The Famous Jio Financial Services Demerger

Jio Financial Services Limited (JFSL) just got listed on 21 August 2023 as a result of a Corporate Restructuring done by the RIL group. You might think, why the demerger? The reason being a business involves various sorts of strategic decision-making in order to create value, increase earnings, grow the business, or simply thrive in the cut-throat competition or grab a pie of a rising market. With the increasing demands for credit and the changes coming up in the financial services world, this decision was perfectly timed.

If you are someone or you know someone who held RIL shares on July 20, 2023, being the record date for the company to be demerged, and has received the shares of JFSL, then you might have some questions about the same. Let’s discuss some of those here:

What is a Demerger?

Before moving ahead, let’s understand what a Demerger means. Demerger is a type of Corporate Restructuring Strategy where a part of the company or a business unit is split to form a new entity or company altogether with its own separate existence. The demerged company has its individual identity and works like a new company formed.

Why the Demerger?

The financial services market has grown so much in the past few years and has immense growth potential in the future as well with an increase in demand for retail credits, developments on the digital payments front, etc. It also comes with its own set of regulatory requirements which require special attention and adherence to those.

How are the shareholders benefited from this demerger?

The shareholders will receive one share for each share held in Reliance Industries Limited. The record date was set as July 20, 2023, meaning everyone who had RIL shares on the date will get one JFSL share. This is a value-unlocking opportunity for the shareholders who can easily realize the value of shares by selling them once the shares get listed. The demerger will also open up an opportunity for investors to invest in a company focusing primarily on Financial Services.

What happens to the share prices?

The RIL in his announcement declared that the cost of JFSL shares will be considered as 4.68% and the cost of RIL shares will be considered as 95.32%. To understand better let’s look at the table below:

There was also a special pre-market trading session held to determine the constant price of JFSL which would be included in the Indices till the JFSL actually lists on the market which came out to be ₹ 261.85.

What are the tax implications in the hands of Shareholders?

The gains from the sale of shares of JFSL will be considered as LTCG or STCG depending on the period you held the shares. The period of holding will be considered from the date you acquired the Reliance Industries Limited shares.

The cost of acquisition will be 4.68% of the amount you paid to originally acquire the Reliance Industries Limited shares.

Let’s say, you purchased the 10 shares of RIL on 25th July 2022 for ₹20,000. You received 10 shares of JFSL on 21st July 2023 the day after the record date. You sell the JFSL shares on the day of listing itself i.e. on 21st August 2023 for ₹2500.

Here, the LTCG will be ₹1,564 [2500- 936 (20000*4.68%)], as the shares were originally purchased on 25th July 2022 and hence held for more than 12 months.

For further queries, comment below!

2 Likes

Thanks for the nice writeup @CA_Niyati_Mistry. Could you enhance the " What are the tax implications in the hands of Shareholders?" section to cover the sales of both post demerger companies under the LTCG grandfathering case, please? By grandfathering, I mean shares bought before 31 Jan 2018 at a price less than the 31 Jan 2018 FMV.

Hello @Russell,

Thanks for the appreciation.

In case of purchase of RIL shares before 31 Jan 2018, the actual cost or the FMV as on 31 Jan 2018 whichever is higher will be considered for the purpose of calculating the cost. Out of that 4.68% of the cost will be considered as cost for JFSL shares and 95.32% will be considered as cost for RIL shares.

Hope this helps!

Thanks for the prompt reply @CA_Niyati_Mistry.

If I may, let me reflect what you’ve said to confirm my understanding. Sales done post demerger that qualify for grandfathering LTCG should use, for cost, 95.32% of the pre-demerger RIL 31-1-2018 FMV and 4.68% of the pre-demerger RIL 31-1-2018 FMV for RIL and JFSL sales respectively?

Hello @Russell

Yes, that’s the perfect understanding.

Thanks for confirming @CA_Niyati_Mistry.

So far I’ve been filing ITR-2 myself. This means I have to enter the 31-1-2018 FMV manually for my trades. If I choose to use Quicko next year I’m most curious if Quicko will, for such grandfathered trades, automatically insert the 31-1-2018 FMV given the ISIN for a trade based on the trade date - in RIL’s case the FMV to be inserted will vary depending on whether the trade was pre or post demerger.

Hello @Russell

On Quicko, you will have to manually enter the FMV details. The buy cost or FMV whichever is higher will be considered for calculation of gains.

Thanks for your prompt responses and useful information @CA_Niyati_Mistry. Take care.

Russell