ITC Hotels’ Demerger To Mirror Reliance Industries-Jio Financial Playbook

ITC Hotels is set to follow in the footsteps of the Reliance Industries-Jio Financial demerger, with its decision to hive off the hotel business potentially affecting passive funds and exchange-traded funds (ETFs). As ITC is a significant component of popular indices like the Nifty 50 and Sensex, its demerger will have similar implications to those seen during the Jio Financial spin-off in 2023.

A Shift in Index Inclusion: ITC’s Demerger Strategy

In previous demerger scenarios, companies were removed from domestic indices like Nifty and Sensex when they split off part of their business, creating a ripple effect for passive funds. This used to result in unnecessary churn, as fund managers would have to quickly adjust their portfolios to reflect the change. However, in line with global best practices, Indian index providers have adopted a more structured approach.

Under the new formula, when a business unit is spun off, the hived-off entity remains included in the indices for three days post-listing. This gives passive funds a chance to sell their holdings without facing major disruptions.

How ITC Hotels Will Be Affected

For ITC, this means that ITC Hotels will remain a part of the Nifty 50 and Sensex indices until it is officially listed as a separate entity. After that, it will be excluded from these indices on the third day of trading. If the stock hits its circuit limit — a price level beyond which the stock cannot rise or fall in a single trading session — the exclusion can be delayed. This helps mitigate unnecessary volatility for passive funds tracking the indices.

A similar situation occurred with Jio Financial shares after its demerger from Reliance in August 2023. The stock faced a lower circuit for five consecutive sessions, causing the exchanges to delay its exclusion from the indices.

The Future for Passive Funds and ETFs

The impact of this demerger on passive funds and ETFs is significant. Funds tracking Nifty or Sensex will need to make adjustments based on the performance of ITC Hotels following its split. The delayed exit of stocks from indices, especially in the event of circuit limits, could lead to brief periods of market instability, making it crucial for funds to stay agile.

Nuvama Alternative & Quantitative Research highlights that ITC Hotels will be dropped from all NSE and BSE indices at its last traded price, effective three business days after its listing date. If the stock hits circuit limits during that time, its exclusion will be postponed for an additional two trading days for each circuit limit hit.

Key Takeaways

• ITC Hotels’ demerger follows the blueprint of the Reliance-Jio Financial split, affecting passive funds and ETFs.
• The new index rules allow the hived-off entity to stay in the indices for three days post-listing, helping passive funds manage the transition.
• The stock will be excluded on the third day of listing unless it hits circuit limits, in which case the exit is delayed.
• This structured approach aims to reduce market churn and give passive funds ample time to adjust their portfolios.