Reliance Board to meet on 02-May for Jio Financial demerger

It looks like the demerger of Jio Financial Services from Reliance Industries would be finalized when the equity shareholders of Reliance and creditors meet on 02nd May 2023. When ICICI veteran, KV Kamath, was brought in to head Jio Financial Services, it was always clear that demerger would be the first target, balance sheet would be second and an IPO would be the third target. The company has already scheduled a meeting of unsecured and secured creditors as well as the shareholders of Reliance Industries on 02nd May 2023, to consider and approve the scheme of arrangement. Under the scheme, as the first step, Reliance Strategic Investments Ltd (RSIL) will be demerged from RIL. Post the demerger, the name of demerged entity will be changed to Jio Financial Services Limited.

Mukesh Ambani had announced the demerger of Jio Financial in the previous AGM held in August 2022. The demerger will be done through a share-swap arrangement and there would be no cash flowing either way. As part of the demerger deal, the shareholders of Reliance Industries Ltd will get 1 share of Jio Financial Services for every 1 share of Reliance Industries Ltd held by them. The financial services business had total revenues of Rs1,387 crore for FY22 while merchant lending and insurance would be some of the big focus areas of demerged entity. KV Kamath will be the non-executive chairman of the new company, while the top level operational staff, including the CEO, has come in from ICICI Bank.

The financial services business of Reliance itself is quite complex. When the Reliance group businesses were split between the brothers in 2005, financial services were given to Anil Ambani, with a non-compete clause binding on the Mukesh Ambani group. However, with the ADAG group largely ceasing its businesses and the cooling period over, RIL has its own financial services business. Their financial services franchise includes Reliance Industrial Investments and Holdings, Reliance Payment Solutions; Jio Payments Bank; Reliance Retail Finance; Jio Information Aggregator Services; and Reliance Retail Insurance Broking. 

The rationale of hiving off the financial services into a separate business entity is to have a differentiated strategy that is aligned to risks and specific market characteristics of the financial services space. The company was of the view that, considering the nature of the competition in the financial services sector, a distinct business entity would be more aligned with a sharp focus. Also, unlike the traditional businesses of Reliance, the financial services business needs a separate set of investors, strategic partners, lenders, private equity investors as well as other stakeholders. Hence, having a separate and distinct entity would serve the interests of the group much better.

On May 02nd, it will not only be the shareholders of Reliance Industries, but also the secured creditors and the unsecured creditors of the company would also be meeting to approve the proposal to demerge the financial services business. The idea is to eventually list the demerged entity, Jio Financial Services, on the NSE and BSE. The company has also mentioned the same in the exchange filing. Since it will be a significantly large NBFC, Reliance Industries has also ensured that the transfer of its investment in Jio Payments Bank, will be in line with the Reserve Bank of India regulations. The financial services business, by default, needs higher levels of leverage and hence it would be instrumental in unlocking value for shareholders if it is kept as a distinct entity.

There are two things evident in terms of strategy. The company is going to chase scale very aggressively. As of FY22, Reliance Strategic Investments (to be demerged and renamed as Jio Financial Services) has reported revenues of Rs1,536 crore. The overall asset base of the financial services arm stands at Rs27,964 crore on a consolidated basis. Secondly, the growth of the financial services business would be largely aligned to its core high growth franchises like retail and telecom / digital. That is the reason, the company plans to keep merchant financing and insurance as two of its major focus areas for the financial services business. That is not just a high growth area, but also largely under-served at this point.

In terms of business plan of Jio Financial Services, the merger would be a 1:1 allocation of shares to the existing shareholders of RIL to compensate for the demerger. Going ahead, Jio Financial Services Ltd will be looking at growing through the organic expansion, inorganic acquisitions as well as through joint-venture partnerships. Some of the major thrust areas of Jio Financial Services, to begin with, would be merchant finance, general insurance, asset management and digital broking. For RIL, it would also be a template for monetization of its verticals and other business lines may eventually follow suit over a period of time. Eventually, Reliance also plans to take digital and retail as separate companies and Jio Financial Services may be the first credible template for the future.

Reliance Strategic Investments Ltd (RSIL) is currently a wholly-owned subsidiary of RIL. It is also an RBI-registered non-deposit-taking systemically important non-banking financial company (ND-SI-NBFC). In terms of future plans, JFSL will also spruce up its liquidity levels in the balance sheet to ensure sufficient regulatory capital for lending to consumers and to merchants. Over time, it also intends to incubate other financial services and fintech verticals in the fields of insurance, payments, digital broking, and asset management. This support will be provided for a period of 3 years. The completion of the demerger transaction is subject to statutory and regulatory approvals. These would include approvals from the NCLT, stock exchanges, SEBI and RBI as well as from the Competition Commission of India.