How RIL F&O positions get adjusted post demerger

RIL demerges financial services

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.

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How is the demerger deal structured?

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.

Why adjustment in F&O for the demerger?

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.

• To give effect to this merger, all F&O contracts of Reliance Industries with expiries slated on July 27, 2023, August 31, 2023 and September 28, 2023 will automatically expire on July 19, 2023 which is the last cum-date for the scheme of arrangement as the stock goes ex-demerger on July 20, 2023. The methodology of the settlement will be based on the valuation and price movement and would only be intimated at a later date.
   
• The same derivative contracts that expired on July 19, 2020 for the expiries of July 27, 2023, August 31, 2023 and September 28, 2023, will once again be introduced on July 20, 2023. The strike prices on which options trading will be made available from July 20, 2023, onwards would be separately made available to the traders based on the price moves and valuation moves in the next one week. 
   
• While the futures pricing appears to be more straightforward, the question is how will the options strikes be introduced after giving effect to the demerger of Jio Financial? Once the price is determined post the opening of capital market trading on July 20, 2023, a minimum of 5 in-the-money (ITM) strikes, 5 out of the money (OTM) strikes and 1 at the money (ATM) strike will be introduced and made available. They will be intimated post trading on July 19, 2023 to the members.
   
• Further strike price introduction for Reliance Industries Ltd post demerger will be based on the price movement on July 20, 2023. These additional strikes will be introduced by the stock exchange even during the trading hours if the price moves so warranted. 

What if you hold Reliance call options on July 19, 2023?

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.

• All the existing monthly and weekly contracts open in the underlying RELIANCE with expiry dates post July 19, 2023 (July, August, September), will automatically expire on July 19, 2023. That would also include the call option held by you.
   
• The settlement price for the purpose of final settlement will be the settlement price of security RELIANCE in the Capital Market segment, on July 19, 2023. For this particular settlement, the pay in/ pay out of final MTM settlement of all Futures contracts on RELIANCE will happen on July 20, 2023, which is the T+1 day.
   
• Consequently, all positions in the existing futures and options contracts on the underlying RELIANCE will cease to exist post the final settlement on July 19, 2023, and it must be noted here that this will result in physical settlement.
   
• However, it must also be noted that such physical obligations of F&O segment will be netted with obligation in the Capital market for July 19, 2023 and will be settled in the capital market segment on July 20, 2023. Also, any delivery shortages would be automatically closed out.

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.