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

July 2012
S&P Dow Jones Indices: Index Methodology

Table of Contents
Table of Contents Introduction Rights Offerings (or Rights Issues)
Definitions Terms Life Cycle of a Rights Offering S&P Indices Calculation of Rights Offerings Equal Weighted and Modified Market Cap Weighted Indices Warrants, Options, Convertible Bonds S&P Indices Treatment of Rights Offerings

1 4 5
5 7 9 10 12 13 14

Spin-Offs
Definitions & Terms Scenarios Treatment of Spin-Offs in Certain Equal Weighted and Modified Market Cap Weighted Indices Spin-Offs: S&P Indices Treatment Index Committee

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17 20 23 25 27

Domiciles
Background Issues Policy

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28 28 28

Share and IWF Updates


Summary Policy Rebalancing Guidelines Multiple Share Classes Investible Weight Factor (IWF) Degree of Freedom S&P/TSX Canadian Indices: An Exception
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31 31 32 33 33 34 37
1

Mergers & Acquisitions


Definitions & Terms Additions and Deletions Mergers & Acquisitions

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38 42 43

Dividends, Stock Splits and Consolidation


Definitions & Terms Special Dividends Hybrid Dividends Scrip Dividends Dividend Treatment for ADRs and GDRs Regional Variations in the Treatment of Cash Dividends Foreign Exchange Conversions for Dividends Dividend Not Quoted Ex by the Exchange Bonus Issues of Shares Not Entitled To Cash Dividend Total Return and Net Return Indices

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48 50 50 51 52 52 54 55 56 57

Unexpected Exchange Closures


Full Day Exchange Closure Partial Day or Early Exchange Closure Treatment of Corporate Actions Rebalancing

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58 58 58 58

Stock Suspensions
Long Term Stock Suspensions Short Term Stock Suspensions

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60 60

Error Correction
Error Correction Policy for S&P Equity Indices

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61

Index Governance
Index Committee

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63

Index Policy
Announcements

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64

Appendix

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

S&P Contact Information Disclaimer

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

Introduction
This document covers corporate action treatment, per S&P Dow Jones Indices 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 S&P Dow Jones Indices 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 and/or special rules that pertain to certain markets. To the extent possible, the implementation and timing is the same across all S&P branded indices.

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

Rights Offerings (or Rights Issues)


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 (rights or subscription price), within a specified time (subscription period). 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 (e.g. 1:3 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 subunderwriters 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 non-renounceable. 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 transferable in the US or tradable in other markets. All three of these terms renounceable, transferable and tradable 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 non-transferable or non-tradable.

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

Accelerated Rights/Entitlement 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-rights/entitlement basis within 3-5 trading days. Retail investors generally have 2-3 weeks to decide to take up the offer. Also known as Jumbos, RAPIDS, and AREOs. Features (some or all of the following features may be present): The stock is suspended when the rights offering is announced. The offer made to institutional holders typically occurs before retail holders 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.) The offer can be conducted on a renounceable or non-renounceable basis. 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): The stock is suspended when the entitlement offering is announced. The offer made to institutional holders is conducted as an Accelerated Rights/Entitlement Offering during the trading halt period. Any renounced right/entitlements are sold through a book building process. The offer made to retail holders is conducted as a Renounceable Rights/Entitlement Offering whereby the right/entitlements 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 company's 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.

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

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-themoney".

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 renunciation date 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 expiration date), those rights not yet subscribed will expire at zero value. Subscription Price: Also known as the offer price or rights price. 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 Adjusted Price throughout this document.

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

Terms Used Interchangeably across S&P 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 Adjusted Price Dividend Disadvantage, Dividend Difference Expiration Date Market Value of the Stock Non-Renounceable Price Adjustment Factor (PAF) Renounceable Rights Offering broad term used to describe all kinds of rights (renounceable and nonrenounceable) Subscription Price

INTERCHANGEABLE TERMS USED/ MEANING OF THE TERM TERP (Theoretical Ex-Rights Price); Ex-Rights Price, Theoretical Open Price, Next Day Open Price Future dividend amount that new shares are not entitled to Renunciation Date Cum Price or Cum Rights Price. This is the closing price on the day before the rights ex-date Non-Tradable, Non-Transferable, Open Offer (in the UK) Dilution Factor Tradable, Transferable Entitlement Offer (used in AU for non-renounceable rights); Open Offer (used in UK for non-renounceable rights) 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 Rights Price), Application Money (in AU) Guaranteed (in North America) Price Adjustment, Price Adjustment Amount, Implied Rights Value

Underwritten Value of the Rights

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

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 excluding 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.

