NSE Indices Ltd, a subsidiary of the National Stock Exchange, plans to change the policy of merger and demerger of index constituents for equity indices to avoid big churnings happening in the current system. This comes ahead of the planned merger of HDFC with HDFC Bank.

The proposal is expected to avoid sharp movement in firms’ stock prices during the merger or demerger of index constituents for equity indices till 2nd November. Regarding the merger treatment, NSE Indices proposed that the transferor company will be excluded from the index on the ex-date of the merger. Equity shares, investible weight factor, and capping factor of the merged entity are updated based on the terms on the ex-date of the merger.

On the ex-date, a company’s replacement is made based on the eligibility criteria of the respective indices despite the Transferor Company being excluded from the indices with a fixed number of constituents. NSE Indices suggested no additional will be made in place of the transferor company is excluded. The announcement of these changes was made three working days in advance of the change in the constituent’s indices.

According to the NSE Indices, the demerged company is omitted from the index much amid its ex-date of the demerger due to the current method. In addition, companies with large market caps get excluded and become eligible for enclosure in subsequent reviews, increasing churn in the index and in funds tracking such index.