Jio Financial Services investors sitting on 100% capital gain after price discovery
Jio Financial Services investors sitting on 100% capital gain after price discovery
the Jio Financial Services demerger and how it impacts an investor who bought Reliance Industries (RIL) shares on July 19.
Demerger Ratio: The demerger ratio determines how the assets and liabilities of the parent company (RIL) will be apportioned between the parent company and the newly demerged entity (Jio Financial Services). In this case, the company apportioned 95.32 percent of the value as RIL’s cost of acquisition, and the remaining 4.68 percent was allocated for Jio Financial Services.Cost of Acquisition: The cost of acquisition is the price an investor is deemed to have paid for the newly demerged entity based on the demerger ratio. For an investor who bought RIL shares on July 19, the deemed cost of acquisition for Jio Financial Services is Rs 133 (i.e., 4.68 percent of Rs 2,853, which was the closing price on July 19). This means that Rs 133 worth of Jio Financial Services’ value is now attributed to each RIL share held by the investor.
Discovered Price for Jio Financial Services: After the special pre-open session conducted by exchanges on July 20, the discovered price for Jio Financial Services was Rs 261.85. This indicates the market’s initial assessment of Jio Financial Services’ value as an independent entity following the demerger.
Current Share Prices: On the same day, i.e., July 20, RIL settled at Rs 2,589 a share. This represents the current market price of RIL shares after the demerger event.
Investor’s Holding: Suppose an investor bought one share of RIL on July 19.
Impact on Investor’s Holding: After the demerger, the investor’s holding now consists of two components: a. RIL: The investor still holds one share of RIL. b. Jio Financial Services: Based on the demerger ratio and the deemed cost of acquisition, the investor is now deemed to hold Rs 133 worth of Jio Financial Services.
Value Calculation: To calculate the total value of the investor’s holding after the demerger: a. RIL: The market price of RIL is Rs 2,589, and the investor holds one share. Therefore, the value of RIL holding is Rs 2,589. b. Jio Financial Services: The discovered price for Jio Financial Services is Rs 261.85, and the investor holds Rs 133 worth. Therefore, the value of Jio Financial Services holding is Rs 261.85.
Total Value of Investor’s Holding: The total value of the investor’s holding after the demerger is the sum of the value of RIL and Jio Financial Services holdings: Total Value = Value of RIL Holding + Value of Jio Financial Services Holding Total Value = Rs 2,589 + Rs 261.85 Total Value = Rs 2,850.85
The investor is now sitting on a total value of Rs 2,850.85, which represents a 100 percent capital gain on their initial investment. This impressive gain is attributed to the positive market response to the Jio Financial Services demerger, which unlocked significant value for both RIL and Jio Financial Services, benefiting the investors who bought RIL shares on July 19.
hartered Accountant and taxation expert Suresh Anchaliya explained that the cost of acquiring shares of Jio Financial Services (JFS) will be just 4.68 percent of the original purchase price. Consequently, the cost of acquiring shares of Reliance Industries (RIL) after the demerger will be lower, as a portion of the original cost is allocated to JFS shares.
If an investor purchased shares of the conglomerate at a 52-week low of Rs 2,180 in March, the cost of acquiring Jio Financial Services (JFS) shares would be Rs 102, and the cost of acquiring Reliance Industries (RIL) shares (post demerger) would be Rs 2,078.
It’s important to note that the capital gains tax will only be applicable when the investor sells the shares. Taxability arises at the time of the sale, not during the demerger process.
Currently, investors cannot sell JFS shares as they are yet to be listed in the market. JFS’ price will remain constant in all indices where RIL is present until the listing date. On the listing date, JFS’ share price could be higher or lower than Rs 261, which was the discovered price during the pre-open session.
As per the scheme of the arrangement, shareholders of RIL will receive 1 share of the demerged entity (JFS) for every 1 share they hold in the conglomerate (RIL).
