Table of Contents

Table of Contents ....................................................................................................................2

Introduction ..............................................................................................................................3
1.

Cash Dividend................................................................................................................4

2.

Special Dividend ............................................................................................................4

3.

Stock Split ......................................................................................................................5

4.

Right Offerings (or Rights Issues) ................................................................................6

5.

Stock Dividend ...............................................................................................................7

6.

Bonus Issue ...................................................................................................................8

7.

Consolidation .................................................................................................................8

8.

Share Repurchase/Buy-Back .........................................................................................9

9.

Spin-offs .........................................................................................................................9

10.

Mergers and Acquisitions .............................................................................................10

11.

Capital Repayments .....................................................................................................10

12.

Additions and Deletions ...............................................................................................11

13.

Contact Us ...................................................................................................................12

Thomson Reuters Indices Corporate Actions Methodology

THOMSON REUTERS INDICES

CORPORATE ACTIONS METHODOLOGY
Introduction
This methodology document details the guiding principles laid down by our index research
experts for the treatment of corporate actions that affect Thomson Reuters Indices 1.
Thomson Reuters recognizes the importance of understanding how adjustments are made in
order to maximize the benefits of using Thomson Reuters Indices for benchmarking,
investment analysis and portfolio construction.
We hope readers find this document useful. In case of any questions or queries please
contact index team by using the following email: [email protected]
About Thomson Reuters Indices
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About Thomson Reuters
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Exchanges. For more information, go to www.thomsonreuters.com.

The Index Committee reserves the right to make exceptions in the treatment if the need arise. Announcements will made
with sufficient notice should the Committe decide to make an exception to the general rules stated in this document.
Thomson Reuters Indices Corporate Actions Methodology

1.

Cash Dividend

A cash dividend is a distribution of wealth to the shareholders of a company, made out of the
earnings during a period (year, half year or quarter). For index calculation purposes, regular
dividends will affect Total Return indices only and not the Price Return indices.
The dividends impact is significant on total return indices. Total Return is the result of
reinvesting all dividends back into the index or portfolio. In the short term, the contribution of
dividends to the total return performance may not be visible. Over time, however, the
difference in accumulated wealth is significant due to reinvestment of income.
The price of the total return index is adjusted according to the amount of dividends paid in by
index constituent companies. When a company issues a dividend, the price of the equity
drops in the exact amount of the per share dividend amount. Leaving aside subsequent
market movements of the equity price, the direct impact of a dividend upon an index is a drop
in the price of the index. However, the total return index is adjusted for the issuance of
dividends by reinvesting them. For the purposes of the Total Return index calculations and
dividend reinvestment, Thomson Reuters will use the gross dividend amount. Further
information about the index formulas that are used in the total return calculations can be
found in Thomson Reuters Index Methodology document, publicaly available on our website:
http://financial.thomsonreuters.com/indices

2.

Special Dividend

A special dividend is a non-recurring distribution of profit to shareholders, usually in the form

of cash. A special dividend is usualy larger when compared to normal dividends paid out by
the company.
Typically, special dividends are distributed if a company has exceptionally strong earnings
that it wishes to distribute to shareholders or if it is making changes to its financial structure,
such as spin-off or changes in debt ratio.
For these larger 'special dividends', the ex-dividend date is normaly one trading day after the
dividend date (the date on which dividend payment is made, typically after the record date).

Thomson Reuters Indices Corporate Actions Methodology

The stock will trade on an ex-distribution basis (adjusted for the amount of the dividend paid)
on the trading day after the dividend date.
For index calculation purposes, a special dividend results in a stocks price being adjusted
(reduced) by the payment amount. Special dividends are adjusted on the ex-date and if
greater than a certain percentage of the underlying security price, may be treated as
corporate actions with price and divisor adjustments (thresholds vary from market to market
depending on local conventions). All special dividends are analysed by Thomson Reuters to
determine if they exceed a pre-set country specific threshold. If the dividend amount is below
the threshold, it is processed as a common dividend. If the dividend amount exceeds the
threshold then it is treated as a capital return event and the underlying security will be
adjusted in all Thomson Reuters Indices through an index divisor adjustment on the ex-date.
Example: The special dividend threshold for Hong Kong is 25%. Lets suppose that a
constituent of Thomson Reuters Hong Kong index announces a special dividend of 75HKD
and on the day of announcement the price of the stock is 250HKD. The special dividend
threshold is calculated as 75/250 and because it exceeds 25% it will be treated as a capital
return event.

3.

Stock Split

A Stock Split takes place when a company decides to increase the amount of its outstanding
shares while decreasing the nominal share price proportionally. Stock splits cause an
increase in the number of shares while reducing its share price in the same proportion, thus
keeping the market capitalization of the company constant. A company with 10,000 shares
trading at $100 can split into 20,000 shares of $50. The objectives of a company opting to
perform a stock split include increasing the liquidity and increasing the perceived
attractiveness for small investors (small investors can more easily afford shares if the cost is
lower).

