The 30-Scrip BSE Sensex, S&P CNX Nifty, BSE-500 or any other indices, will not be impacted on account of Reliance Industries de-merger on January 18.
Although the market price of Reliance Industries will get adjusted for de-merger, all indices in which Reliance Industries is included in the compilation of the indices, will have to adjust their base weightage to nullify the fall in the market price of Reliance on account of the de-merger.
Special trading session on RIL
In the weightage base index, weighting factors are revised when new shares are issued on account of bonus issues, rights issues or any other substantial price adjustment that would have a direct impact on indices. In case of bonus issues, the new weighting factor will be the number of equity shares outstanding after the bonus issue has become effective.
When a company included in the compilation issues right shares, the weighting factor for that share increases by the number of additional shares issued.
An offsetting or proportionate adjustment is then made to the base year average to negate the impact of fall in prices on account of the rights issue. Weighting factors are also revised when new shares are issued by way of merger of company, conversion of debentures, or preferential issues.
Base changes are in effect proportional adjustments in the base year average market value to offset price changes in market values upon which the index is based. The formula for changing the base year average is as follows.
New base year average = old base year average X new market value/ old market value.
In case of Reliance Industries, the market price of the company is likely to fall on account of de-merger of the company. The base year weightage of the BSE Sensex or Nifty or any other index will have to adjust for the fall in the market price of Reliance Industries on account of the demerger scheme. Since the number of shares of Reliance Industries remains the same after de-merger, the base year average will get adjusted in the following manner.
Assuming that the market price of Reliance Industries declined by Rs 175 on account of the de-merger, the base year average will change after calculating the new market value of all index stocks and then dividing it by old market value of all index stocks.
After the price adjustment on account of the de-merger, the Reliance Industries weightage in Sensex decline, so its contribution to Sensex also declines. The Reliance weightage in Sensex after the de-merger declined to 9.10 per cent from 11.25 per cent on December 26.
Effectively, the Sensex weightage of all other Sensex component goes up proportionately. Infosys weightage went up from 11.34 per cent to 11.62 per cent while that of ICICI Bank weightage goes up from 8.46 per cent to 8.67 per cent.
As a result of the decline in Sensex weightage, Reliance's contribution to the Sensex declined by 195.31 points from 1021.85 to a new 826.54.
The other Sensex component, which saw increase in their weightage, saw their contribution to Sensex increase automatically.