Demerger of Jio Financial Services from Reliance Industries has seen the Nifty 50 index which includes 50 companies have 51 companies with Jio Financial Services being the 51st company having a weightage of around 1%.
However, Jio Financial Services will be removed from the index as it doesn’t yet match the selection criteria for being included in the Nifty 50 index.
The company was scheduled to be removed from the index after 3 days of listing. Since it hit a lower circuit in the first two trading sessions, this was extended by another 3 days and the company will be removed from the index on 28th August.
How will the removal of Jio Financial Services affect the price of the Nifty 50 index or its futures and options?
The exclusion of Jio Financial Services from the index will not affect the index price as at the end of the day on 28th August, the exchange will redistribute the ~1% weightage of Jio Financial Services to all 50 stocks based on their weightage.
Why was Jio Financial Services included in the index?
This is due to the change in methodology exchanges used for the reconstitution of indices. Earlier, exchanges used to remove companies going through merger/demerger once shareholder approval was received.
Now whenever any stock is going through a merger/demerger the exchange holds a special pre-open session (SPOS) for price discovery of the stock on the ex-date/record date. Here, the parent company is retained in the index, along with the demerged entity.
Since Reliance Industries was part of the Nifty 50 index, Jio Financial Services became part of all the indices that Reliance was in.
So as per the rules, after the demerged entity is listed on the stock exchanges, it is removed from the index after 3 trading days. However, if it hits circuit limits in two of these three days, then the exclusion is extended by another 3 days after which the company will be removed from the index.
You can learn more about this here: Revision in methodology for handling corporate actions involving demerger