An official of the Korea Exchange on Thursday said the bourse is scheduled to implement the new rule, proposed in 2018, sometime this year to prevent major indices from having too large a weighting for a single stock.
Market expectations are for the rule to be implemented in the first half of the year, especially if Samsung shares start rising too fast.
Samsung Electronics Co Ltd, trading at 60,900 won ($52) on Thursday, comprises 33% of Korea's bluechip KOSPI 200 benchmark <.KS200>. The exchange is expected to use a 3-month average market weight to determine if a stock has exceeded the 30% limit, which would trigger the rebalancing.
At the current pace of gains and based on a three-month average price, Samsung shares are expected to comprise more than 30% of the index, before the exchange's next scheduled review of the rule in June.
Once implemented, institutional investors whose portfolios mirror the index through ETFs and other passive funds will need to sell Samsung Electronics shares to rebalance their books and abide by the 30% cap restriction.
The impact on shares of Samsung Electronics will be minimal, analysts said. Some were unhappy with the rule change.
"Passive funds will be forced to reduce their weight of Samsung Elec. Yes it will help diversify risks, but it's like tying up the hands of the champion," said Park Jong-youn, a Seoul-based fund manager at the IBK Insurance that manages over 8 trillion won.
"Once the weighting is capped, the index will no longer reflect any gains even if Samsung does really well. The loss, on the other hand, will be reflected for the investors."
Bourse operators of the German index DAX and eurozone index STOXX50 <.STOXX50> have market cap limit of 10% for a single stock. For the Nasdaq 100 and Hong Kong's Hang Seng, it is 20% and 15%, respectively.
Samsung Elec shares have risen nearly 50% in the past year on expectation of a gradual recovery in the global chipmaking sector, almost five times the rise in the KOSPI 200 <.KS200>, the index for core stocks listed in the broader KOSPI market.
Based on Samsung Electronics' current price and weighting, passive funds would need to offload about 500 billion won to 800 billion won worth of the shares once the rule is enforced, two local fund managers and three analysts estimated.
That amounts to less than 4% of the 25 trillion won of money in exchange-traded funds (ETFs) that track the KOSPI 200 index, and about 1% of the holdings of local passive funds, by some analysts' estimates.
The assets are mostly operated by South Korean institutions, market analysts said, ruling out risks of foreign capital outflows.
"Institutional investors will need to sell some of Samsung Elec, but for foreign investors who do not track the index, however, this could be a chance for bargain-hunting, which may blunt the impact of the adjustment," said a Seoul-based fund manager who owns Samsung shares and declined to be named.
(Editing by Vidya Ranganathan and Simon Cameron-Moore)
By Hayoung Choi and Cynthia Kim
