The National Stock Exchange has decided that a demerged company will be retained in a Nifty index, reversing the earlier practice of excluding it.
"This is a big positive for Reliance Industries, which will be demerging Jio Financial Services soon. Had the methodology not changed, it could have led to $3 billion of outflow from the stock," said Abhilash Pagaria of Nuvama Alternative & Quantitative Research.
As per the NSE press release, the decision to revise the methodology was on the basis of global practices and feedback received from the market participants.
Old methodology
If any index constituent was demerging its business division into a separate new entity, then NSE used to remove it soon after equity shareholders’ approval to a scheme of arrangement.
It was then replaced with another eligible stock.
"It would have been difficult to find a replacement for RIL, which has over 10 percent weightage in the Nifty 50," said Pagaria, who had participated in the consultation process with NSE.
New methodology
The stock will now be retained in the index.
"Additionally, the spun-off entity shall be included in the index at a constant price, which is the difference between the demerged company’s closing price on T-1 day and price derived during the special pre-open session (SPOS) on the ex-demerger (or T) date," as per the NSE press release.
A SPOS is conducted for the purpose of price discovery of stocks in cases involving corporate restructuring. Eventually, the newly listed spun-off business will be removed from the index after the end of the third day of its listing.
"We were expecting NSE to modify demerger methodology and it is a very good step from exchange," said Pagaria.
The change comes into effect from April 30, 2023. RIL has convened a meeting of its shareholders on May 2 to approve the demerger of Jio Financial Services.
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