InGovern recommends shareholders vote 'for' RIL-Jio Financial spinoff

One big benefit will be unlocking of treasury shares of RIL, says proxy advisory firm

InGovern, a voting advisory firm, has recommended a ‘for’ vote for the scheme of demerger proposed by Reliance Industries (RIL), India’s most valuable firm, to hive off its financial services division.

The scheme of arrangement involves demerger of the financial services businesses of RIL into Reliance Strategic Investments (RSIL). One share of RSIL will be issued to those holding one share of RIL. Once the scheme becomes effective, the name of the resulting company will be changed to Jio Financial Services (JFSL), which will be listed separately on the bourses.

The NCLT-convened meeting to vote on the proposal will be held on Tuesday. For the special resolution to go through, RIL will require a majority of 'for' votes from its shareholders. Additionally, public shareholders who cast 'for' votes will have to exceed those casting 'against' votes, said a legal expert.

In a note, InGovern said: “the scheme is in the interests of all stakeholders of RIL and the JFSL.”

“One of the biggest benefits is the unlocking of the treasury shares of RIL that are moved into JFSL and JFSL would be able to leverage the value of these shares to build a book,” it said.

JFSL holds 6.1 per cent stake in RIL, which is worth some Rs 1 trillion.

Given RIL’s interests in multiple businesses, creation of an independent company will bring in exclusive focus on financial services and help explore opportunities in the sector, InGovern said.

“The independent company can attract different sets of investors, strategic partners, lenders and other stakeholders having a specific interest in the financial services business. A financial services company can have a higher leverage (as compared to RIL) for its growth; and unlocking the value of the financial services business for the shareholders of the RIL,” it said.

Shares of RIL last closed at Rs 2,420. The stock has underperformed the market over the past one year, declining 13 per cent even as the benchmark Sensex has gained 7.5 per cent.

Analysts believe that JFSL’s listing and value unlocking could be a key trigger for shares of the retail-to-telecom giant.

“The listing and value unlocking from RIL’s financial services business in the coming months will be a key event for the stock. We also expect the company to lay down a strong roadmap for growth in the financial sector in the coming AGM. While significant efforts are needed to scale the financials business, given RIL’s robust execution, capacity to invest, industry leading retail infrastructure and leading market share across the retail and telecom industry, it appears likely that RIL will dominate the industry,” said Nomura in a note earlier this month.

Jefferies has assigned a value of between Rs 134 and 224 per share for JFSL.

“Based on core networth of Jio-FS (Rs 14,000 crore) and value of stake in RIL (Rs 1 trillion) with price-to-book range of 3-5 times as well as holdco-discount of up to 40 per cent (based on benchmarks), we value JioFS in the range of Rs 90,000-150,000 crore that implies Rs 134-224 per share in RIL's sum of the parts (SoTP),” said the brokerage in a recent note.