DSE Index

Designed by S&P Dow Jones Indices

(Source: Dhaka Stock Exchange Ltd., www.dsebd.org)

The Dhaka Stock Exchange presently computes three indices:

• DSE Broad Index (DSEX)
• DSE 30
• DSE Broad Shariah Index (DSES).
It introduced DSE Broad Index (“DSEX”) and DSE 30 Index (“DS30”), designed by Standard and
Poor's (S&P), one of the world's leading credit-rating agencies, based on the free-float methodology
used by the world's major indices with effect from January 28, 2013.The base year for both indices
is 2008 and the base point is 1,000. Market capitalization under free-float methodology is
calculated by taking the equity's price and multiplying it by the number of shares readily available
in the market. More than 5 per cent shareholding by listed companies‟ sponsors, directors,
government‟s shareholding, strategic shareholding and cross holding by associated companies are
excluded from the calculations under the free-float system. All eligible stocks for the DSE indices
are required to trade at least half of normal trading days each month for the three months prior to
the rebalancing reference date. All listed DSE stocks are classified according to the DSE Industry
Classification system. None of the DSE Indices include debentures and bonds.

DSE Broad Index (DSEX)

DSEX is the Broad Index of the Exchange (Benchmark Index as it shows the exact price movement
of the listed companies) which reflects around 97% of the total equity market capitalization.
Eligible stocks must have a float-adjusted market capitalization above 500 million BDT as of the
rebalancing reference date. Stocks must have a minimum six-month ADVT of 1 million BDT as of
the rebalancing reference date. At each annual rebalancing, if a current index constituent falls
below 1 million BDT, but is no less than 0.7 million BDT, then the stock remains in the index
provided it also meets the other eligibility criteria. Sector diversification rule is not applied to the
DSE Broad Index. In case of DSEX, financial viability is not required for index membership.
Under the S&P Dow Jones Index Methodology, interim IPO additions to the DSE Broad Index
(DSEX) take place quarterly on the third Thursday of April, July and October. To be considered
eligible for inclusion, an IPO must fall within the top half of the ranked companies, by float-
adjusted market capitalization and have at least one month of sufficient liquidity at each quarterly
observation date. The total numbers of constituents in DSEX stands at 263 as of April 17, 2017.
DSE 30 Index (DS30)
DS30 is constructed with 30 leading companies which can be said as investable Index of the
Exchange. The companies are changed every six months on the basis of performance. It reflects
around 51% of the total equity market capitalization. Eligible stocks must have a float-adjusted
market capitalization above 100 million BDT. Additionally, if a current index constituent falls
below the 100 million BDT threshold, but is no less than 70 million BDT, then the stock remains in
the index provided it also meets the other inclusion criteria. Stocks must have a minimum three-
month average daily value traded (ADVT) of 5 million BDT as of the rebalancing reference date.
Liquidity criteria can be reduced to 3 million BDT in certain circumstance to ensure there are
enough constituents in the index. At each semi-annual rebalancing, if a current index constituent
falls below 5 million BDT but is no less than 3 million BDT then the stock remains in the index
provided it also meets the other eligibility criteria. The number of constituents in Banks, Financial
Institutions, Insurance sector, Real Estate Sub-sector of Service & Real Estate sector,
Pharmaceuticals and Fuel & Power is capped at 5 each and 20 combined for the DS30 Index.
Stocks must be profitable as measured by positive net income over the latest 12-month period, as of
the rebalancing reference date. The figure is calculated by adding the latest four quarters of net
income reported for the company. The base value is 1000 for DS30 Index.

DSEX Shariah Index (DSES)

Dhaka Stock Exchange Limited Launched DSE Broad Shariah Index (DSES) on January 19,2014.

Methodology of DSEX Shariah Index

The DSEX Shariah Index (DSES) serves as a Shariah—compliant broad market benchmark
measuring the performance of the Bangladesh equity market.The Index is constructed as a subset of
the DSE Broad Index (DSEX) and includes all stocks included in the parent index that pass rules-
based screens for Shariah compliance. An Index Committee is set up to govern the maintenance of
the index.

