The index maintenance sub-committee of NSE Indices, a subsidiary of the NSE, on Wednesday revised the methodology for treatment of demergers involving the Nifty equity indices.
The change is expected to help reduce the churn in index constituents resulting from corporate action involving demergers. It will be applicable to the scheme of arrangement of all companies involving demergers, approved by shareholders on or after April 30, the NSE said in a note.
The change has come ahead of the shareholder approval for the demerger of RIL and Jio Financial Services, scheduled for May 2.
“Once Jio Financial gets demerged and removed from the index, RIL’s weight may go down by 60-70 basis points from the current weight of 10.35%. As per the modification, only the spun-off entity will be removed from the index. This is a very logical move on the part of the index provider,” said Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research.
According to the earlier methodology, the demerged company was excluded from the index soon after the approval of shareholders for the demerger.
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According to the new methodology, the demerged company will be retained in the index if a special pre-open session is conducted by the exchange. The NSE conducts such sessions for price discovery of all stocks involving corporate restructuring. The spun-off entity will be included in the index at constant price, which is the difference between the demerged company’s closing price on T-1 day, wherein T is the ex-demerger date, and the price derived during a special pre-open session on the ex-demerger date. The spun-off entity will be removed from the index after end of day on the third day of its listing.
In case a special pre-open session is not conducted by the exchange, the demerged company will be removed from the index at the beginning of T-1 day, where ‘T’ is the ex-demerger date.