Mumbai: Reliance Industries on Monday decided to absorb its Reliance Petroleum unit through a share swap, a strategy which will boost its earnings potential without diluting its capital greatly.

Reliance Industries, India’s largest listed firm, said it would issue one share for every 16 held in the unit, giving it direct control of the world’s largest refinery complex.

Shares in Reliance Industries fell as much as 4.1% as the swap ratio gave a slight edge to Reliance Petroleum shareholders, traders said, but the move to fold the unit into the parent is expected to help the company in the long run.

“The merger will unlock significant operational and financial synergies that exists between RIL and RPL,” Reliance Industries said in a statement. ”There will be further gains from reduced operating cost arising from synergies of combined operations.”

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Reliance, which owned 70% of the unit, said it would cancel the shares on the absorption. It also said it would buy Chevron Corp’s 5% in Reliance Petroleum.

This would give Reliance the unit’s 580,000-barrel-per-day refinery built at $6 billion and commissioned in December for a fraction of the cost on its books.

“It ensures the increase in equity is kept to the bare minimum to boost all ratios such as EPS and return on equity,” Ambareesh Baliga, vice president at Karvy Stock Broking, said.

Reliance has used this strategy in the past by launching new companies to build large projects and then folding them back in when the projects begin operation.

Baliga said this helps to keep risks linked to new projects away from the parent until they began production.

The new refinery is located next to Reliance Industries’ 660,000-bpd refinery in Jamnagar.

The combined firm would have refining capacity of 1.24 million barrels per day, the largest in the world.

Analysts said the amalgamation would provide some savings to Reliance and boost its financial muscle.

“Operational synergies are likely in the form of cost optimization and better negotiating ability for buying crude,” analysts Niraj Mansingka and Ruchi Vora at Edelweiss Securities said in a research note.

“There could be potential saving on dividend distribution tax,” they said, adding Reliance will also benefit from a bigger balance sheet that would give it muscle to raise funds for expansion.

The founders shareholding in Reliance Industries will fall to 47% from 49% following the absorption.

At 0607 GMT, Reliance Industries shares were down 2.3% at Rs1,235.90, while Reliance Petroleum was down 0.4% at Rs75.80 after rising 7.6% in early trade, in a Mumbai market that dropped 2.5%.