8 mins read . 14 Jul 2023
In the latest board meeting of Reliance Industries, the shareholders voted decisively in favour of the demerger of the financial services business of the group. Currently, the financial services business of the group is housed under Reliance Strategic Investments Ltd, which is classified as a systematically important NBFC. This demerger has been on the cards for a long time and now the company has also announced the record date for the merger as July 20, 2023. That means, investors should be having the shares of Reliance Industries in their demat accounts as on July 20, 2023 to be eligible for the outcome of the demerger deal of Reliance Industries.
Here is a quick look at how the specific demerger deal for Reliance Industries is structured. The financial services business of Reliance Industries Ltd (Reliance Strategic Investments Ltd) will be separated under a scheme of arrangement and made into a separate company. As compensation to the shareholders of RIL for this demerger and reduction in value of the company, they will receive 1 share of Reliance Strategic Investments Ltd of face value Rs10 for every 1 share of Reliance Industries of face value Rs10 held by them. In short, the demerger compensation ratio is 1:1 for the shareholders of Reliance Industries. Post the demerger, Reliance Strategic Investments Ltd will be renamed as Jio Financial Services Ltd. While the record date for the demerger has been set at July 20, 2023, the scheme of demerger is effective from July 01, 2023.
Obviously, the demerger of the financial services business of Reliance Industries will lead to reduction in value of the overall company as the value will now go into Jio Financial Services. Shareholders will be compensated as they get shares in the ratio of 1:1 in Jio Financial Services. However, the entire deal will lead to shift in the valuation of Reliance Industries Ltd and also change in the shareholding structure of the shareholders of Reliance Industries as they will now also hold additional shares of Jio Financial Services. However, the adjustment in F&O for will not as straightforward as in the case of bonus or split where the adjustment is just a ratio driven adjustment. In a demerger, the adjustment is more of a value driven adjustment. Here is how the adjustment for the demerger of Jio Financial Services from Reliance Industries Ltd will be done in F&O markets.
That is the more practical question. What exactly happens if you are (say) long a Reliance Industries OTM call option as on July 19, 2023. Here are the steps that describe the outcome.
To sum it up, the demerger will lead to a shift in value, although it should be holdings neutral for the shareholders of Reliance Industries.