Major Impact of Reliance JFSL Demerger

You may be aware that Reliance recently underwent a demerger involving its financial subsidiary, Jio Financial Services Limited (JFSL). After JFSL was listed, its stock started to consistently hit the lower circuit. Since Reliance was a constituent of major indices, it naturally led to JFSL’s inclusion in these indices as well. Consequently, the total count of indices increased by one due to the addition of JFSL. This necessitated JFSL’s removal from the indices.

For instance, if we consider Nifty 50, which initially had 50 stocks, it became Nifty 51 with the inclusion of JFSL. However, JFSL was eventually removed because it was a relatively newly listed company and did not meet the criteria outlined in the index methodology for index membership.

The removal of JFSL from these indices had a significant impact, particularly in terms of the “notice period” for changes in constituent stocks within derivative indices resulting from a demerger.

To address this situation, the exchange obtained approval from SEBI to issue notices of less than four weeks before excluding a newly spun-off entity from the index. This streamlined process applies specifically to situations where stocks are undergoing demergers and are also part of indices that have derivative products.

Currently, the exchange offers trading in derivatives linked to four equity indices: Nifty 50 Index (NIFTY), Nifty Bank Index (BANKNIFTY), Nifty Financial Services Index (FINNIFTY), and Nifty Midcap Select Index (MIDCPNIFTY), all of which are provided by NSE Indices Ltd.

Following the index methodology, a spun-off business or entity is included in the index at a fixed price on the day before the Ex-Demerger date (T-1 day). This price is determined during a Special Pre-Open session (SPOS) on the Ex-Demerger date.

Subsequently, once the spun-off business or entity is independently listed on the exchange, it is removed from the index as per the index methodology. The specific date for this exclusion is announced by the index provider.

In conclusion, the exchange will notify market participants about the removal of a newly listed entity (i.e., the spun-off business or entity) from all indices where derivative products are traded. This notification will follow the announcement made by the index provider, helping ensure a smoother transition in cases of demerger-related changes in constituent stocks within derivative indices.