The compiler of Hong Kong's benchmark stock index proposed a new methodology to ensure a more balanced representation of major industries and geographies, as well as to allow newly listed sizable companies to join the index sooner.

The Hang Seng Index has 52 constituent stocks, in which 79% are mainland Chinese companies. Information technology is the largest industry group, representing 35.4% of the total market capitalization of the index. The index, launched in 1969, represents roughly 60% of the aggregate market capitalization of all stocks trading on the Hong Kong stock exchange.

In a consultation paper published Dec. 22, Hang Seng Indexes Co. Ltd. proposed to select constituents by industry group based on a target coverage for each group in the index. It will be different from the current approach that is primarily based on market capitalization and turnover of individual stocks, regardless of their industries.

"Our simulation indicates that selecting constituents by industry group can alleviate the weight concentration issue for certain industries," the paper said.

The compiler also proposed to increase the number of constituents to between 65 and 80 to "improve the overall coverage of the index and achieve a reasonable representation for each industry."

As more stocks will be included under the new methodology, the weighting cap of each constituent will be reduced to 8% from the current 10%. Meanwhile, the weighting cap of secondary-listed companies and those with weighted voting rights structure, such as Xiaomi Corp. and Meituan, will align with other constituents. Currently, these companies are subject to a lower cap of 5% of the index.

The index will also maintain a minimum number of Hong Kong companies; the paper suggested it will be about 25, compared to 24 currently.

The proposal also removes the requirement of minimum listing history for companies to be eligible for the index inclusion, with an intention to include sizable new listings promptly after debut. Currently, companies have to be listed for at least three months to two years to be considered for inclusion, depending on the market value of individual stocks.

The consultation will end on or before Jan. 24, 2021. The compiler said it plans to announce conclusions in February 2021.