NSE’s unit proposes stock exclusion from index on merger ex-date

NSE Indices has sought market participants’ feedback on the ‘treatment of merger and demerger’ in the Nifty indices by November 2. NSEIL has proposed to make changes to the indices effective from the ex-date of the merger or demerger instead of excluding the stock within four weeks of the shareholder’s approval for such a corporate event, said a release on Tuesday. Ex-date is the cut-off date on which investors do not get the benefit of a company’s action.

Analysts had estimated that as per current rules,

would have been excluded from the Nifty in December, which could see an outflow of around $1.3-1.5 billion from the passive funds. If NSEIL’s proposals are accepted, HDFC will be excluded on the ex-date, which will likely happen mid-next year.

According to the NSEIL, if a merger happens between companies that are part of an index, the exclusion of a company ahead of its ex-date would trigger selling by passive funds to rebalance the weights of the index constituents. Later, when the weightage of the merged entity changes, post-merger, the funds will have to buy the stock again at the prevailing market price.

“Companies with large market capitalisation may get excluded and may again become eligible for inclusion in subsequent reviews, thereby increasing churn in the index and consequently in funds tracking the such index,” NSEIL said.

As per the new proposal, a company’s replacement will be made on the ex-merger date with eligible stock in case the index has a fixed number of constituents. No replacement will be made in case of a variable number of constituents, the NSEIL release said.

The NSEIL has proposed to retain the company in an index in the event of a demerger. The weightage of the company on the index would be adjusted before the market opening of the ex-date of the demerger based on the price discovered during the special trading session for the demerged company.