ITC Ltd. is preparing for the demerger of its hotels business, a move that is expected to have significant implications for both mutual funds and foreign investors. As one of the most heavily weighted stocks in the NSE Nifty 50, ITC holds the fifth highest weight in the benchmark index at 4.1%. Following the special pre-open session on January 6, 2025, the composite weight of ITC and the newly formed ITC Hotels Ltd. will remain unchanged until the latter’s shares are officially listed and begin trading.
The exit of ITC Hotels from the benchmark indices will occur based on pre-conditions set by the stock exchanges. As of September 30, 2024, domestic and foreign institutions owned a combined 24.56% stake in ITC Hotels, with mutual funds holding 7.66%. Notably, the SBI Nifty 50 ETF accounted for approximately 0.80% of this stake.
Investor Landscape and Foreign Ownership
The parent company, ITC, is included in 36 Nifty 50-based exchange-traded funds and index funds, which collectively manage assets worth Rs 3.98 lakh crore. These funds held ITC shares valued at nearly $2 billion (over Rs 16,300 crore). Among domestic investors, insurance companies owned about 13.5% of ITC, with the Life Insurance Corporation (LIC) holding 9.1% and GIC Re holding 1%. The Government of India, through the Special Undertaking of the Unit Trust of India (SUUTI), owned 4.69% of the hotels arm, while foreign investors held 9.06%, including GQG Partners with a 1.8% stake and the Government of Singapore with 0.6%.
ITC is also part of the MSCI and FTSE Global indices, and the demerger will necessitate adjustments to these global indices once the stock exits the Nifty 50 and BSE Sensex.
Foreign Investment Cap and Supply Overhang
ITC Hotels will initially have a foreign ownership cap of 34%, which includes 10% for non-resident Indians and 24% for foreign portfolio investors. As of September 30, 2024, foreign investors held 9.6% in ITC Hotels, leaving approximately 21% available for foreign investment upon listing before the stock enters the red flag list.
While foreign ownership in the hotels sector can reach up to 100% through the automatic route, ITC will require board approval, shareholder resolution, and regulatory consent to increase the cap in the hotels business.
Additionally, British American Tobacco, which holds a 15.3% stake in the hotel company, is expected to exit the hotel arm upon listing, allowing the company to generate cash from monetizing non-core assets. The SUUTI’s 4.69% stake in the hotel arm also presents a potential supply overhang, with nearly 20% of the company’s equity likely to enter the market in the coming months.
Demerger Timeline and Shareholder Benefits
The demerger is effective from January 1, 2025, with the ex-date for the demerger set for January 6, 2025. Investors wishing to own shares of ITC Hotels must hold shares of ITC until January 3, 2025. According to the scheme of arrangement, shareholders will receive one share of ITC Hotels for every ten shares held in the parent company. Post-demerger, ITC will retain approximately 40% ownership in the hotel business, marking a significant shift in the company’s structure and investment landscape.
