Batista’s OGX Faces Ibovespa Removal as Short-Sale Limit Raised

OGX Petroleo & Gas Participacoes SA, the oil company founded by Eike Batista that has dropped the most on the Ibovespa this year, faces removal from Brazil's benchmark index and the prospect of more bets against the stock.

BM&FBovespa SA (BVMF3) will exclude from the gauge any companies whose shares trade for less than 1 real (44 cents), the exchange operator said in a statement yesterday. The limit on equity lending for OGX, which has plunged 91 percent this year to 38 centavos in Sao Paulo, was raised to 50 percent of shares available for trading from 45 percent, the bourse said in a separate statement. Stock loans, used in short sales, climbed to 44.9 percent on Sept. 11, data compiled by Bloomberg show.

OGX's relative importance in the gauge has grown because of the index's reliance on trading volume for determining equity weightings. While the oil producer is the index's third-smallest company by market value, it has the third-biggest weighting of 73 Ibovespa stocks. OGX has been responsible for about half of the measure's 12 percent drop this year through yesterday as trading in the stock rose to all-time highs.

Market Cap

In addition to excluding penny stocks, the new methodology will determine company weights on the gauge by the free-float market value, adjusted for liquidity. Positions will be limited to 20 percent of the index, the bourse said.

"Using market capitalization and liquidity to calculate each stock's weighting on the gauge will make it easier for investors to replicate the index and will avert distortions," Eduardo Guardia, BM&FBovespa's investor relations director, told reporters today in Sao Paulo. "The new methodology provides a better representation of the companies that are present on the Brazilian stock market."

The index changes will be implemented in two steps starting in January 2014, and will be fully effective by May, BM&FBovespa said. The exclusion of penny stocks will be effective in January, according to Guardia.

While OGX, the most volatile stock in the 823-member MSCI Emerging Markets Index, was considered in the overhaul of Brazil's main stock gauge, the process was started before the stock's plunge overwhelmed the Ibovespa, according to BM&FBovespa's Chief Executive Officer Edemir Pinto.

Pre-Operational

Batista, whose $34.5 billion fortune in early 2012 made him the world's eighth-richest person, ceased to be a billionaire in July, according to the Bloomberg Billionaires index. All six companies that Batista listed since 2006, which have dropped as much as 93 percent this year, came to the market in pre-operational stages.

"Pre-operational projects represent an opportunity, but investors will be more cautious about these companies now," Pinto said today.

A committee of exchange executives, banks and brokerages developed the changes to the benchmark index. BM&FBovespa said on its website that it hadn't made changes to the gauge's methodology since its inception in 1968. LLX Logistica SA (LLXL3), the shipping unit that Batista founded, is the second-lowest priced stock on the Ibovespa after dropping 36 percent this year to 1.53 reais.