NSE tweaks index inclusion rules for spun-off entities to reduce churn

The NSE, one of India's two main stock exchanges, tweaked how it accounts for spun-off companies in its various equity indexes in order to reduce churn in their constituents.

The move comes as big companies such as HDFC Ltd and HDFC Bank are merging, with potential for entities to be spun off, and Reliance Industries Ltd plans to list Jio Financials separately.

The change will apply to any such spin-offs approved by shareholders of the parent companies on or after April 30, the NSE said in a circular late on Wednesday.

Currently, all newly listed entities are excluded from indexes, and in cases of indexes with fixed constituents, are replaced with another eligible stock.

But now, any newly listed spun-off businesses will be initially included in a relevant index at a constant price, which is the difference between the demerged firm's closing price the day before the ex-demerger date and the price during a special pre-open session on the ex-demerger date.

Then, three sessions later, this entity will be removed from the index. If it hits the price band in the first two days, its removal will be deferred by another three days, the NSE said.

"As the size of the domestic passive indices has grown massively in past few years ... We are also seeing big index constituents merging," Nuvama Alternative & Quantitative Research said in a note.

"So it is an apt time to look at the best practices that avoid unnecessary churning and make corporate action very smooth."

(Reporting by Nallur Sethuraman in Bengaluru; Editing by Janane Venkatraman)