BL Explainer. What does the demerger of Reliance Industries and Jio Financials mean to investors

What was the price discovered for Reliance Industries and Jio Financial Services in the special pre-open session held today?

The price discovered for Jio Financial Services in the pre-open session is Rs 261.85. This was arrived by deducting the price of RIL in the pre-open session of ₹2,580 from its previous closing value.

What is the demerger of Reliance Strategic Investments, which will be renamed Jio Financial Services, all about?

Last September, Reliance Industries had said it has decided to spin-off its fast-growing digital fintech division to create value to shareholders. Accordingly, it sought shareholders’ approval and in May, shareholders and creditors approved the spin-off of Reliance Strategic Investments Ltd, which will be renamed Jio Financial Services. The National Company Law Tribunal in June gave the final approval.

What is the ratio in which Reliance shareholders will be given shares in Jio Financial Services?

The ratio for demerger is set at 1:1. For each share held in Reliance Industries as on the record date (i.e. July 20), one share of JFSL will be credited. That means, shareholders who had bought Reliance Industries shares on or before July 19, will receive JFSL shares.

Why are JFSL shares part of a host of indices, including Nifty and Sensex?

In a move to reduce churn in index constituents resulting from corporate action involving demergers, exchanges in April brought in a new framework. Accordingly, a demerged company will remain part of the index, only if the exchanges decide to conduct a Special Pre-Open session (SPOS) for the spun-off entity.

This will help index funds and exchange traded funds to reduce their transaction cost and hence tracking error, which will ultimately benefit investors.

Additionally, the spun-off business/ entity should be included in the index at constant price ₹261.85 (which is the difference between the demerged company’s closing price one day prior to ex-date of demerger and price derived during SPOS).

JFSL will be part of the index for three days only. However, If the stock hits a price band during the first two days of these 3 days, then the exclusion would be deferred by another 3 days. There would not be any extensions after that, NSE said.

What is the timeline for listing of Jio Financial Services?

It is expected that the demerged entity is likely to be listed within 2-3 months. According to Axis Securities, JIo Financial is likely to list around ₹160. “Post-demerger, we value Jio Financial Services at the treasury stock valuation of ₹1,08,597 crore (1x RIL’s treasury stock valuation),” it said.

The company’s total outstanding shares stand at ₹676.6 crore, implying each share’s valuation would be ₹160/share. The shareholding pattern will be the same as that of Reliance Industries Ltd, it added. “We value JFSL at treasury stock valuation as the business model of the company is yet to be announced. As against most analysts expectations, market gave a valuation of ₹261.85. for Jio Financial, indicating a bright future for the company.

What should investors do now?

An annual study by Motilal Oswal Financial said during 2017–22, Reliance Industries Ltd was the biggest wealth creator for the fourth consecutive time at ₹13.018 lakh crore. RIL has retained the number one position nine times in the last 16 five-year periods. This gives a clear picture of how Reliance Industries creates wealth for its investors. So, investors with a long-term perspective, must continue to hold the stock in their portfolio.