It is basically the ratio at which a company is acquiring another company by offering its own shares in exchange for the target companies shares and all this happens during a merger or acquisition. The swap ratio is 2:1, that is the company will offer 2 shares for every 1 share of the target company.
Swap ratio is used in case of mergers and acquisitions. This is the ratio at which the acquiring company offers it’s share to the target company, in exchange of their (target) shares.
The Swap Ratio is calculated by taking in account the financial ratios of the company, their book value, profit after tax, dividend paid, earning per share as well as mergers and acquisitions.
If company A is acquiring company B and offers a swap ratio of 1:5, it will issue one share of its own company for every 5 shares of the company B being acquired. In other words, if company B has 10 crore outstanding equity shares and 100 % of it is being acquired by company A, then company A will issue 2 crore new equity shares of company A to the shareholders of company B, proportionately.