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Reliance Industries Ltd (RIL) and Jio Financial Services Ltd (JFSL) Demerger Explained

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Date of posting this article: Tuesday – 18th of July, 2023.

By the time I am writing this post, the news is already out that the shareholders of Reliance Industries Limited will be entitled to one share of JFS (Jio Financial Services) for each share held in Reliance Industries. The record date is Thursday – 20th of July, 2023.

Why Reliance Industries is going for a demerger and making a separate company called Jio Financial Services Ltd?

According to experts this demerger decision is taken to keep the financial service business distinct from other businesses of Reliance Industries and may attract a different set of investors, strategic partners, lenders and other stakeholders.

What business will Jio Financial Services Ltd (JFSL) do post-demerger?

Post-demerger, they will lend money to consumers (Business-to-Consumer (B2C)) and merchants (Business-to-Business (B2B)), based on proprietary data analytics and eventually branch out to insurance, payments, digital broking and asset management.

Reliance already has a huge database of consumers via Jio and other products. So it will be easy for Jio Financial Services to market its products.

So suppose you have 100 shares of Reliance on the record date then you will get 100 shares of Jio Financial Services in your demat account within a few days. Expected days are anywhere between 30-60 days.

I have already bought some 🙂

Tomorrow on the 19th of Jul, 2023, the 197 shares will be in my Demat account. Even though the Indian stock markets have switched to settlement on the T+1 day – the shares come into the Demat account only after the market closes on the T+1 day. So effectively on T+2 day, the shares can be seen in the Demat account. Earlier it was T+2 days. The change happened earlier this year on Friday, January 27, 2023.

If you do not know – selling the shares which are still not in your Demat account – earlier T+2 days and now T+1 days, can be risky.

Advice: I am not getting into the details of why it is risky to sell shares that have still not come into your Demat account but for now please remember that you should sell the shares only after that (T+) mark is not shown in your Demat account and you can see the Qty of shares clearly in your Demat.

Some illiquid shares may get delayed to show even on the T+2 day. It may also happen due to technical reasons that the shares have not come into your Demat account. My point is why take the risk for that 1k or 2k profit that will not change your life? The reward is not worth the risk.

National Stock Exchange (NSE) will be conducting a special pre-open session for Reliance Industries Ltd (RIL) on Thursday, 20th of July, 2023. Why? Because Jio Financial Services is set to enter the NSE barometer Nifty.

As per the index methodology (a formula that is used to select companies to enter the Nifty), the spun-off entity would be included in indices. Will write this later when the information will be available.

JFS (Jio Financial Services) will be huge on the release day itself as some percentage of RIL’s cash holdings will shift to JFS.
So those who will have clear shares of RELIANCE on the demerger date – 20th of July 2023 will get the same number of shares of JFS within 60 days.

I think JFS will list anything between 200-250 per share.

RIL will for sure run up – so profit here too.

So if you have 100 RIL shares, here is your FREE profit:

100 * 200 = 20,000/- FREE/Additional profit. A conservative estimate. More if it lists at 200+.

Since these are free shares I will keep them for as long as possible as I believe that JFS will become a big company.

Update Thursday, 20 Jul 2023:

Why Reliance Shares Dropped – Explanation in Simple Language:

Since morning I am getting emails on why Reliance Shares Dropped today.

Let me explain in a simple way.

Two brothers own a company ABL Ltd which is listed in the stock exchanges and the current price let’s assume is Rs.100/-.

Now some fight happens between the two and they want to separate ways. The elder brother is an expert in 80% of the products and services sold by the company and the younger brother is good at the rest 20%.

They agreed that they will keep a hold on what they are good at.

So they file for demerger as per company laws. They are also willing to give to shareholders of their company, one share per share held.

Now technically this company will become two different companies and post-demerger the revenues will be shared as per the agreed percentage so that both companies keep functioning. In the above case, it’s 80:20 revenue sharing.

80% of the revenue goes to the elder brother and 20% goes to the younger brother.

But the stock is not divided – it is one + one.

So there has to be some price discovery post-merger for both companies.

To know this today there was a special pre-open price discovery session between 9 AM and 10 AM to discover RIL price ex-Jio Financial. Normal trading in Reliance Industries took place only after 10 am.

A special pre-open price discovery session was introduced on April 2023 to handle corporate actions such as mergers and demergers. A pre-open session helps in minimising volatility and discovering the best price to start normal trading.

Just like other days, the equity markets opened at 9.15 am today. The only difference was Reliance Ind price did not move till 10 am just to discover its actual price to trade.

Pre-open sessions happen every day from 9 to 9.15 am to discover the price of the stocks to start trading from 9.15 am. But for demergers and mergers, you need extra time. So that special one-hour session for Reliance was done.

Pre-open price discovery is out of the scope of this post – I will write on some other day but in short, when you place a pre-market buy/sell order, it’s matched with others buy/sell prices. The best price where maximum trades can take place is decided as the open price for all stocks when the market opens to trade at 9.15 am.

