ITC’s Hotel Business Demerger: Implications for Index Funds and ETFs

ITC’s decision to spin off its hotel business is expected to impact passive funds and exchange-traded funds (ETFs), mirroring the effects seen during the Reliance Industries-Jio Financial demerger. As a constituent of major indices like Nifty 50 and Sensex, ITC is widely held by index funds and ETFs.

Changes in Index Management Practices

Previously, companies undergoing demergers were removed from domestic indices immediately, leading to significant churn for passive funds. To align with global practices, domestic index providers have since introduced a new approach: hived-off entities are retained in indices for three days post-listing, allowing passive funds time to sell their holdings.

ITC Hotels’ Listing and Exit from Indices

Under the current framework, ITC Hotels will remain part of Nifty 50 and Sensex until its listing. The stock will then be excluded on the third trading day. However, if the stock hits circuit limits, its removal will be deferred by two trading days per instance.

A similar situation arose in August 2023 when Jio Financial shares hit the lower circuit for five consecutive sessions, prompting delays in the stock’s exclusion from indices.

Price Determination and Timeline

The listing process for ITC Hotels is anticipated to take approximately a month, comparable to Jio Financial’s timeline of 33 days. Until listing, the stock price will remain fixed, calculated as the difference between ITC’s closing price on January 3, 2025, and the open price during the special pre-open session (SPOS) on January 6, 2025. Nuvama Alternative & Quantitative Research estimates ITC Hotels’ initial market price at ₹150–₹175 per share.

Prospects for ITC Hotels in Global Indices

While ITC Hotels will exit domestic indices, it may secure a position in the MSCI Global Small Cap Indexes. Meanwhile, ITC will retain its spot in the MSCI Standard Index. Regarding the FTSE Index, uncertainty remains: if ITC Hotels does not list within 20 working days of the demerger record date, it risks exclusion under current methodology. However, this scenario is considered unlikely based on prevailing practices.