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

S&P Indices Calculation of Rights Offerings


STEP 1: Determine if the rights offering is in-the-money or out-of-the-money: If the subscription price < the stock closing price on the day before the ex-date, then the rights offering is in-the-money If the subscription price 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 < the stock closing price on the day before the ex-date, then the rights offering is in-the-money If the subscription price + dividend 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 S&P Indices 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:

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Price adjustment calculation: Value of the Rights = {Market Value of the Stock (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 Value of the Rights **Please note that the Market Value of the Stock is the previous days 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 Dividend 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 exdate, 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 (SPN.AX). For SPN.AXs (May 2009) rights offer, the full AU$ 0.05927 distribution (AU$0.04603 cash dividend + AU$ 0.01324 capital return) was used in the TERP calculation of SPN.AX. We added this amount to the SPN.AX rights subscription price of AU$ 0.78. We did not dilute the cash dividend and capital return on the dividend ex-distribution date. Example 2: A 7:5 rights offering (i.e., the right to buy seven new shares for every five shares owned) at a subscription price GBP 1.50 and the market value of the stock on previous days close is GBP 3.34; no future dividend has been announced. Value of Rights = {3.34 (1.5 + 0)}/ {(5/7) + 1} = GBP 1.07333333 Price Adjustment Factor = (3.34 1.07333)/ 3.34 = 0.67864271 Adjusted Price or TERP = 3.34 * 0.67864271 = GBP 2.26666667 OR Adjusted Price or TERP = 3.34 1.07333333 = GBP 2.26666667

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Example 3: A 7:5 rights offering at a subscription price of GBP 1.50 and the market value of the stock on previous days close is GBP 3.34; a future dividend for the amount GBP 0.50 is declared, but the new shares are not entitled to this dividend Value of Rights = {3.34 (1.5 + 0.5)}/ {(5/7) + 1} = GBP 0.78166667 Price Adjustment Factor = (3.34 0.78166667)/ 3.34 = 0.76596806 Adjusted Price or TERP = 3.34 * 0.76596806= GBP 2.5583333 OR Adjusted Price or TERP = 3.34 0.78166667 = GBP 2.5583333

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 noneligible 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 (i.e., 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 companys weight remains the same as its weight before the rights offering. No divisor adjustment is made.
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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 companys stock. The main difference lies in their lifespan. Rights usually expire after a few weeks, while warrants typically continue for several years.

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S&P Indices Treatment of Rights Offerings


For all markets - Developed, Emerging & Frontier - irrespective of whether the rights are renounceable or not, or fully underwritten or not. Price adjustments are applied at the opening of the rights ex-date as per the calculations shown earlier in this document. Share changes are also applied at the full rights ratio at the opening of the rights ex-date. 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 S&P Indices discretion, with a 3-5 days notice. 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, S&P Indices follows the local practice for renounceable and nonrenounceable accelerated and traditional rights offerings as described below. (i) Renounceable Rights (Traditional) Adjust the headline stock price on the ex-date 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 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. Price adjustment on the ex-date Share change on the ex-date applying the rights ratio/terms (iii) Non-Renounceable Rights (Traditional) Less frequent in the Australian markets Price adjustment on the ex-date Share change on the ex-date applying the rights ratio/terms

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(iv) Non-Renounceable Rights (Accelerated) The most common type of rights offerings seen in Australia Trading halts when the rights offering is announced 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. Ex-date is the date that trading resumes Price adjustment on the ex-date Share change applied on the ex-date applying the rights ratio/terms Accelerated Rights Offering Accelerated Rights may come in two parts institutional (accelerated) and retail (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: Known Price: If the subscription price is known in advance, we adjust price and shares on the ex-date. 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, S&P 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.

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S&P 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 & 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 build/placement 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.

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Spin-Offs
Definitions & 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, and/or 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 spun-off entity. Spin-offs may also be referred to as demergers.

Carve-out: This is also referred to as a partial spin-off. 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 Morris 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 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 & Gamble split-off its Folgers coffee assets, which were merged with J.M. Smucker (also in 2008).

