JSX management to review composite index criteria

JAKARTA (JP): The Jakarta Stock Exchange (JSX) management said on Tuesday it would review criteria for calculating the composite index after a huge rights issue by Bank Danamon virtually left the index at its mercy.

Analysts hailed the move, saying it would prevent fund managers from abandoning the index on the pretext it no longer represented the entire market picture.

Bank Danamon's 215 billion rights issue on Monday made it the largest stock and gave it a disproportionate influence on the index, the exchange said in a statement.

One point movement, equivalent to a Rp 25 rise or fall, in Danamon's shares will cause the benchmark index to fluctuate 10.861 points, it said.

"Starting April 6, the calculation of the composite index will no longer include shares that are added in very large numbers," it announced.

"In the meantime, the JSX along with the index committee will review the criteria for calculating the index in order to ensure it is reasonable even if there are additions of shares in large numbers."

The research head at Trimegah Securindolestari, David Chang, said the move was needed to make the index representative of the entire market situation.

He also believed it was timely, noting that more huge rights issues from listed private banks would come on stream in the near future.

In the pipeline are rights issues from Bank Internasional Indonesia, Bank Lippo, Bank Niaga, Bank Universal, Bank Tiara Asia and Bank PDFCI.

Chang said share prices of those banking stocks were very low now, which would mean they would dictate fluctuations in the index if they floated huge number of rights shares.

He believed it would be fair for JSX to reduce the weighting of banking stocks in the composite index to reduce or eliminate the tendency.

"But in the future, when the banking sector improves and their share prices go up, they should increase the weighting. I think that is fair."

If such an adjustment was not made, Chang said, fund managers would be forced to buy banking stocks to balance their portfolio or abandon the composite index altogether.

"If not adjusted, fund managers perhaps will not use the composite index to look at the market because the composite index will be very volatile. Therefore, they would have to look at another index, which may be the LQ-45."

Research head at BNI Securities Adrian Rusmana contended that even the LQ-45 would not suffice for fund managers' needs.

Adrian also noted that adjustment to the current composite index would change its function to cover all transactions.

He recommended the JSX create another index which would meet investors' need.

"With those banking shares, the composite index does not mirror the market anymore. Therefore, the JSX should consider introducing another index, which could be used as a benchmark."

Chang disagreed with Adrian's suggestion for another index, arguing it would fail to attract fund managers.

"If they introduce another index, then we will have too many indexes. If we have a lot of indexes, after a while nobody will use them and they will return to the composite index. Creating a new index is very easy, but if nobody uses it, what's the point? It will be useful for us to make adjustment," Chang said.

Adrian responded the best solution in lieu of a new index would be to suspend trading on most banking shares, especially those undergoing government-sponsored recapitalization.

"Why not just suspend trading of those shares. They are mostly empty shares, no significant fresh money injected into the bank. This manipulates the market," Adrian said. (rid)