Why the Jio Financial Services demerger matters

Why the Jio Financial Services demerger matters

On Friday 31st March 2023, Reliance Industries rallied sharply, but it was not just about stock price. The volumes on Reliance surged 50% over the previous day to 130 lakh shares, while the number of trades surged by 51.3% to 4.46 lakhs on Friday. This surge in interest in the Reliance stock can be largely attributed to the decision to demerge Reliance Strategic Investments Ltd (RSIL) from Reliance Industries and eventually list it on the bourses. 

RSIL, post the demerger, will be renamed Jio Financial Services and RIL shareholders will get Jio Financial shares in the ratio of 1:1. What really excited investors was that this could set the tone for demerger of other businesses like Reliance Digital and Reliance Retail. That is likely to trigger a lot of value creation for shareholders of RIL and that is what is exciting.

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Scale and price are in the Reliance DNA

Investors are also excited by the fact that Reliance could rethink the NBFC business model in India. People still remember how Jio positioned itself in the Indian telecom market in 2016 and changed the equations of the industry. Back then, Reliance Jio had used a variety of innovative schemes to draw customers through an attractive price and service point.

Now, RIL has motioned to demerge its financial services business into Jio Financial Services (JFSL). For starters, this is likely to hot up competition in the NBFC sector. Today, the consumer facing NBFC business is dominated by Bajaj Finance and Poonawala Fincorp. With Jio Financial, it will be a new dimension.

Putting a smart team in place

JFSL has put some of the best minds to work on its NBFC plans. Banking veteran, KV Kamath will be the non-executive chairman providing broad strategic direction to Jio Financial. They have also roped in Hitesh Sethi, former CEO of McLaren Strategic Ventures, for the CEO role. Other top notch professionals have also been roped in and a good NBFC ecosystem would be the magnet for the best of talent. The approvals are likely to take another 6-8 months; so Jio Financial has enough time to put its team in place.

Business plan for the future

The plan is yet to fully crystallize, but to begin with the focus would be on merchant finance and insurance. Jio Financial is also planning a foray into asset management and digital broking later. Merchant financing and insurance are expected to rehash the current funding template and is directly relevant to the Reliance retail and telecom franchises. That is what Reliance shareholders are betting would make a huge difference to the valuation of the stock.