Highly dilutive or large rights issue
consultation – Revised proposal –December 2014

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Agenda Background Summary of original proposal & definition of highly dilutive terms or large impact
rights issues
 Client feedback and changes to original proposal
 Summary of MSCI current methodology versus original proposal versus revised
proposal

 Discussion points: Migration and Valuation of rights
 Appendix:
 Appendix I: Detailed Implementation for Revised Treatment
 Appendix II: Indicative list of historical rights issues qualifying to be implemented underrevised proposal
 Appendix III: 2014 Migrations triggered by rights issues©2014 MSCI Inc. All rights reserved.

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Background
MSCI has launched a consultation on September 18, 2014 on the treatment of highly
dilutive or large rights issue. The consultation ended on November 10, 2014.
Following client feedback, MSCI is re-opening the consultation with a revised proposaland 2 discussions points.

MSCI welcomes feedback from the investment community on the amended proposal
through December 15, 2014.
This consultation may or may not lead to any changes to the MSCI Indexes.

©2014 MSCI Inc. All rights reserved.

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Original Proposal for Highly Dilutive or Large Rights Issue
 Apply a Price Adjustment Factor (PAF) on Ex-date using the value of Right on Ex-date (market
value if Right is trading else intrinsic value).
 Add Right to the Index as of the close of Ex date using market value if the Right is trading elseusing Intrinsic Value.
 Add Subscription Cash to the Index effective on the last day of subscription period.
 Delete Right and Subscription Cash from the Index as of the close of Pay-date.
 Increase NOS as of the close of Pay-date. Migration upward, if any, will be done
simultaneously.

Original Proposal for thresholds to define highly dilutive terms and large
impact rights issues
Rights issues with terms 5 per 1 or more as highly dilutive- Large impact rights issues as those:- Triggering an upwards migrations as a result of a size-segment review- With impact on free float-adjusted Market Capitalization of more than USD 5 billion for
DM and USD 2.5 billion for EM for Standard Indexes- With impact on free float-adjusted Market Capitalization of more than USD 3 billion for
DM and USD 1.5 billion for EM for Small Cap Indexes©2014 MSCI Inc. All rights reserved.

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Clients feedback and changes to original proposal Based on client feedback, MSCI has revised its original proposal as follows:

Subscription cash should be added as of the close of ex date to increase weight of security due to rights issue;Thresholds should be simplified and MSCI to remove float-adjusted market capitalization based thresholds.

 There is no clear consensus for timing of implementation of migrations due to rights issue. Hence, MSCI proposes topostpone migrations to Index Reviews. Migrations, due to rights issue, if any, will be announced with Index Review
announcements. However, MSCI still proposes to implement these rights issues as per the revised proposal if theymeet the thresholds for highly dilutive and large rights issues.

Original Proposal

Revised Proposal**

Add subscription cash effective open ofsubscription period

Add subscription cash as of close of ex dateThresholds:• 5 per 1 or more
• Triggering an upward migrations as a result ofa size-segment review• Based on float adjusted USD impact
segregated between DM/EM/Standard/SmallCap.

Thresholds*:• 5 per 1 or more
• Triggering an upward migration as a result ofa size-segment review

Migration as of close of pay date of new shares

Migration postponed to Index Review as per
Index Review Rebalancing rules* MSCI intends to cover only IMI securities under the revised proposal.
**Please refer to Appendix I for detailed implementation of revised proposal©2014 MSCI Inc. All rights reserved.

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MSCI current methodology versus original proposal versus
revised proposal
Implementation date

MSCI current
Methodology

Original Proposal forHighly dilutive or large
rights issue

Revised Proposal forHighly dilutive or large
rights issue*

On Ex-date

Apply a PAF using the terms of the
event

Apply a PAF using the Rights(market value or Intrinsic Value)

Apply a PAF using the Rights(market value or Intrinsic Value)

As of close of Ex-date

Increase NOS

Add Rights to the Index

Add Rights and Subscription cash
to the Index

From open of last day of
subscription period

N/A

Add Subscription Cash to the Index

N/A

As of close of Pay-date

N/A

1)

1)

2)

Delete Rights andSubscription Cash from the
Index
Increase NOS + migration, ifany2)Delete Rights andSubscription Cash from the
Index
Increase NOS

Migration

N/A

As of close of pay-date

At an Index review (based on
Index Review Rebalancing rules)

Thresholds

N/A

Thresholds:•
5 per 1 or more•
Triggering an upwardmigration as a result of a sizesegment review•
Based on float adjusted USD
impact segregated between
DM/EM/Standard/Small Cap.

Thresholds:•
5 per 1 or more•
Triggering an upwardmigration as a result of a sizesegment review*Please refer to Appendix I for detailed implementation of revised proposal©2014 MSCI Inc. All rights reserved.