Thomson Reuters Indices Corporate Actions Methodology

The treatment of a stock split is the following:

Adjusted Price = Closing Price * A / B
New Number of Shares = Old Number of Shares * (B/A)
Note: It is assumed that shareholders receive B(i), new shares for equity i (denoted B
above) for every A(i) shares held (denoted A above).

4.

Right Offerings (or Rights Issues)

Through Rights Offerings, companies seeks to increase their capital by issuing new
securities. This offer is extended to existing shareholders and gives them an opportunity to
buy a proportional number of additional shares at a specific price (rights or subscription price,
usually at a discount) within a fixed period (subscription period). The existing shareholders
are given a chance to maintain their stake in the company to prevent dilution.
The rights are securities just like shares and can be listed on a stock exchange. Rights are
often tradable during a predetermined trading period. They can be exercised to subscribe to
new securities during the exercise period. On the payment date of the event, the shareholder
who exercised the rights will receive the resulting securities and will pay the company the
exercise price per share. Unexercised rights lapse.
Rights can be transferable or non-transferable. Transferable rights, also known as
renounceable rights, are issued to existing shareholders and can be traded in the open
market. Non-transferable or non-renounceable rights cannot be bought or sold due to being
non-transferable. The existing shareholders can buy the new issued stocks at a discount so
as to be compensated for the dilution caused due to rights offering. However, shareholders
who do not exercise the rights by buying the discounted stock will lose money as their
existing holdings will suffer from the dilution.
Rights issue results in capital inflow, and increases the number of shares as well as the free
float-adjusted market capitalization of a security. For the purpose of index calculation,
Thomson Reuters assumes that the rights will be fully subscribed at the time of the event and
will adjust both the price and the share counts of the impacted securities by the ex-date of
Thomson Reuters Indices Corporate Actions Methodology

the event. Subsequent share count changes will only be captured at the next rebalance biannual date.
The treatment of a Rights Issue is the following:
Adjusted Price = (Closing Price * A + Subscription Price * B) / (A + B)
New Number of Shares = Old Number of Shares * (A + B) / A
Where shareholders receive B(i) new shares for equity i (denoted B above) for every A(i)
shares held (denoted A above).
Example: 2:25 rights offering (i.e., the right to buy two new shares for every twenty five
shares owned) at a subscription price $2.50 and the market value of the stock on previous
days close is $3.45; Total No. of old shares is 100.
Adjusted Price = (3.45 * 25 + 2.50 * 2) / (25+2) = $3.38
New No. of Shares = 100 * (25+2) / 25 = 108

5.

Stock Dividend

A stock dividend is an event in which a corporation distributes a payment to

shareholders in the form of shares of stock, as opposed to money, while increasing the
number of shares. The treatment of stock dividends is similar to stock splits, except that
stock dividends are quoted in terms of the percentage of shares received to those held.
Shareholders receive B(i) new shares for equity i (denoted B below) for every A(i) shares
held (denoted A below). A 10% stock dividend is the same as a 1.10 for 1 stock split with
an adjustment factor of 1.10.
The treatment of a Stock Dividend is the following:
Adjusted Price = Closing Price * A / (A+B)
New Number of Shares = Old Number of Share * (A+B) / A
Companies can also offer optional stock dividends where shareholders can opt for new
stocks or cash. When stock dividends are offered in alternative to cash, Thomson Reuters
Thomson Reuters Indices Corporate Actions Methodology

will assume that all shareholders will opt for cash and treat the event as a
common dividend.

6.

Bonus Issue

In a Bonus Issue, shareholders are awarded additional securities free of any payment. It is
sometimes referred to as "Scrip Issue" or "Capitalization Issue" and is effectively a free issue
of shares paid for by the company issuing the shares out of capital reserves.
The treatment of Bonus Issues is similar to the Stock Split or the Stock dividends.
Example: Company ABC calls a 1 for 4 Bonus Issue, for every four shares that shareholders
own in ABC they will receive one additional free share, i.e. shareholders will own 5 shares of
ABC plc after the issue. The number of shares issued increases by 25%. The issued share
capital increases by 25%, although this is offset by the reduction in the capital reserves. The
share price adjusts proportionately; if the market price was $100 before the issue, it will
adjust to $80 as the number of shares has increased.

7.