Highlights

The DSEX Shariah Index (DSES) provides broad market coverage of Shariah-compliant equities
listed on the DSE. It is designed to be a broad market benchmark. All locally listed stocks that meet
size and liquidity criteria are eligible for inclusion. Constituents are weighted by float-adjusted
market capitalization.

Partnership

S&P Dow Jones lndices served as a consultant to the Dhaka Stock Exchange in designing the
methodologies for the DSEX Shariah Index (DSES), the DSE Broad Index (DSEX) and the DSE 30
Index (DS30). S&P Dow Jones lndices also provides the list of securities passing Shariah-
compliance screens to the DSE at each monthly rebalancing, but is not otherwise involved in the
governance or ongoing maintenance of the lndices.

Shariah Screening

The DSEX Shariah Index (DSES) utilizes the Shariah screening methodology and processes
employed by the S&P Shariah Family of lndices. S&P Dow Jones lndices has contracted with
Ratings Intelligence Partners (Rl) to provide the Shariah screens and filter the stocks based on these
screens. Ratings Intelligence Partners is a London/Kuwait—based consulting company specializing
in solutions for the global Islamic investment market. Its team consists of qualified Islamic
researchers who work directly with a Shariah Supervisory Board. It is continually working with
regional banks to create Shariah—compliant equity products and expand investment offerings.
RI works with a Shariah Supervisory Board, which is a board of Islamic scholars serving to
interpret business issues and recommend actions related to business decisions for the inclices.
The members are:

 Dr. Muhammad Ali Elgari - PhD in Economics from the University of California, U.S.A.

 Dr. Abdul Sattar Abu Cuhuddah — PhD in Islamic Law from Al Azhar University. Cairo.
Egypt.

 Dr. Nazih Hammad — PhD in Islamic Law from the University of Cairo, Egypt.

 Dr. Mohammad Amin Ali-Qattan — PhD in Islamic Banking, University of Birmingham,

United Kingdom.

 Dr. Mohd Daud Bakar —— PhD from the University of St. Andrews, United Kingdom.

Eligibility Criteria
Sector-Based Screens
Business activities related to the following are excluded:
1. Advertising and Media, with the following exceptions:
 Media and advertising companies generating revenues in excess of 65% of total income
from the GCC countries
 News Channels, Newspapers, Sports Channels
2. Alcohol
3. Cloning.
4. Financials, except: Islamic Banks, Islamic Financial Institutions, Islamic Insurance Companies
(company having Shariah Committee to supervise all activities, all products are Islamic, all
investments of the company are Islamic and passes accounting based screens
5. Gambling
6. Pork
7. Pornography
8. Tobacco
9. Trading of gold and silver as cash on deferred basis
During the selection process, each company's latest financial statement is reviewed to ensure that
the company is not involved in any non-Shariah compliant activities, regardless of whether the
latest statement is a quarterly, semi—annual or annual statement.
If the latest statement is available in all three of these frequencies an annual statement will likely be
used, as these are more likely to be audited. Those that are found to be non-compliant are screened
out. The above industries are not considered lslamic and would not be appropriate for investment
for observant Muslims.

Accounting-Based Screens

After removing companies with non-compliant business activities, the rest of the companies are
examined for compliance in financial ratios, as certain ratios may violate compliance measurements.
Three areas of focus are leverage, cash, and the share of revenues derived from non-compliant
activities. All of these are subject to evaluation on an ongoing basis.

Such accounting based screens are not applicable to companies which are run on a fully Shariah
compliant basis and such companies shall be considered Compliant. Such companies may be
characterized by (the list below is indicative, non-exhaustive and reviewed on a case to case basis):
 Having a Shariah Supervisory Board
 All transactions (business and financial) are in accordance with Shariah principles
 Incorporated and managed in a fully Shariah compliant manner.

