Adjustments in F&O contracts of Power Grid Corporation of India Limited on account of bonus issue

[nithin_kumrr]

The Board of Directors of Power Grid Corporation of India Ltd (POWERGRID) in its meeting held on July 31, 2023, announced the issue of bonus shares in the ratio of 1:3 (1 equity share of the company for every 3 equity shares held). The ex-date being September 12, 2023.

As a result of POWERGRID announcing the issue of bonus shares, the Futures and Options contracts in POWERGRID will be adjusted according to the framework prescribed by SEBI. The adjustment will be both in Strike Price and Lot Size of Options and Price and Lot Size of the Futures contract. You can check the announcement from the exchange here.

SEBI has prescribed a framework to the exchanges for adjustment of corporate actions in derivative contracts at the time of the corporate action. The exchange has published everything regarding the adjustments in the case of corporate actions here. The adjustments are carried out in such a way that the value of the position of the market participants, on the cum and ex-dates for the corporate action, continue to remain the same as far as possible.

Here’s how the adjustment works out:

Calculation of the adjustment factor:

The adjustment factor for the Bonus issue of A: B is defined as (A+B)/B. In the case of POWERGRID, the adjustment factor is (1+3)/3 = 1.33333 since the bonus issue ratio is 1:3.

Adjustment for Options Contracts:

Strike Price: The adjusted strike price is arrived at by dividing the old strike price by the adjustment factor.

Lot Size: The adjusted lot size is arrived at by multiplying the old market lot by the adjustment factor. The revised lot size would be 3600.

Example:

Assume you hold a position in POWERGRID 200 CE, the current lot size is 2700. On ex-date, the 200 CE will be adjusted to 150 (Strike Price 200 / Adjustment Factor 1.33333) and the lot size will be adjusted to 3600 (Current Lot Size: 2700 * Adjustment Factor 1.33333).

Adjustment for Futures Contracts:

Futures base price: The adjusted futures base price is arrived at by dividing the settlement price of the future one day before the ex-date by the adjustment factor.

Futures lot size: The adjusted market lot will be arrived at by multiplying the old market lot by the adjustment factor. The revised market lot would be 3600.

Example:

Assume you are holding a position in POWERGRID SEP FUT and on pre-ex-date (September 11, 2023) futures close at 250, on ex-date the price will be adjusted to 187.5 (Price on pre-ex-date: 250 / Adjustment Factor: 1.33333)

While the lot size will be adjusted to 3600 (Current lot size: 2700 * Adjustment Factor: 1.33333).

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Holders of F&O contracts are not eligible for corporate action benefits.

If you are holding equity shares of POWERGRID on ex-date (September 12, 2023) you will be eligible to receive the bonus shares. The credit of shares can take up to 15 days from the record date (September 12, 2023). You can learn more about this here.

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You can learn more about what bonus issue is here:

An explainer on the difference between a stock split and a bonus issue

Stock splits and bonuses are two common corporate actions that investors get confused with. In this article, we take a look at stock splits and bonuses and how these two corporate impact your holdings and the share prices. Before we dive into what a stock split and a bonus issue are, it’s important to understand two dates: the Record date and the Ex-date. These dates determine your eligibility for any corporate action. The record date is the cut-off date on or before which you need to have th…

[rawgamingstar]

When will be the shares credited to demat account??

[KarthikAcharya]

Hey @rawgamingstar

After the ex-date/record date, it usually takes around 15 days for Bonus shares to be credited to the shareholder’s demat account, but the timing may depend on the RTA.

You can check on this link to learn more about this.

[Joe_Chris]

I had bought only 1 share at 252 before the declaration.

Now the price is adjusted to sub 195.

I have received 4.75 bonus…

How about the loss in share value? Is it because I had less than 3 shares at the time of corp action?

[Joe_Chris]

@Bhuvan

Would you please enlighten me? Thnx

[TheGouda]

Assuming a stock’s closing price a day before the ex-date is Rs 100, it went through 1:3 Bonus (one bonus share for every three equity shares). On the ex-date, the opening price would be approximately Rs 75. Explained here.

Since fractional equity shares aren’t allowed to trade over exchanges, it will be cash settled.

VBL Bonus share Cash equivalent for fractional shares not credited

The amount equivalent to your fractional allotment will be credited to your bank account in due course. The fractional shares are consolidated and alloted to the trustee appointed by the board, who will sell the shares at the prevailing market price. After that, the sale proceeds will be credited to eligible shareholder’s bank account according to their fractional entitlement. You can check this notification from VBL for more details.