So what happened today? The overall market opened as usual at 9.15 AM with one difference – Reliance Ind price stock did not change in the Nifty or anywhere else till 10 AM. Till 10 AM, Reliance Ind quoted at a fixed price – that is at yesterday’s closing price which was Rs.2841.85 a share.

Price discovery of RIL (ex-Jio Financial) happened between 9.45 AM & 9.55 AM today. And then at 10 AM this morning, Reliance Ind (ex-Jio Financial) started trading. F&O contracts on Reliance Industries also started trading at 10 AM.

The price of Jio Financial was taken as the difference between RIL’s closing price yesterday which was Rs.2841.85 and the discovered price of Reliance in the special price discovery session.

While writing this post the price of Reliance is already discovered.

The price of Jio Financial Service is fixed at Rs 261.85 per share. So we can easily calculate the discovered price of Reliance post demerger.

So what was the discovered price post Jio Financial of Reliance? Here is the calculation:

2841.85 (RIL closing price yesterday) – 261.85 (Jio Financial Service price) = 2580.00

2580 was the discovered price of Reliance at 10 am today post demerger. Of course, it will change with time as trading continues.

Reliance is currently trading at 2617.15 which is 7.91% lower than yesterday’s close.

So those who held the shares of RIL yesterday are at a loss, right?

No.

Here is the profit:

Current price of RIL minus the price of RIL as per price discovery at 10 am:
2617.15 – 2580 = 37.15.

So even though RIL is trading almost 8% lower than yesterday’s close those who held the shares yesterday including myself are in more than 1% profit.

Hope all doubts are cleared.

If you still have any doubts please write in the comments section.

Update Friday, 21-Jul-2023:

Jio Financial Services will be maintained in all the NSE and BSE Indices at a constant price of 261.85 per share which was derived on Thursday, July 20, 2023. However, the stock will be dropped from all the NSE and BSE indices at the last traded price which is effective at the opening of the JFSL listing date + 3 business days.

For Instance: If, supposedly, JFSL lists on August 21, 2023, then the stock will compulsorily be deleted from both NSE and BSE on August 24, 2023.

For 3 days they will be included in Nifty 50 and BSE 30 – this will be a problem for Index funds. Not sure how they will manage it but if I get to know I will update this post.

Disclaimer: This is an educational post and not an advisory service. Please do thorough research before buying any stock as stock markets are subject to market risks. Read the full disclaimer here.



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About the author: Dilip Shaw I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 14 comments… add one }
  • Dey Rabindra July 20, 2023, 2:36 pm

    Dear Dilip

    Thanks for your genuine analysis.

    is it fair now to invest in Reliance, and how

    Is sip mode or small quantities every month

    Regards.

    Rabindra

    • Dilip Shaw July 23, 2023, 12:16 pm

      SIP is any day better 🙂
      But if your motto is short-term profit then it is down and will go up soon .. so hurry
      so decide .. long or short term
      Regards,
      Dilip

  • Raju PS July 20, 2023, 3:06 pm

    Your analysis of Reliance is very informative and shows your depth of knowledge about the market.

    Thanks,
    Raju PS

  • Satyanarayana Chilukuri July 20, 2023, 9:44 pm

    Thank you Sir,
    Your mails are very helpful

  • VijayKumar Banagar July 20, 2023, 11:01 pm

    Thank u for your continued information regarding the stock market.
    I request you to keep writing such posts

  • Anand Upadhye July 21, 2023, 12:30 pm

    Sir,
    Most of the brokerages and analysts, based on earlier demergers of Reliance, have set a target of 3200 for Reliance. Can we expect Reliance to hit this target?

    JFS was expected to start somewhere between 160 – 200, but it’s now starting at a higher price of 261.85, so many traders may sell JFS shares and book profits, which may lower the price of JFS.
    Is it worth buying more JFS shares if we get them at a lower price?

    Sir, your view and advice on these, please?

    Thank you.
    Anand.

    • Dilip Shaw July 21, 2023, 7:25 am

      RIL is a good share … after 3200 will it never cross 3200??
      Good companies have no target 🙂

      JFS is free for RIL holders – so they can book profits.
      For new buyers let things settle down then buy checking the fundamentals.

      Regards,
      Dilip

      • Anand Upadhye July 21, 2023, 1:17 pm

        Sir,
        Thank you very much for your advice.

        Will wait for your post on ‘Pre-opening price discovery’

        Regards,
        Anand.

    • Dilip Shaw July 23, 2023, 12:20 pm

      RIL is a good share … after 3200 will it never cross 3200??
      Good companies have no target 🙂

      JFS is free for RIL holders – so they can book profits.
      For new buyers let things settle down then buy checking the fundamentals.

      Regards,
      Dilip

  • clayalvares July 21, 2023, 3:16 pm

    Very good explanation

    Regards
    Clay Alvares

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