Sucheta Dalal :RIL demerger: Investors grapple with implications
Sucheta Dalal

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RIL demerger: Investors grapple with implications  

December 27, 2005

In the coming days, the Reliance Industries scrip will provide fertile ground for stock manipulators to create confusion in the minds of investors as the mechanics of the demerger have not been fully explained to ordinary investors.


One area of uncertainty is over the Reliance futures contract that will expire on January 29 and February 23, as the National Stock Exchange (NSE) has announced that Reliance shares will become ex-demerged on January 18.


An investor says, ‘‘The NSE notification says that all futures contracts for January and February will compulsorily expire on January 18, but the settlement procedure has still to be notified. This has created confusion among people who hold these contracts.’’ The simple answer in this case is that investors must play safe and square up the contracts themselves.


Another issue being raised by investors is the impact on stock indices and on the Net Asset Value (NAV) of mutual funds when the price of Reliance Industries adjusts on January 18 after the demerger. This too is a specious argument. Every mutual fund, which holds Reliance shares, will end up owning five entities in its place. And investment analysts, incidentally, expect that the sum of these will most probably have a higher valuation than Reliance enjoyed on its own. However, as the stock exchanges have announced the date on which the old Reliance shares become ex-demerger, it is important for NAV calculations that the new listed companies spawned by Reliance are also listed and traded on that day without any gap.


This could well happen, but the Securities and Exchange Board of India (Sebi) and the stock exchange could have avoided confusion by explaining the modalities of the demerger and its handling to investors at large.


It is not enough for Sebi and the bourses to communicate their plans to brokers through intra-net circulars. As Reliance has among the largest number of public shareholders in the country, it is important that a detailed explanation is offered to all investors, including its potential to impact various stock indices, index derivatives and the cash market. Market experts say the stock exchanges are expected to ensure that there no impact on major indices such as the Nifty when Reliance goes ex-demerger on Jan. 18.


But RIL’s weightage in the Nifty would drop from around 9 per cent today to around 7.7 per cent based on standard index calculations. This means the two index funds that replicate the Nifty will have to make minor changes in their portfolio, so will index arbitrageurs.


-- Sucheta Dalal