ITC Hotels’ intention to split off the hotel industry might have an impact on exchange-traded funds (ETFs) and passive funds, following in the footsteps of the Reliance Industries-Jio Financial demerger. ITC’s demerger will have ramifications akin to those of the Jio Financial spin-off in 2023 because it is a major component of well-known indexes like the Nifty 50 and Sensex.
A Change in Index Inclusion: ITC’s Approach to Demerger
When businesses broke off a portion of their operations, they were taken out of domestic indices like the Nifty and Sensex in earlier demerger scenarios, which had an impact on passive funds. In the past, fund managers would have to swiftly modify their portfolios to reflect the shift, which led to needless churn. However, Indian index providers have taken a more systematic approach in accordance with international best practices.
When a business unit is spun off, the hived-off organization is nevertheless included in the indexes for three days after listing, according to the revised methodology. As a result, passive funds can sell their assets without experiencing significant disruptions.
How This Will Impact ITC Hotels
This implies that until ITC Hotels is formally registered as a distinct company, it will continue to be included in the Nifty 50 and Sensex indices. On the third day of trade, it will then be removed from these indices. The exclusion may be postponed if the stock reaches its circuit limit, which is a price level that it cannot increase or fall above in a single trading session. This lessens needless volatility in passive ETFs that follow the benchmarks.
Following its demerger from Reliance in August 2023, Jio Financial shares experienced a similar circumstance. The exchanges postponed removing the stock from the indexes after it had a downward circuit for five straight sessions.
The Prospects for ETFs and Passive Funds
This demerger has a big effect on ETFs and passive funds. Depending on how ITC Hotels performs after its separation, funds that track the Nifty or Sensex will need to adapt. Funds must remain flexible because delayed stock withdrawals from indices, particularly when circuit limitations occur, may cause brief periods of market volatility.
Three working days following its listing date, ITC Hotels will be removed from both NSE and BSE indexes at its most recent trading price, according to Nuvama Alternative & Quantitative Research. The exclusion of the stock will be delayed for an extra two trading days for each circuit limit hit if it occurs within that period.
Important Takeaways
- The demerger of ITC Hotels, which impacts ETFs and passive funds, is modeled after the Reliance-Jio Financial split.
- In order to facilitate the transition for passive funds, the new index rules let the hived-off firm to remain in the indexes for three days after listing.
- Unless it reaches circuit limits, in which case the exit is postponed, the stock will be eliminated on the third day after listing.
- The goal of this methodical strategy is to lessen market volatility and provide passive funds with enough time to modify their holdings.