British American Tobacco Plc. may sell 4% of ITC Ltd. in the coming days, increasing its free-float weight factor and forcing index funds to rebalance their portfolio.
BAT will pare its stake in ITC from 29% to 25% in the next few days, according to a report by Bloomberg. The stake sale will be valued at a little over Rs 20,400 crore, or $2.46 billion, at the current market prices.
BAT plans to conclude the stake sale before the end of the month so that it can account for the proceeds in the current quarter ending March 2024, Bloomberg said in the report.
The 4% stake amounts to 49.90 crore shares that would be sold in the market over the next few weeks. This would lead to demand for the stock from index funds to rebalance their portfolios.
ITC currently has a free-float weight factor of 0.71 on the NSE. This will eventually increase to 0.75 by the end of the stake sale by BAT. This change in free float will require all passive funds to recalibrate their portfolios to ensure the weights align with the index weights.
ITC currently has a weight of 3.71% in the Nifty 50 Index. After the completion of the share sale, ITC will see its weight rise to 3.94% in the Nifty Index. Thus requiring index funds to buy shares of ITC.
So, while there could be a fear of near-term supply in the stock, there will be enough demand from the index funds to align their portfolio ahead of the yearly closing of accounts on March 29, 2024.
There are 23 Nifty 50 and Nifty 100-based exchange-traded funds and index funds. All these funds will be required to balance their portfolio. Not to mention, ITC is present in all active mutual fund portfolios.
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