NSE revises methodology to retain demerged companies in index

National Stock Exchange has revised the methodology for handling corporate actions involving demergers and has allowed demerged companies/entities to be retained in the index. The change shall be applicable to the scheme of arrangement of all companies involving demerger which may be approved by equity shareholders of respective companies on or after April 30, 2023, NSE said in a release on April 27.

NSE floated a market consultation paper on the treatment of mergers/demergers in Nifty equity indices on October 18, 2022. On November 18, the Index Maintenance Sub-Committee (Equity) of NSE announced a revision in the methodology of Nifty equity indices for the treatment of mergers, based on the feedback received from the market participants.

At present, the demerged company is excluded from the index and the same is replaced with another eligible stock soon after the equity shareholders’ approval to a scheme of arrangement for the demerger of a company (in case of indices with a fixed number of constituents). Moreover, a demerged company is excluded after shareholders’ approval without making a replacement in the index. (in case of indices with a variable number of constituents). In case, a demerged company is a constituent of indices on which Futures and Options are traded at NSE, changes are announced to the market participants four weeks prior to the index reconstitution date.

The revised methodology, however, allows the spun-off business/entity to be included in the index at a constant price if the special pre-open session is conducted by the stock exchange. “The spun-off business/ entity shall be included in the index at the constant price (which is the difference between the demerged company’s closing price on T-1 day wherein T is Ex. Demerger date and price derived during Special Pre-Open session (SPOS) on the Ex. Demerger date,” NSE says.

According to NSE, the spun-off business/ entity which is the newly listed entity shall be removed from the index after the end of the day (EOD) on the third day of its listing.

"In case, during the first 2 days of these 3 days, if the spun-off business/ entity hits the price band on both days, then the exclusion date shall be deferred by another 3 days. After observing two consecutive days of the spun-off business/ entity not hitting the price band, such spun-off business/entity shall be removed after the third trading day of such observation. If on such 3rd day spun off business/ entity again hits the price band, exclusion of such stock shall not be deferred any more," NSE says.

"If Special Pre-Open session is not conducted by Exchange, the demerged company shall be removed from the index at the beginning of T-1 day (close of Ex.–2) where T day would be the Ex. date for demerger of stock by making a suitable replacement in case of indices with a fixed number of companies. No replacement (inclusion) will be made in case of indices with the variable number of companies," it adds.

According to NSE, the revised methodology is expected to help in reducing churn in index constituents resulting from corporate action involving demergers.

The move will provide relief to several organizations that are aiming to demerge their businesses into separate entities. Last year, Mukesh Ambani-led Reliance Industries said that the company will demerge its financial services business into Reliance Strategic Investments Ltd (RSIL) which will be Jio Financial Services Ltd. (JFS). Jio Financial Services will be listed on the Indian stock exchanges, according to the company. Last month, Haldiram Group, one of the country's most popular snacks and sweet makers, said that its FMCG business Haldiram Snacks and Haldiram Foods will be demerged into Haldiram Snacks Food.