Leverage Compliance
This compliance„is measured as:
Debt / MarketValue of Equity (36 month average) < 33 %
Cash Compliance
There are compliances with, reference to cash holdings. These are:

Accounts Receivables / Market value of Equity (36 month average) < 49 96;

(Cash + Interest Bearing Securities) / Market value of Equity (36 month average) <33%

Revenue Share from Non-Compliant Activities

In certain cases, revenues from non-compliant activities can be tolerated, if they comply with the
following threshold:

(Non-Permissible Income other than Interest Income) / Revenue < 5%

Dividend Purification Ratio
This ratio is provided to investors for purification purposes, it is calculated as:
Dividends * (Non Permissible Revenue / Total Revenue)
Index Eligibility
The stocks, first, must be constituents of the DSE Broad Index (DSEX). They are then screened for
Shariah compliance. Only those stocks that are compliant remain in the DSEX Shariah Index
(DSES).
Timing of Changes
The DSEX Shariah Index (DSES) will see additions and deletions on an ongoing basis due to
corporate activity linked to changes in the parent index. Updates due to changes in compliance are
applied once a month on the third Thursday of the month.
Additions are made to the DSEX Shariah Index (DSES) once a month, typically the third Thursday
of the month after the addition to the parent index, if found compliant by the Shariah board.
Deletions will be done at the same time as the underlying index.
Additions
Once an announcement is made of an impending addition to the DSE Broad Index (DSEX), RI will
screen it for compliance. If the stock is found to be compliant, after approval by the Shariah board,
it will be added to the respective Shariah index. RI will also regularly monitor the existing non-
compliant stocks of the underlying index. If any of these stocks become compliant because of
changes in financial ratios or a change in business activity due to mergers or restructuring, it will be
added to the Shariah index with notice to clients.
Deletions
All deletions from the parent index will be deleted from the Shariah compliant index on the same
day. RI will also conduct an ongoing review of existing Shariah index constituents for continued
inclusion in the index.
Additions and deletions to the index which will occur due to ongoing reviews and changes in
compliance are done on the third Thursday of each month with advance notice to clients.

1. What are the S&P Shariah lndices?

Our Shariah indices provide investors with a comprehensive set of Shariah-compliant investment
solutions. Representative of each market, with high correlations to their underlying indices, each
index offers a comparable investable portfolio while adopting explicit, transparent selection criteria
as defined by Islamic law.

2. Is screening sector- or stock-based?

Stocks that are considered for inclusion in the S&P Shariah lndices are screened using a sector-
based screening regime supplemented by a stock-based screening scheme. As a result, although
certain sectors (e.g., hotels) are often classified as non—compliant, each stock is individually
screened and the non—permissible revenues are determined using various methods that include
consulting company statements, third—party sites (e.g., Bloomberg and Google Finance), and
contacting the companies themselves. This method has the benefit of being more accurate than a
simple sector—based screening, particularly in the case of conglomerates, where a single sector-
based classification is unlikely to be representative of all the activities of the conglomerate.

3. Are advertising and media companies considered Shariah-compliant?

The S&P Shariah lndices Methodology states that companies in the advertising and media sector are
generally not Shariah-compliant with the exception of:

. Newspapers
. News channels
. Sports channels
. Media and advertising companies generating revenues in excess of 65% of total income from GCC
countries (also see question 15).

4. Are embryonic and stem cell research and production companies considered Shariah-compliant?

Companies engaged in genetic cloning activities are generally excluded from inclusion in any S&P
Shariah Index with the following exception: embryonic/adult stem cell research is permissible only
if it is used for therapeutic/healing purposes and not for duplication of tissues or organs of humans
and animals.
5. Are all financial companies considered Shariah-non-compliant according to the S&P Shariah
lndices Methodology?
All companies in the financial sector such as conventional banks and insurance companies are
considered Shariah-non-compliant with the exception of Islamic banks, Islamic financial institutions
and Islamic insurance companies. Such financial companies are defined as:
. Having a Shariah Committee to supervise all activities
. Having only Islamic products
. Investing in only Islamic products or companies
. Passing accounting-based screens.

6. Why are defense stocks included?

The Ratings Intelligence/S&P Shariah Control CommitteeI takes the view that weapons can be used
for both permissible (e.g., self-defense) and non-permissible (e.g., unprovoked aggression)
purposes. The weapons themselves are neutral. Hence, the manufacturing of weapons is considered
permissible.

7. How are companies with a large percentage of income generated through interest judged to be
compliant?

The S&P Shariah lndices Methodology does not use interest income (as a percentage of total
income) as a screening filter. The S&P Shariah lndices Methodology
filters out non-permissible income excluding interest income as a percentage of the total revenues.
Non-permissible income includes such things as alcohol sales, sales of products containing pork,
etc.