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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 when, as, and if issued, 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 when issued transactions occur on an if and when 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 in its actual form 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 Distribution Ratio. This is the ratio of new shares in the spun-off entity to the existing shares in the parent company. For instance a 2:3 (or 2 per 3) spinoff 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 payable date.

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 exdate 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 (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;
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(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 1012B/A 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.

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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 As price is adjusted to reflect the capitalization of Company B being divested. 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.

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.

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.

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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 entity Headline Index Treatment
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 & 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. 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 & capitalization, with no divisor change.

Scenario
A remains in the index, B is deemed ineligible for inclusion

Announcement Schedule
3-5 days prior to the expected exdate

Attribute Indices Treatment (GICS, Value/Growth, etc.)


Same treatment as the headline index in both scenarios.

A remains in the index, B is deemed eligible for inclusion

3-5 days prior to the expected exdate

Scenario 1: As with the headline index.

Scenario 2: Once Company B trades, it is removed from any relevant Company As attribute indices and is added to Company Bs attribute indices.

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

Announcement Schedule
Shortly after the spin-off is announced

Headline Index Treatment


Scenario 1: Price adjustment for Company A; change in share and/or IWF for Company B. Depending on the terms of the spin-off, an overall adjustment in the divisor

Attribute Indices Treatment (GICS, Value/Growth, etc.)


Scenario 1: Decrease in capitalization & divisor adjustment for Company As relevant attribute indices. Increase in capitalization & divisor adjustment for Company Bs relevant attribute indices.

Scenario 2: N/A market price exists A is deemed ineligible to remain in the index however, B is deemed eligible for inclusion 3-5 days prior to the expected ex-date 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 & a change in the divisor Scenario 2: No price adjustment for Company A; Company B enters the index at zero price & capitalization, no divisor change. Once Company B trades, Company A is removed from the index at that days closing price, with a divisor change. 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

Scenario 2: N/A Scenario 1: Company A is removed from its attribute indices and Company B is added to its attribute indices, which may differ from As.

Scenario 2: As with the headline index.

Neither A nor B are eligible to be in the index

As soon as possible, after S&P has determined ineligibility

Same treatment as the headline index in both scenarios.

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Treatment of Spin-Offs in Certain Equal Weighted and Modified Market Cap Weighted Indices
S&P 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 spinoff 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 days 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 stocks weight in an equal weighted index. 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 stocks 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 S&P 500 Equal Weighted Index and the S&P 500 Dividend Aristocrats). These indices will continue to follow the add/drop policy of the parent.

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

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Spin-Offs: S&P Indices Treatment


Using our earlier descriptions of the two scenarios, S&P 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 indices 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 S&P Global Water index and the spin does not fall in the water category? A: We will still add the spin in the S&P 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 .

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Q: What if the spin-off doesnt 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. S&P 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 days open to account for the spin-off, the return on the parent for that day could be understated. S&P 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 indexs 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.

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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, S&P 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: Parent stock is dropped from the index. 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: Parent stock receives a reverse split and price adjustment and remains in the index.

Index Committee
S&P 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 exdate 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.

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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 investors holdings.

Issues
Traditionally index providers (including S&P), analysts and investors had relied on incorporation or registration as the primary determinant of a companys nationality. This determines a companys 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 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 S&Ps domicile policy: 1. Unless a companys legal incorporation or registration is a domicile of convenience the incorporation and registration determines its country of domicile. Domiciles of convenience are listed below in the notes. 2. Where the incorporation/registration is in a domicile of convenience, if a companys 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 companys country of domicile.

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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 and/or 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 domiciles of convenience 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 company's 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 S&P Index Committee does reserve the right to review companies on a caseby-case basis. Our goal is to be more transparent in how we assign companies to countries, particularly going forward.

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Headquarters vs. Principal Corporate Offices In some cases, a companys 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.

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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 S&P 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 constituents 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 S&P branded indices. At S&Ps discretion, de minimis merger and acquisition share changes may be accumulated and implemented with the quarterly share rebalancing. 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 preannounced on a best efforts basis with at least two-to-five trading days notice when possible. For the S&P Composite 1500, secondary offerings involving new share issuance can be made effective at the close on the same day it is announced. The S&P BMI US index provides a minimum two day notice.

