Why Reliance Industries Opted For 1:1 Share Swap For Jio Financial Services

The spinoff of Reliance Industries Ltd.'s digital fintech business is unlikely to unlock much value for the company, but it provides all its shareholders exposure to the fast-growing digital fintech industry. And it will eventually create value for them.

But what prompted the 1:1 demerger ratio? The answer lies in the diverse shareholder base of Reliance Industries.

RIL is no longer the company with the largest shareholder base, with that position now going to Yes Bank Ltd. with 48.13 lakh shareholders. Still, Reliance has 32.6 lakh shareholders and that's where the decision for Jio Financial Services to mirror the parent's shareholding emerges from.

Shareholder Base

Reliance is known to reward shareholders via bonus shares, at times announcing the decision during its annual general meetings.

In its justification to the stock exchanges on the share entitlement ratio for Jio Financial Services, RIL cited its diverse retail shareholder base.

The share entitlement ratio on the basis of net worth of the demerged undertaking and that of RIL would have been 16:1— that is one equity share of the financial services unit for every 16 held in RIL, it said.

According to the company, there were a couple of things that needed to be considered while arriving at the final ratio:

• The company did not want the paid-up equity of the subsidiary to exceed that of the parent.

• Over 14.34 lakh shareholders of RIL held up to 15 equity shares and would not have gotten any equity share in financial services business, excluding them from the value-unlocking exercise and going against the interest of small shareholders.

• 75.10% of these shareholders own up to 100 shares.

If the 16:1 ratio were to be adopted, Jio Financial Services would have 42.29 crore shares. That would increase the stock price of the business, making it difficult for small investors to trade in the shares of the financial services arm.

As a result, the board opted for mirror shareholding and announced 1:1 entitlement to ensure:

• All shareholders of RIL get equity shares of Jio Financial Services.

• The 1:1 ratio is in the interest of small shareholders and will avoid complaints of missing out.

• No fractional entitlements will arise with this ratio.

• It's easily comprehensible to small shareholders.