Consolidation

This event may also be referred to as a Reverse Stock Split, as it is the exact opposite of a
stock split. In a reverse split the company decides to decrease the amount of its outstanding
shares while at the same time increasing the share price proportionally, keeping the market
capitalization unchanged.
A reverse split will result in all shareholders holding fewer shares in the company. However,
the stake of each shareholder in the company will remain the same and the nominal value
per share will increase. Each new consolidated share will carry the same rights as the prereverse-split shares including voting rights and dividend entitlements.
The adjustment factor is calculated just like in the stock split.
Example: 1 for 4 reverse stock split for company XYZ. Before the reverse split XYZ had
1,000,000 outstanding shares with a nominal value per share of EUR 0.50. After the Reverse
Split the company will have 250,000 outstanding shares, with a nominal value per share of
EUR 2.00. The total market cap of the company remained contant, EUR 500,000.
Thomson Reuters Indices Corporate Actions Methodology

8.

Share Repurchase/Buy-Back

A Share Repurchase or Buyback is an offer by the issuing company to existing shareholders

to repurchase the companys own shares or other securities convertible into shares. This
results in a reduction in the number of outstanding shares.
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. In the first scenario, an adjustment factor is
normally used to reflect the price offered in the buy-back. When companies retain securities
as treasury stock, Thomson Reuters will not process an adjustment factor and the free float
number of shares will be updated at the next scheduled rebalance event.

9.

Spin-offs

Spin-off or demerger is the creation of an independent company through the sale or

distribution of new shares of an existing business/division of a parent company. Shares of
the new organization or spun-off entity are distributed to the equity shareholders of the
parent organization, at a ratio established by the parent (for example, each shareholder in
parent company A will receive 5 shares in the spun off company B). Both company's
shareholders and stakes are identical at the moment when the spin off is initiated. Each
shareholder holds shares in company A as well as in B at the moment of the spinoff.
The impact of Spinoffs on Thomson Reuters Indices is the following:
Adjusted Price = ((Closing Price * Shares Before Spin-off) (Price of Spun Off Shares *
New Shares)) / Shares Before Spin-off.
The price adjustment of the parent company is performed together with an index divisor adjustment.

Thomson Reuters does not add Spun companies inbetween rebalances. Spun entities will
require a minimum of 6 months of history in order to qualify for becoming an index
constituent (other requirements also apply, including liquidity, minimum free float, etc, as per
Thomson Reuters Index Methodology).

Thomson Reuters Indices Corporate Actions Methodology

10.

Mergers and Acquisitions

A merger is a strategic transaction, which involves combining two or more companies,

generally by offering the stockholders of one company securities in the acquiring company in
exchange for the surrender of their stock. The great majority of these event are acquisitions
and typically there is no name change or price adjustment made to the acquiring company.
However in some cases a merger two firms often but not always of about the same size,
agree to go forward as a single new company rather than remain separately owned and
operated. For example, both Thomson and Reuters ceased to exist when the two firms
merged, and a new company, Thomson Reuters, was created.
Mergers may be pure cash deals or a stock exchanges or a combination of both. A merger
results in the deletion of the target company, normaly with a name change and price
adjustment made to the acquirer.
The Impact of M&As on Thomson Reuters Indices is the following:
Shares Adjustment Factor = (New Shares + Old Shares) / Old Shares
For the purpose of processing M&A activity, Thomson Reuters will use the prices provided by
the exchange. In the event of a delisting, Thomson Reuters will use the last available price to
process the removal of the security from the indices, with a divisor adjustment. Share count
adjustments to the parent company may be perfomed if deemed appropriate by the Index
Committee.
Float adjustments that result from M&As are applied at the next scheduled rebalance date.

11.

Capital Repayments

Capital repayments are characterized by the distribution of a portion of a companys reserves

or capital to its shareholders. They are similar to special dividends. The price of the security
is adjusted on the ex-date of the event.
Adjusted Price Factor = [P(t) + Cash] / P(t)
Impact on Shares = No change.
Where P(t) = Price on Ex-date.
Thomson Reuters Indices Corporate Actions Methodology

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12.

Additions and Deletions

Thomson Reuters Indices may be affected by addition and deletions of constituents due to a
number of different reasons.

Initial Public Offerings: IPO additions to the index take place on the index scheduled
rebalancing dates.

Spin-offs: Spin-offs from current index constituents are eligible for index inclusion at the
next scheduled rebalancing date if the spun-off issue has met the eligibility
requirements for the index under consideration.

Mergers & Acquisitions: M&As 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, the target will be dropped from our indices. All-cash takeovers
generally become effective on the date of the takeover. Thomosn Reuters Indices may
not necessarily wait until the delisting date of the target for its deletion from the index.
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 Thomson Reuters indices. 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 security
is suspended from trading, the last available price will be used. Delisting: Thomson
Reuters Indices 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
Thomson Reuters Indices.

Thomson Reuters Indices Corporate Actions Methodology

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13.

Contact Us

For any additional clarification required or for any topics not covered in this document please
do not hesitate to contact our Thomson Reuters Index team via the following email:
[email protected]

Thomson Reuters Indices Corporate Actions Methodology

12