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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 companys 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, S&P 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 S&P U.S. Indices Methodology document. o M&A activity is implemented when the target company is deleted. Corporate actions such as stock splits (or bonus issues, or stock dividends), reverse splits/consolidations, rights offerings, and certain share dividend payable events are implemented on their actual effective dates irrespective of the share freeze. 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. 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 S&P BMI Index Series (the 3rd Friday in September for developed and emerging markets and the 3rd Friday in December for frontier markets), the weekly
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share change freeze might occur sooner. Please refer to the annual reconstitution calendars for the most updated information. For the S&P/TSX indices we use 5-basis-points of the S&P/TSX 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 S&P indices depending on local market custom and conditions. Typically, we come across of one of these three broad treatments: US. In S&P US indices (including the S&P 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, S&P 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. S&P 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 S&P Global BMI, classes with no float have no weight in the index. They are, however, included for the purpose of determining a companys 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 companys total market capitalization and in the total shares outstanding. Please note the exception for the S&P/TSX 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 strategic nature and are not included in the IWF calculation.

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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 companys available float. 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 & acquisitions may also cause an IWF change. Please refer to the S&P Float Adjustment Methodology for a more detailed description of float adjustment and the S&P 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. S&P 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 S&P Global BMI and the S&P Frontier BMI, use DOF in its calculation of the IWF. Indices like the S&P 500, the S&P/TSX 60, and the S&P/ASX 200 are considered domestic 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 stocks investability is determining whether the market is open to foreign institutions. S&P 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, S&P investigates each security that may be a candidate for inclusion in the S&P Global BMI, the S&P Frontier BMI, the S&P 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 companys capital they may hold individually, and separate limits on the amount they may hold collectively. S&P considers the total amount of capital that foreign institutions may own collectively as the basis for determining a stocks degree of freedom. S&P Indices takes the DOF into consideration in its calculation of a stocks IWF.

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Examples of Restrictions on Openness Special classes of shares, such as A and B classes in China where foreign investors are restricted to B-class only. Sector restrictions, most commonly limiting foreign ownership of airlines, defense, energy producers, financial institutions, print and broadcast media and public utilities. Single foreign shareholder limits on general classes of shares, such as Brazils rule of no more than 5% of the voting classes or 20% of aggregate capital, or Colombias 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, S&P uses the aggregate amount which foreigners as whole might acquire, and thus considers 100% of the shares as available. Company statutes that impose limits which differ from national law. In such cases, S&P uses the most restrictive limit. For example, if the national limit on foreign ownership is 49% but a companys articles of incorporation set a limit of 25%, S&P uses a DOF of 25% for that companys capital.

The basic formula to calculate IWF considering DOF is: IWF = min {1-( strategic holders), or the DOF} Example: Major shareholders for Security ABC Private Investors Board of Directors/ Founders = 18% Corporate Holder Company ZXC = 10% 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. S&P Indices 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.

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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 S&P 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 S&P 500, the S&P/ASX 200, and the S&P TSX 60.

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S&P/TSX Canadian Indices: An Exception


The S&P/TSX methodology states that share/IWF changes are applied if they result in a change of 5 basis points or more to the S&P/TSX Composite, and not the 5% rule stated above. The S&P/TSX indices also aggregate multiple listed shares and do not account for unlisted shares. Please refer to the S&P/TSX Canadian Indices methodology for a more detailed description of the treatment in these indices.

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Mergers & Acquisitions


Definitions & 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 S&P 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): company.

The statutory limit restricting foreign ownership in a given

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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 merger/acquisition, declares bankruptcy or no longer satisfies the listing rules of the stock exchange.

Dutch Auction: This is also referred to as the descending price auction or clock auction. The bidding process starts with a high asking price which is then lowered until a participant accepts the auctioneers 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 strategic 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 and/or cash payment to the shareholders of the target company. If both companies are in an S&P index, one company, identified as the target company, 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.
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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 and/or 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, Jshares 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 best efforts 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 greenshoe) and a closing date. Recapitalization: A change in the companys capital structure which often involves altering the asset allocation between equity and debt.

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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 Unregistered Shares.

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 new 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 secondary offering in many markets.

Share Repurchase/Buyback: 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. S&P 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 companys shareholders. Tender offers might be friendly or hostile. A friendly offer is when the bidder informs the companys board of directors of its intent; and if the board approves
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they would recommend that the shareholders accept the offer. A hostile offer is when the target companys management is either not informed in advance or unwilling to accept the offer, yet the bidder continues to pursue it. The term partial tender offer 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 targeted 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 isnt 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 spunoff issue has met the eligibility requirements for the index under consideration. Spin-offs are effective on their ex-dates. Mergers & 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 acquirers shares. In an all-cash takeover, S&P 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
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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 S&P branded indices. 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. Same day removals for bankruptcy are not done. 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. 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 M&A 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 S&P 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 S&P 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 & 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 and/or weight change (share issuance and/or IWF change) to the acquirer, also referred to as the surviving company in a merger.

