The much talked about Reliance-IPCL merger is all set to happen. The Reliance Industries board will consider the merger of IPCL with itself on March 10. While the IPCL merger will give a big boost to the RIL balance sheet, all eyes are now fixed on the swap ratio for the merger, reports CNBC-TV18.

The proposed Reliance-IPCL merger will add a lot of weight to the Reliance balance sheet. IPCL's FY07 net profit is likely to be close to Rs 1,000 crore (Rs 10 billion) and it has a cash balance of around Rs 1,100 crore (Rs 11 billion).

The combined net worth of the merged entity will be over Rs 50,000 crore (Rs 500 billion) whereas the balance sheet size will be a whopping Rs 78,000 crore (Rs 780 billion).

But it is the swap ratio that will receive close scrutiny. Valuation experts say, a swap ratio is usually decided by taking the average of 3 methods -- earnings value, market price and net asset value.

The first two have equal weightage while net asset value is given lesser weight for calculating the swap ratio. Going by just market price the swap ratio would work out to about 5.5:1; that for every 5.5 shares of IPCL, a shareholder gets 1 share of Reliance.

Going by that merger ratio, Reliance will have issue around 5.5 crore (55 million) shares to IPCL shareholders, almost half of which will go to Reliance Industries and its promoters for the 47% stake they hold in IPCL.

The question is will the RIL board cancel those shares or follow the RPL model and hold them in a trust? If they decide to cancel those shares, the promoter group's stake in RIL could test the 50% mark.

If they don't, here's how the promoter group's stake in RIL will change: it is currently at 50.84%. After the merger it will come down to 49%. And post-merger and post issue of preference warrants to promoters, it will go up to about 53%.

RIL acquired 26% stake in IPCL in 2002 at Rs 231 a share when the National Democratic Alliance government divested its stake. Coincidentally, the IPCL stock price closed on Wednesday at exactly the same price.

IPCL operates three petrochemical complexes, a naphtha-based complex at Vadodara and gas based complex each at Nagothane near Mumbai and at Dahej. Together, IPCL and Reliance will create one of the world's largest petrochem companies.

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