The reason for this is to allow for investment in the shares of companies who are in the research and
development phase (e.g., mining or energy companies). These companies often do not generate a
sizable revenue (during the R&D phase) from operations, but have a market capitalization well in
excess of the cash on their balance sheet2 based on the expectation of high future revenue and
profits.3However, they usually have a high dividend purification ratio (requiring purification at a
high level) because any interest they may have received during the R&D phase appears exaggerated
due to the small or non-existing revenue from operations.

Such stocks, if they pass all other Shariah screens, and if the cash balances plus any interest-bearing
marketable securities (these are the sources of interest income) are within the Shariah limits with
respect to the average market capitalization, are allowed for investment.

8. How are investments in mutual funds by companies treated? Is the income derived from these
investments considered compliant?

Investments in mutual funds are generally considered to be non-compliant unless the funds in
question are Shariah-compliant Islamic funds. There are, however, occasions where regional or
circumstantial assumptions may be employed (e.g., having observed that around 50% of the
investible universe in India comprises Shariah-compliant stocks, 50% of the income from a mutual
fund based in India may be considered compliant).

9. How does the S&P Shariah lndices Methodology define debt? How is it calculated?

Debt, as defined by the S&P Shariah lndices Methodology, is the sum of all short- and long-term
interest-bearing borrowings and liabilities. It is calculated by summing all such items reported in
constituent companies' statements.
10. How is the average market capitalization of stocks calculated?

The average market capitalization of X over n months is calculated by multiplying the moving
average daily closing price of X over n months (must be adjusted for corporate actions) (Pavg) with
the total number of shares outstanding for X.

For stocks that have multiple share classes, this is estimated as Pavg/Plast * M, where M is the
current market capitalization and Plast is the last closing price of X (for Pavg and Plast, the figures
for the main share class are used).

For companies that do not have a sufficiently long price history (e.g., recent IPOs), the figure Pavg
is calculated as the moving average daily closing price of X over n days where n is the number of
days X has been trading or the number of days that a daily closing price for X has been available.

11. How is the dividend purification ratio calculated? What goes into the component of dividends to
be purified?

The dividend purification ratio is calculated as:

DP ratio = Non-Permissible Revenue/Total Revenue

Non-permissible revenue, in this context, includes allforms of revenue or income that are
considered non-permissible from a Shariah perspective (e.g., alcohol sales, gambling revenue, etc.)
and includes any income generated from interest.

The DP ratio determines what portion of the dividends received must be purified (i.e., given to
charity). As an example, a DP ratio of 0.10 (i.e., 10%) implies that 10% of the dividends need to be
given to charity, while a DP ratio of 1.0 (i.e., 100%) requires all of the dividends received to be
purified.

12. How are consolidated statements used? Are any unconsolidated balance sheets used?

In certain regions (e.g., Japan and India), companies often publish separate consolidated and
unconsolidated balance sheets and income statements. However, Ratings Intelligence (S&P‟s
Shariah screening partner) has observed that these companies usually are large conglomerates
having a large number of subsidiaries, often with a less than
100% holding in each subsidiary. In such cases, using a consolidated company statement often
results in the Shariah ratios being distorted (e.g., debt/equity ratios of 200% or above). Because of
this, Ratings Intelligence and S&P Dow Jones Indices have sought and obtained Shariah Committee
authorization to use unconsolidated balance sheets by default and calculate pro-rata figures by
taking into account the parent company's holding in each subsidiary.

13. Do the S&P Shariah Indices use only audited results or are unaudited results used as well?

In determining Shariah compliance for inclusion in the S&P Shariah Indices, we use the latest
financial statement regardless of whether the latest statement is a quarterly, semi-annual, or annual
statement.
Annual statements are typically audited while quarterly and semi-annual statements are often
unaudited.

14. Are any interim or quarterly results used?

We use the latest statement regardless of whether the latest statement is a quarterly, semi-annual, or
annual one. If the latest statement is available in all of these three formats, the annual statement will
be preferred, since it is more likely to be audited and often more complete.