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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 and/or IWF change) to the acquirer if the purchase was funded with acquirer shares. We have three scenarios where M&As are concerned: (i) (ii) (iii) Target company is in the S&P indices and the acquiring company is not. Target company is not in the S&P indices, but the acquiring company is. Target and acquiring companies are both in S&P indices.

S&P Indices follow the same treatment for M&As for all three scenarios above. Only in certain situations, at S&Ps 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 S&P indices. Depending on the market(s) in question, information available, and the particular M&A 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) (ii) (iii) (iv) (v) (vi) end of the offer period takeover date or the merger effective date delisting date or last trading day of the acquired entity when the offer is declared unconditional and has met all shareholder, regulatory or court approvals for rules-based indices, when certain thresholds for eligibility to remain in the index (per index methodologies) are crossed 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 takeover/merger 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).

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Each M&A event is followed closely and reviewed carefully by S&P index analysts and treated on a case by case basis. Clients are notified well in advance regarding our treatment. Type of M&A
(1) All-Cash Takeovers/Cash Offers

S&P Announcement
3-5 days prior to the expected ex-date

Implementation
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.

S&P Indices Treatment


On the opening of the ex-date, the target company is dropped from all S&P 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 Takeovers/Scrip Offers

3-5 days prior to the expected ex-date

Determined on a caseby-case basis

Target company is dropped from all S&P branded indices. Acquirer will have a share change and a possible IWF change.

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Type of M&A
(3) Cash & Stock Takeovers

S&P Announcement
3-5 days prior to the expected ex-date

Implementation
Determined on a caseby-case basis

S&P Indices Treatment


Target company is dropped from all S&P branded indices. Acquirer will have a share change and a possible IWF change.

(4) Merger

3-5 days prior to the expected ex-date

Determined on a caseby-case basis

Target company is dropped from all S&P branded indices. A surviving entity is identified. The surviving entity will likely have a name change, identifier changes, and a weight change (share issuance and/or IWF change)

(5) Partial Acquisitions

3-5 days prior to the expected ex-date

Typically right after the tender offer results are confirmed, S&P 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 and/or an IWF change (stock acquisition). The target company is dropped from S&P branded indices and any corresponding changes are made to the acquirer/surviving company all on the implementation (ex-)date

(6) Cross-border M&As

3-5 days prior to the expected ex-date

Determined on a caseby-case basis

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.
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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.

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Dividends, Stock Splits and Consolidation


Definitions & Terms
Regular Dividend: A regular dividend is a distribution of a portion of a company's 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 stocks 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 companys 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.
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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 1.05 for 1 stock split with an adjustment factor of 1.05.

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 21:20 stock split, which is the same as a 5% stock dividend.

Consolidation: This is also referred to as a Reverse Stock Split 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 received/shares 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).

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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 special and not regular or ordinary if: 1. The company describes it as a special, extra, irregular, return of capital or some similar term in the dividend announcement. Companies may also use the terms of a distribution from reserves either from capital contribution or share premium accounts. 2. The analyst covering the stock determines that it does not follow the companys 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 special even if they are subject to a withholding tax. Note:

When an ordinary dividend is increased or decreased it is still ordinary, not special. When a dividend is paid the first time it is ordinary unless the companys release specifically states otherwise.

Hybrid Dividends
Hybrid dividends, payable in cash & stock, are treated as follows in S&P branded indices: For hybrid dividends considered to be regular dividends, S&P 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 S&P, 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 rights, but not with all the features of a rights offering. Generally, shareholders are offered three options for the rights received (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
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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. S&P Indices 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.

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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 ADR/GDR is known ahead of time, the depositary bank usually provides only an estimated dividend amount in the trading currency of the ADR/GDR 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, S&P branded indices use the dividend treatment outlined below: (i) if the dividend ex-date is known, and the actual/exact amount is known, we enter this amount on the dividend ex-date. 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 ADR/GDR based on the forex rates at that time) on the dividend ex-date. if the information regarding the dividend amount is available only after the exdate has passed, then we recognize this dividend when we find out the amount (giving our clients 1-2 days notice). We will not wait for the payable date, which could be months away in some instances.

