Reliance Industries Limited (RIL), the most valued company in India, has begun the process of demerging its financial services arm. The proposed plan of arrangement between Reliance Industries Limited and Reliance Strategic Investments Limited (RSIL) will be discussed and approved at a meeting of Reliance Industries' creditors and shareholders on 2 May, 2023. The name of Reliance Strategic Investments Limited will become Jio Financial Services Limited following the demerger.
In October 2022, RIL had announced the demerger of its financial services arm into an independent entity and subsequent listing it on the stock exchanges. The demerger will be done through a share-swap arrangement. Shareholders of RIL will get one share of Jio Financial Services for every share held by them.
RIL also stated that creation of an independent company focusing exclusively on financial services can help "attract different sets of investors, strategic partners, lenders and other stakeholders having a specific interest in the financial services business; a financial services company can have a higher leverage (as compared to the demerged company) for its growth; and unlocking the value of the demerged undertaking for the shareholders of the demerged company."
But wait, everything is not that rosy, why? you would ask. Well, NSE has a rule which states that a Nifty constituent shall be excluded from the Index in event of its demerger.
Let me tell you, RIL has a market cap of ~15.9 trillion & has the highest weightage of 9.9% in Nifty 50. The index is tracked by many exchange-traded funds and index funds with assets of over ~2 trillion INR, and RIL’s removal from the index may lead to selling to the tune of ~20,000 crores by passive funds, which track the widely popular Nifty50 index.
Many analysts tracking the index changes say, that the rule on the removal of large stocks from an index due to a scheme of demerger or amalgamation leads to unnecessary churn and needs a rethink. And it is not just analyst who thinks so, it’s our NSE too.
NSE is reportedly considering revising the eligibility criteria for inclusion of stock in the Nifty index, as RIL plans to demerge its financial services arm. This move comes as a response to concerns raised by market participants about the potential impact of the demerger on the composition of the Nifty index.
The revision of the eligibility criteria for inclusion in the Nifty index is expected to be done in consultation with market participants, including asset managers, brokers and other stakeholders. The goal is to ensure that the Nifty index continues to accurately represent the performance of the Indian stock market, even after the demerger of RIL's financial services arm.