The Board of Directors of REC Limited (RECLTD) in its meeting held on June 30, 2022, approved the issue of bonus shares in the ratio of 1:3 (1 equity share of the company for every 3 equity shares held). As RECLTD trades in the F&O segment, this will result in adjustments in F&O contracts on ex-date August 17, 2022.
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.
As a result of RECLTD announcing the issue of bonus shares, the Futures and Options contracts of RECLTD 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 .
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 IOC, the adjustment factor is (1+3)/3 = 1.3333 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 8000.
For example:
Assume you hold a position in IOC 140 CE, the current lot size is 6000. On ex-date, the 140 CE will be adjusted to 105 (Strike Price 140 / Adjustment Factor 1.3333) and the lot size will be adjusted to 8000 (Current Lot Size: 6000 * Adjustment Factor 1.3333).
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 is arrived at by multiplying the old market lot by the adjustment factor. The revised market lot would be 8000.
For example:
Assume you are holding a position in IOC JUL FUT and on pre-ex-date (August 16, 2022) futures close at 140, on ex-date the price will be adjusted to 105 (Price on pre-ex-date: 140 / Adjustment Factor: 1.3333)
While the lot size will be adjusted to 8000 (Current lot size: 6000 * Adjustment Factor: 1.3333).
Holders of F&O contracts are not eligible for corporate action benefits.
If you are holding equity shares of RECLTD on ex-date (August 17, 2022) you will be eligible to receive the bonus shares. The credit of shares can take up to 15 days from the record date (August 18, 2022). You can learn more about this here.