Virendra Verma
Rajesh Abhram

Mumbai, Jan. 1

SEVERAL index funds tracking Sensex and the Nifty are planning to sell shares of Reliance Industries (RIL) on January 17 and buy back them the next day when the stock is traded, without the value of de-merged companies.

Managers of these index funds said the decision has been taken to meet the norms for index funds, under which they cannot invest in non-index shares.

"We have decided to sell RIL shares on January 17 and buy them back on January 18. There is no point in holding the unlisted shares which will not be part of the index," said Mr A.K. Sridhar, Chief Investment Officer, UTI Mutual Fund.

Most of the index funds do not invest in shares of companies that are not part of the benchmark index in which they have decided to invest. The investment in the shares of the companies that are part of the index has to be in the same proportion as it is in a particular index.

But there are some index funds like HDFC Mutual Fund with provision to invest in companies out of the index stocks with high probability to outperform the index. For instance, RIL has a weightage of 9.18 per cent on the S&P CNX Nifty index and 11.62 per cent on the Sensex. So, index funds need to keep the RIL weigthage at this level.

The situation in RIL has arisen due to corporate action in which the investments of RIL in some businesses would be de-merged and shareholders would get shares of the new companies.

Stock exchanges have fixed January 18 as the ex-date for this. This means that Reliance shares will be valued without the investments from this date onwards.

If index mutual funds hold shares till January 18, they will be eligible for shares of de-merged companies, but the structure of index funds does not allow them to hold these shares.

Fund managers said the impact of selling and buying RIL shares would not make much difference to the stock price, as the number of shares would not be much.

This is due to the low corpus for index funds in India. The biggest index fund in India is that of Benchmark Mutual Fund, whose Nifty BeES, an exchange-traded fund, has a corpus of around Rs 150 crore. This is followed by UTI Mutual Fund, which has around Rs 90 crore spread over three schemes. Other index funds are those of ING Vysya Mutual Fund, Templeton, SBI Mutual Fund, Tata Mutual Fund, and Prudential ICICI Mutual Fund.

A total of 15 mutual funds have index funds on the Nifty. The number of index funds based on the Sensex is comparatively lower.

Related Stories:
Reliance demerger catches fund managers, traders on wrong foot
Reliance F&O: NSE cancels Jan 17 trading, fixes Jan 18 as ex-date to adjust de-merger
Reliance demerger comes into effect
Special one-hour trading in Reliance on Jan 18 for index management

(This article was published in the Business Line print edition dated January 2, 2006)
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