + [ D Sb ] ) [ S0 + Sb ]



Pb0 = Px ndash D





















Error Correction



























Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer









Hybrid Dividends 50

Scrip Dividends 51











Rebalancing 58




Error Correction 61


Index Governance 63

Index Committee 63

Index Policy 64

Announcements 64

Appendix 65



Disclaimer 67






















COMMONLY USED TERM








Dilution Factor





Rights Value








































































Scenario













































Domiciles




























































































































Note
































Px = ( [ P0 S0 ] + [ D Sb ] ) [ S0 + Sb ]



Pb0 = Px ndash D





















Error Correction



























Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer



Disclaimer 67






















COMMONLY USED TERM








Dilution Factor





Rights Value








































































Scenario













































Domiciles




























































































































Note
































Px = ( [ P0 S0 ] + [ D Sb ] ) [ S0 + Sb ]



Pb0 = Px ndash D





















Error Correction



























Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer






















COMMONLY USED TERM








Dilution Factor





Rights Value








































































Scenario













































Domiciles




























































































































Note
































Px = ( [ P0 S0 ] + [ D Sb ] ) [ S0 + Sb ]



Pb0 = Px ndash D





















Error Correction



























Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer








































































Scenario













































Domiciles




























































































































Note
































Px = ( [ P0 S0 ] + [ D Sb ] ) [ S0 + Sb ]



Pb0 = Px ndash D





















Error Correction



























Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer






























Domiciles




























































































































Note
































Px = ( [ P0 S0 ] + [ D Sb ] ) [ S0 + Sb ]



Pb0 = Px ndash D





















Error Correction



























Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer

























































































































Note
































Px = ( [ P0 S0 ] + [ D Sb ] ) [ S0 + Sb ]



Pb0 = Px ndash D





















Error Correction



























Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer





























Px = ( [ P0 S0 ] + [ D Sb ] ) [ S0 + Sb ]



Pb0 = Px ndash D





















Error Correction



























Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer

















Error Correction



























Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer

















Disclaimer




Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer



Table of Contents

Table of Contents 1

Introduction 4


Spin-Offs 17

Domiciles 28






Error Correction 61

Index Governance 63

Index Policy 64

Appendix 65


Disclaimer 67

Introduction



Spin-Offs

Domiciles






Stock Suspensions

Error Correction

Index Governance

Index Policy

Appendix


Index Management

Media Relations


Disclaimer

S&P Dow Jones Indices Corporate Actions: Policies & Practices

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Transcript of S&P Dow Jones Indices Corporate Actions: Policies & Practices