ITC Hotels' demerger to mirror Reliance Industries-Jio Financial playbook

ITC's spunoff unit to remain part of Sensex, Nifty for 3 days post-listing to help index funds navigate change

ITC's move to hive off its hotel business will have implications for passive funds and exchange traded funds (ETFs) similar to that seen during the Reliance Industries-Jio Financial demerger. As ITC is part of popular indices such as Nifty and Sensex, it is held by several index funds and ETFs.

 

Earlier, during a demerger exercise, a company used to be removed from the domestic indices. This created a lot of unnecessary churn for passive funds. In line with global practice, domestic index providers adopted a new formula under which the hived-off entity is retained in the index for three days after listing to enable selling by passive funds.

 

As per the current practice, ITC Hotels will remain a part of NSE and BSE indices like Nifty 50 and Sensex, and the passive funds tracking these indices, till its listing. The stock will be excluded on the third day after trading commences in the scrip. However, the exchanges can choose to delay the stock's exit if it keeps hitting the circuit.

 

During the last such event in August 2023, Jio Financial shares hit the lower circuit for five straight sessions post-listing as passive funds rushed to sell their holdings. This led to deferment of the stock’s exclusion from the indices.

 

“ITC Hotels will be dropped from all NSE and BSE indices at the last traded price, which is effective at the open of ITC Hotels listing date plus three business days. If the stock hits circuit limits, the exclusion will be postponed by two trading days each time," according to a Nuvama Alternative & Quantitative Research report.

 

The listing may take close to a month, going by the timeline of previous major demergers. Jio Financial had taken around 33 days. Till the listing, the stock's price will remain constant.

 

“(The price) will be calculated based on the difference between the closing prices of ITC on January 3, 2025, and open price of ITC discovered during the SPOS (special pre-open session) on January 6, 2025," the report said.

 

According to Nuvama, ITC Hotel's initial market price could range between Rs 150 and Rs 175 per share.

 

While ITC Hotels is set to move out of the domestic indices, the company may find a place in the MSCI Global Small Cap Indexes. ITC will remain part of the MSCI Standard Index, the report said. In the case of FTSE Index, there is uncertainty. "As per the current methodology, the stock (ITC Hotels) will be excluded if it does not list within 20 working days after the Record Date of the demerger. Based on general understanding, there should not be any exclusion of ITC Hotels," the report stated.