15. Are there any differences in treatment by market?

The properties of the S&P Shariah Indices Methodology are market—independent in that stocks in
all markets are treated with the same rules.4

16. Why are the norms of standardized organizations such as the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOlFI) not used?

The S&P Shariah lndices‟ screening methodology reflects the latest thinking of the Shariah Control
Committee. This may differ from the norms of organizations like AAOlFl for two reasons. Firstly,
different Shariah committees can come to different conclusions. Secondly, these ”consensus”
organizations tend to be less dynamic in their thinking. We do expect screening norms to converge
on the S&P Shariah lndices‟ criteria over time.

17. When does the monthly Shariah review process occur?

 During the week of the first and second Fridays of the month, the Shariah screening of the
underlying index members occurs. Values may be fixed (subject to Shariah Control
Committee approval) at any point during this time, but this usually happens on the Tuesday
of the week of the second Friday of the month, with the moving average market
capitalizations corresponding to the three years immediately preceding the Tuesday of the
week of the second Friday of the month.
 During the week of the second and third Fridays of the month, Shariah committee
authorization is obtained.

S&P Dow Jones Indices announces changes to the S&P Shariah Indices on the third Friday of the
month.

Changes to the Shariah indices take effect at the start of business on the Monday immediately
following the third Friday of the month.

18. In the debt/36—month average market cap, which clauses are considered debt?

Our definition of debt includes the following (this list is non-exhaustive):

. Long-term interest—bearing debt as disclosed by the company‟s management

. Short-term interest-bearing debt as disclosed by the company‟s management

. Current portion of long-term interest-bearing debt as disclosed by the management

. Interest—bearing short-term liabilities such as overdrafts, bridge loans, etc.

We exclude:

. Short-term non-interest—bearing operational payables/ Iiabilities such as gratuity payable,

creditors for goods and services, provisions, etc.
. Long-/short-term Islamic debt
. Long-/short-term non-interest—bearing debt

19. Accounts receivable/36-month average market cap: what is included in accounts receivable?

Our definition of accounts receivables includes the business/operationaI/trade and non-trade

receivables.

20. Do cash and interest-bearing securities include short-term investments, cash equivalents,
deposits and bonds?

Our definition of cash and interest-bearing securities includes the following (this list is non-
exhaustive):

.Cash in hand

. Cash at bank

.Term deposits (three months)

. Short-term investments held for sale/trading

.Government bonds (if classified as short-term investments)

.Investments in mutual funds, other equity funds held for sale/trading

We exclude:
- Islamic investments

21. Are companies that are fully Shariah- compliant subject to accounting-based screens?

Companies that are fully Shariah compliant are not subject to accounting-based screens, subject to
Shariah Board approval. Such companies are classified as Shariah-compliant irrespective of their
leverage ratios. While the subsequent list is non-exhaustive and companies are reviewed on a case-
by-case basis,companies are typically characterized by the following:

. Presence of a Shariah Supervisory Board

. All transactions (business and financial) are in accordance with Shariah principles.

. Incorporated and managed in a fully Shariah-com pliant manner

Notes

1. The Ratings intelligence/S&P Shariah Control Committee is made up of prominent scholars who
are very experienced in the application of Shariah to financial products and services. Ratings
Intelligence is a consulting firm focused on Islamic Finance.

2. Shariah law promotes the development of businesses and fair trade.

3. If a company only has cash on its balance sheet, with no prospect of future revenues, the equity
market will likely see through this, ensuring that its market capitalization will generally be less than
the value of its cash holdings. As a result, the stock will fail the cash compliance screens and so be
non-compliant.

4. During the meeting held on March 31, 2010 in Dubai, the Shariah Committee recommended that
media and advertising companies generating revenues in excess of 65% of total income from the
GCC (Gulf Cooperation Council) countries may be allowed for investment while most other
advertising and media companies are not allowed (except for newspapers, news channels and sports
channels, also see question 3). However, this rule applies to companies originating from any market
(i.e., it is not limited to the GCC region). The rule itself is related to the fact that globally—used
media (versus that media used only in the GCC region) typically includes images and/or
advertising/media language that is inappropriate from a Shariah perspective.