In a press statement on Thursday, Reliance Industries Limited (RIL) disclosed a formula to calculate the cost of acquisition (COA) of equity shares of RIL and Reliance Strategic Investments (to be renamed as JFS). CEO of Zerodha Nithin Kamath commended RIL for quickly announcing the COA prior to the corporate action (JFS demerger), which took place on the ex-date in the previous session. According to Kamath, this action improved price discovery and permitted trading apps for brokers to timely modify the purchase average price for holdings.
Since firms frequently delay announcing the COA even after the ex-date, there is a chance that retail investors will panic and sell because of a fictitious loss when the price changes are not made on schedule. Announcing COA in advance would be ideal and advantageous for investors, according to Kamath, as it helps reduce potential causes for panic and enables brokers to provide accurate profit and loss (P&L) information to investors even on the ex-date.
According to RIL’s press release, the formula for calculating the COA is the net worth of the combined firm (RSIL or JFS) divided by the net worth of the demerged company (RIL), as required by income tax regulations. In the event of a demerger, the formula specified an apportionment ratio of 4.68 for RSIL and 95.32 for RIL.
Centrum Broking determined the net worth of RSIL, which was estimated at 23,500 crores, using the apportionment ratio of 4.68% for RSIL and the standalone net worth of RIL of 5 lakh crore. RIL clarified that this information is being provided for shareholders’ benefit only and that there is no express or implied responsibility on the part of the company for this advice.
According to the CEO of Zerodha, businesses typically disclose COA after the ex-date. Without it, trading apps are unable to reduce the buy average price for holdings in order to take the demerger into account. This raises the possibility that a retail investor will panic and sell after realising an exaggerated loss, according to him.
