Nifty criteria may be tweaked before RIL's financial services arm demerger

Current rule could lead to firm's exclusion from index

Ahead of the proposed demerger of Reliance Industries’ (RIL’s) financial services arm, the National Stock Exchange (NSE) might tweak the framework on addition and removal of stocks in the benchmark Nifty50 index.

Under the present rule, which requires a Nifty constituent to be excluded in the event of its demerger, index heavyweight RIL would have to be removed. That might lead to selling to the tune of Rs 20,000 crore by passive funds, which track the widely popular Nifty50 index.

With a market cap of Rs 15.9 trillion, RIL has the highest weighting of 9.9 per cent in the 50-share index, which is tracked by exchange-traded funds and index funds with assets of over Rs 2 trillion. The company has already initiated a demerger process and the scheme is to be put to the vote before shareholders and creditors on May 2. The demerged entity, Jio Financial Services, is expected to list separately on the bourses by September 2023.

“NSE Indices will soon float a discussion paper on treatment of a stock undergoing a scheme of demerger. Following this, the index computation methodology will be revised to avoid unnecessary churn in the Nifty50 index,” said a person with direct knowledge of the matter.

NSE Indices is the NSE subsidiary that manages Nifty indices.

According to industry sources, a brokerage floated a private note last month asking some of its clients to short RIL, as the stock could be removed from the Nifty. The RIL stock fell as much as 10 per cent from its highs in March. Following the note, a source said, analysts and exchange officials were inundated with queries pertaining to the treatment of RIL ahead of the demerger.

On the cards

• A stock is required to be removed from Nifty at the time of demerger
• NSE Indices plans to remove this clause 
• The change will prevent RIL’s exclusion from Nifty
• Earlier, rule around scheme of amalgamation was tweaked
• Move ensured HDFC, HDFC Bank don’t get removed from the index

The change in methodology might be completed next month, said a source. An email on the issue sent to the NSE remained unanswered till the time of going to press.

Analysts tracking index changes say the rule on the removal of large stocks from an index due to a scheme of demerger or amalgamation leads to unnecessary churn and needs a rethink. “It is just a matter of time before Nifty Indices modifies the methodology for demergers just as it did for mergers in November 2022,” says Abhilash Pagaria, head, Alternative & Quantitative Research, Nuvama Institutional Equities.

Last year, soon after the announcement of the mega merger of HDFC Bank and HDFC, NSE Indices had changed the index computation methodology for amalgamations. Without this change, the two stocks would have been removed from the Nifty, leading to a churn of close to Rs 50,000 crore in the index. At present, HDFC Bank’s weighting is 9.1 per cent and HDFC’s 6.2 per cent.

 “As the existing process creates a lot of unnecessary volatility, it is pointless to exclude RIL from the Nifty50 index. That would lead to major weight changes for other constituents and lead to an outflow of $3 billion in RIL,” he added.

In 2017, Grasim had been removed from the Nifty ahead of its merger with Aditya Birla Nuvo (ABNL). More recently, NMDC was removed from the Nifty CPSE index due to a demerger scheme to hive off NMDC Steel. However, these stocks had a much smaller weighting in the index.