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Discussion point: Migrations
As per the revised proposal, MSCI proposes to implement migrations triggered by highly dilutive or large rights issues atindex reviews.
Alternatively, should MSCI consider implementing migrations triggered by highly dilutive or large rights issues at t-1 ofthe ex date (cum date) to cater for the reverse turnover experienced by Small Cap funds with MSCI current
methodology, initial proposal and revised proposal?
Under this alternative, as per analysis of 2014 cases, only for 2 cases out of 4, MSCI would have potentially been able tomigrate on cum date, announced with two full business days advance notice to clients, given the late disclosures bycompanies. Please refer to Appendix III.
What are the views on this alternative?



How many days should MSCI consider as sufficient notice to implement migration triggered by highly dilutive or large rights issues at t-1 of theex date? Should MSCI pre-announce the migration on cum date only if 2 full business days notice is provided to clients?



If MSCI could not pre-announce and implement the migration on cum date due to late disclosures by companies, should MSCI implement theserights issues as per the revised proposal?
Migration as of close of exdate (current methodology)

Migration as of close of pay date(original proposal)

Migration at Index Review(revised proposal)

Migration as of close of
cum date (alternative)

Small Cap

Potential reverse turnover

Reverse turnover

Reverse turnoverNo reverse turnover.

Standard

Migration is implemented
simultaneously with NOS
increase. No reverse
turnover.

Migration is delayed to pay dateand implemented simultaneouslywith NOS increase. No reverse
turnover.

Migration is delayed to Index
Review – time to achievemarket price stability. No
reverse turnover.

Migration is anticipated. No
reverse turnover. In case,the event don’t go through,Index will have a Small cap
stock in a Standard Index
until next Index Review.

IMI

Migration is implemented
simultaneously with NOS
increase. No reverse
turnover.

Migration is delayed to pay dateand implemented simultaneouslywith NOS increase. No reverse
turnover.

Migration is delayed to an
Index Review. No reverse
turnover.

Migration is anticipated. No
reverse turnover.

©2014 MSCI Inc. All rights reserved.

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Discussion point: Valuation of rights
 As per proposed implementation, MSCI proposes to use market value of right whenrights are trading else to use intrinsic value.* Is the proposed implementation suitable for valuing rights?
 Should MSCI instead carry forward the last traded market price of right once rights stop trading (fromend of rights trading date to pay-date) and delete right using this carry forwarded market price?
 Alternatively, should MSCI carry forward the last traded market price of right once rights stop trading(from end of rights trading date to one day before pay-date) and switch to intrinsic value for closing on
pay-date and delete right using this intrinsic value?
Valuation ofrightsCarry forward last traded valueMarket value when trading else
Intrinsic value

Carry forward last traded market value andswitch to intrinsic value as of close of pay
date

PROS

• Consistent with MSCI current approach of
carrying forward last traded price once
security stops trading.

• Rights value tracks performanceof the stock trading on themarket.
• No change in Index Divisor as ofclose of pay date.

• Consistent with MSCI current approach of
carrying forward last traded price once
security stops trading.
• No change in Index Divisor as of close of
pay date.

CONS• Change in Index Divisor as of close of Pay
date (when MSCI deletes rights and cash
and increase NOS).
• Rights value does not track performanceof the stock trading on the market.

• Index volatile as switch back &forth between market value andintrinsic value.

• Index volatile as switch back & forth
between market value and intrinsic value.
• Rights value does not track performanceof the stock trading on the market till pay
date -1.

*Please refer to Appendix I for the formula used to calculate intrinsic value of the right.
©2014 MSCI Inc. All rights reserved.

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Appendix:
I. Detailed implementation for revised treatment
II. Indicative list of historical rights issues qualifying to be
implemented under revised proposal
III: 2014 Migrations triggered by rights issues©2014 MSCI Inc. All rights reserved.

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Appendix I: Detailed Implementation for Revised Treatment
 Ex Dateo Apply PAF- Apply a Price Adjustment Factor (PAF) on ex date using the value of Right on Ex-date.*

PAF = [P(t) + Right per Share P(t)] / [P(t)]o Add RightP(t)value= Closingon theelse
ex-date- Right will be valued at market
if it priceis trading
it will be valued at derived Intrinsic Value if it is not trading.
Right
per shareP(t) == [(P(t)
Price of* Shares
the Right
on the- ex-date
Intrinsic
Valueof Right
IssuedIssue P * Shares Issued)] / [ Shares Before ]- Add Right to the Index as of the close of Ex-date (effective next day), if subscription price is lower than the market
price of the security. Right is added to Index at market value if the right traded on the Ex-date else at intrinsic value if
the right did not trade on the Ex-date.
- Right will not be added to Index if the subscription price is equal to or above the market price at the time of
confirming the event even though the Rights issue is fully underwritten. The changes in NOS and FIF, if any, will be
postponed to the Pay-date.
o Add Subscription Cash
Subscription Cash = [ Shares Issued / Shares Before ] * [ Issue Price ] * [ Pre Event Number of Shares ]Pre Event Number
of isShares= Numberof shares
theclosesecurityin MSCI Indexes- Subscription
Cash line
added
to the Index
as offortheof Ex-date(effective next day), if the subscription price isbelow the market price. The value of subscription cash will be a Fixed value. It will be kept in Index until Pay-date.