(ii)

(iii)

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 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 0.031 and a PID component of the dividend of GBP 0.015 taxed at 20% rate. So, for our index calculation purposes, the dividend amount for Segro Plc was GBP 0.043 Dividend = GBP 0.031 + GBP {0.015 * (1-0.2)} = GBP 0.043

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Korea. The majority of dividends are not announced prior to their ex-date. S&P 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 2887.TW 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 2412.TW 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. S&P 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 years figures, adjusted for any split/bonus between last years 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. S&P/TSX Canadian Indices have a minimum 4% of price threshold to recognize a dividend as special; i.e., 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. S&P Indices 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.

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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; i.e., Australian companies pay out profits as dividends either before or after tax. The franking rate 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: If the company provides a converted dividend amount, we use that amount. 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.

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Dividend Not Quoted Ex by the Exchange


At times, when companies declare a conditional dividend (contingent upon some event taking place say a merger, or Board approval, etc.), S&P Indices might still decide to recognize it. In such cases, clients will be notified in advance.

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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: Calculate the adjusted price (next day open) incorporating this bonus share and take the difference as a price adjustment. Add the second line to the relevant indices. Drop this second line and increase current shares number on the dividend exdate. Since this is a market-cap neutral event at the time of bonus shares issuance, P0 * S0 = (Px * S0) + [(Px 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 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: Apply the bonus issue on the ex-date Adjust the dividend effective at a later date accordingly (i.e. decrease the dividend amount in order to adjust it over the new number of shares including those resulting from the bonus issue).

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Total Return and Net Return Indices


Gross and net total return indices are calculated for most S&P 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 S&P Indices 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 & Young.

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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 days closing prices. If all exchanges fail to open, S&P 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, S&P 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 exchanges lead in such situations. If the exchange moves the corporate action ex-date, S&P Indices does the same. Adds and drops to the index and share/IWF 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 share/IWF 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 share/IWF 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.
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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.

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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.

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Error Correction
Error Correction Policy for S&P Equity Indices
Types of Errors:
1. 2. 3. 4. Closing price of a stock on a given day is incorrect Missed corporate event Missed index methodology event (deviation from what is stated in the methodology document) Late announcement TREATMENT IN S&P BRANDED INDICES Bad closing prices due to an S&P error are always corrected and reposted. Bad closing prices due to a vendor or exchange error are only corrected and reposted if S&P receives the new information within a reasonable time. Best available prices at market close are used for index calculation. Agreements are established with exchanges / price sources for cutoff times for corrections used in our index calculations. Errors are corrected & 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 S&P 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.
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TYPE OF ERROR Closing Price

Missed Corporate Event / Index Methodology Event

All errors due to S&P mistakes (data entry, methodology misapplication, etc.) are corrected & reposted, provided the error is identified within two trading days. S&P follows the same rules for all indices S&P follows the same rules for all markets developed, emerging and frontier. If S&P reposts for one index due to a constituent event, then we repost for all indices that are affected by the correction. All clients are notified of files being reposted.

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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.

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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 5:17 PM Eastern Time. Press releases are posted on the Web site, www.indices.standardandpoors.com, 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.

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

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S&P Contact Information


Index Management
David M. Blitzer, Ph.D. Managing Director & Chairman of the Index Committee david_blitzer@standardandpoors.com +1.212.438.3907 Maureen Maitland Vice President, Index Management and Production maureen_maitland@standardandpoors.com +1.212.438.1178 Gouri Seetharam Director, Index Committee Management and Analysis gouri_seetharam@standardandpoors.com +1.212.438.8642

Media Relations
David Guarino Communications dave_guarino@standardandpoors.com +1.212.438.1471

Index Operations & Business Development


index_services@standardandpoors.com U.S.

+1.212.438.2046 +44.20.7176.8888 +86.10.6569.2905 +813.4550.8564 +61.2.9255.9802 +1.416.507.3200 +971.4.3727131 +91-22-26598359

EMEA China Japan Australia Canada Dubai India

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Disclaimer
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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. S&P 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 S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. In addition, S&P 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 2012 S&P Dow Jones Indices. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part is prohibited without written permission. STANDARD & POOR'S and S&P are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"). Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones).

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