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Wednesday, Dec 28, 2005


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Reliance demerger catches fund managers, traders on wrong foot

Virendra Verma

Mumbai , Dec. 27

THE demerger of Reliance Industries (RIL) has created confusion among fund managers, FIIs and traders who follow the Sensex and the Nifty index.

The confusion among fund managersis: how to balance their portfolio following the demerger and what to do with the shares of new companies, which would not be traded for some time?

For traders in the derivatives market, the confusion is how to value index futures after RIL stocks start trading without the shares of the new companies. After the demerger, the value of RIL share would fall.

RIL has the second highest weightage of 9.04 per cent on the Nifty and the highest on the Sensex at 11.46 per cent.

In the past too, companies on the index have been demerged. For instance, Dabur Pharma was de-merged from Dabur, which was part of S&P CNX Nifty Junior. NIIT, then a part of the Nifty, was demerged into NIIT Technologies. Similarly, Ultratech Cement was formed after the demerger of Larsen & Toubro's cement division. In most cases, trading in the companies' shares was suspended for some time. But, trading in RIL shares would continue. "Each is different and has to be looked into separately," said an NSE official.

A fund manager managing the Nifty index said, "I do not know what to do with the shares of new companies (formed after the demerger) as an index fund does not allow investment in stocks outside the index." According to him, calculating NAV would be a problem, as it is difficult to put a value on unlisted securities. This is also a nagging issue for several FIIs that invest in Nifty and Sensex stocks alone.

Mutual funds have to adjust their index portfolio with the same weightage as in the index. They would have to sell shares of RIL and buy shares of other companies in the index. This happens due to the weightage of RIL in the Sensex and the Nifty falling, while the weightage of other stock increases.

For traders, the problem is that if they hold Nifty futures till January, 18 they could lose money as the price of RIL shares would fall and this in turn would affect the index value.

Related Stories:
Reliance F&O: NSE cancels Jan 17 trading, fixes Jan 18 as ex-date to adjust de-merger
Reliance fixes Jan 25 as record date for demerger scheme — `Resulting cos' to issue shares to RIL shareholders
Reliance demerger comes into effect

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