Rules on Index Exclusion Revised by NSE

NSE Indices is a wholly-owned subsidiary of the National Stock Exchange of India (NSE). It was established as a separate entity to develop and maintain indices that accurately reflect the Indian equity market’s performance.

NSE Indices provides index-related services, including index design and development, index licensing, index calculation, and dissemination of real-time index values. The company has a robust governance structure, which includes a committee of experts that oversees the index methodology and ensures its compliance with international standards.

Index Exclusion Rules Revised

Recently, NSE Indices released a circular that modifies the current procedure offor removing a demerged company from an index. According to the revised methodology, the exclusion of a company from an index will happen on the date of the shareholders’ meeting to approve the demerger scheme of the company. The NSE announced that if a demerged company undergoes a special pre-open session for price discovery during corporate restructuring, it will remain in the index.

On Wednesday, the circular that everyone was eagerly waiting for was finally released. This happened before the scheduled RIL shareholders’ meeting on May 2nd, where they will vote on the proposed demerger of Reliance Strategic Ventures, which is aimed at unlocking its value. The release of the circular came after NSE had published a consultative paper in October 2022, seeking the opinions of market stakeholders and others on the proposed revision. The index will remove the spun-off company three days after it is listed. The demerger process, from shareholders’ approval to NCLT’s approval, takes around 6 to 8 months.

According to the current process, when a demerged company is approved by shareholders, it is taken out entirely from the index. This can result in significant losses for RIL due to analysts’ concerns and passive funds that follow indices such as Nifty 50.

However, the present regulations allow for the demerged company to be replaced by another eligible stock on fixed constituent indices like Nifty 50. Indices with a variable number of constituents, such as Bank Nifty, do not have a replacement option.

According to Abhilash Pagaria, the head of alternative and quantitative research at Nuvama Wealth, the timing of the change in the National Stock Exchange’s (NSE) circular is appropriate as it has been made before the shareholder approval for Reliance Industries Limited (RIL) and Jio Financial Services’ demerger, which is scheduled for May 02.

The circular states that the demerged company will remain in the index, and the spun-off business/entity will be added to the index at a constant price. This constant price will be calculated as the difference between the demerged company’s closing price on the day before the demerger (T-1 day) and the price determined during the Special Pre-Open Session (SPOS) on the day of the demerger.

After the third day of its listing, the newly listed entity that has been spun off will be taken out of the index if it fails to confirm the pricing band threshold. Pagaria predicts that if Jio Financial is demerged and removed from the index, RIL’s weight could decrease by approximately 60-70 bps, based on its current weight of 10.35%.


Manoj Kumar, Partner & Head-M&A and Transactions at Corporate Professionals, stated that the decision to keep the demerged company in the Index is correct, as the crucial factor is obtaining NCLT approval. Thus, making shareholder approval the trigger for exclusion may not have been the best practice. Regarding the spun-off business, it is logical to exclude it from the indices after a price discovery process, and its inclusion in the indices will depend on its market performance over time.

In conclusion, NSE Indices has issued a circular revising the existing methodology for excluding a demerged company from an index. The revised methodology excludes the company on the third day of its listing instead of on the date of the shareholders’ meeting to approve the demerger scheme. The methodology is expected to bring more clarity and transparency to the process, and over time, the stock may be included in the indices as per its performance in the market.

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