- If the subscription price is equal to or above the market price, Subscription Cash will not be added to Index and MSCI
will wait for results of Rights issue to implement the increase in NOS and FIF, if any.

* The PAF may be adjusted based other factors such as dividend entitlement for new shares and other asset attached trading on ex date.
©2014 MSCI Inc. All rights reserved.

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Appendix I: Detailed Implementation for Revised Treatment(Continued)
 Ex Date + 1- Price Adjustment Factor (PAF) is removed and no longer a part of Index.
- Right is now a part of Index.
- Subscription cash is now a part of Index Pay Date
- The Rights will be deleted from the Index as of the close of Pay-date (effective next day). The deletion pricewill be market value of the Right if it is trading else deletion price will be Intrinsic Value.
- Subscription Cash line will be deleted from the Index as of the close of Pay-date (effective next day).
- New shares resulting from rights issue will be added to the Index as of the close of Pay-date (effective nextday).
 Pay Date + 1- Right and Subscription Cash are removed and are no longer part of Index- New shares are added and are now part of the Index.

 Index Reviews- Migration, if any qualified by the event, will be done as a part of the Index Review as per Index Review
Rebalancing rules.

©2014 MSCI Inc. All rights reserved.

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Appendix II: Indicative list of historical rights issues qualifying
to be implemented under revised proposal*
Ex DateMSCISecurity
Code

Security Name

Terms

Impact in USD

Small

16-Jul-12

12562.01

FONDIARIA - SAI ORD

R 252 : 1 @ EUR 1

1,371,320,104

IT

Small

16-Jul-12

13117.03

UNIPOL GRUPPO FINAN ORD

R 20 : 1 @ EUR 2

894,866,780

IT

Small

16-Jul-12

13117.01

UNIPOL GRUPPO FINAN PRIV

R 20 : 1 @ EUR 0.975

421,942,987

GB

Small to Mid

17-Jul-12

32883.01

MELROSER 2 : 1 @ GBP 1.42

1,714,133,968

ES

Mid

30-Apr-13

69016.01

BANKIA

R 397 : 1 @ EUR 1.352663

18,678,783,610

GR

Small

11-Jun-13

22868.01

BANK OF PIRAEUS

R 35.680197 : 1 @ EUR 1.7

7,569,882,555

GB

Large

18-Sep-13

10326.01

BARCLAYS**

R 1 : 4 @ GBP 1.85

9,845,550,724

CH

Small

1-Oct-13

29841.01

SCHMOLZ + BICKENBACH

R 7 : 1 @ CHF 0.53

408,452,146

IT

Small to Mid 31-Mar-14

36948.01

BANCO POPOLARE

R 17 : 18 @ EUR 9

3,081,816,312

BR

Small to Mid

6-Jun-14

31001.01

B2W

R 59.874514 : 100 @ BRL 25

736,393,739

DE

Large

6-Jun-14

10862.02

DEUTSCHE BANK NAMEN**R 5 : 18 @ EUR 22.5

9,418,895,300

IT

Mid

9-Jun-14

23292.01

BANCA MONTE PASCHI ORD

R 214 : 5 @ EUR 1

7,597,150,446

PT

Small to Mid

1-Jul-14

15361.02

BCP BANCO COMERCIAL

R 7 : 4 @ EUR 0.065

3,430,266,719

Country
CodeIndex family

IT*The list is only indicative and not exhaustive**These will not be implemented as per new implementation based on revised proposal©2014 MSCI Inc. All rights reserved.

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Appendix III: 2014 Migrations triggered by rights issues
Ex DateMSCISecurity
Code

Security Name

Terms

Announced withless than 2business days
noticeIT

Small to Mid 31-Mar-14

36948.01

BANCO POPOLARE

R 17 : 18 @ EUR 9

Yes

BR

Small to Mid

6-Jun-14

31001.01

B2W

R 59.874514 : 100 @ BRL 25

No

PT

Small to Mid

1-Jul-14

15361.02

BCP BANCO COMERCIAL

R 7 : 4 @ EUR 0.065

Yes

FR

Small to Mid

31-Oct-14

73294.01

NUMERICABLE GROUP

R 15 : 7 @ EUR 17.82

NoCountry
CodeIndex family©2014 MSCI Inc. All rights reserved.

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