Tata Consultancy Services Limited (TCS) Limited goes ex-bonus in the ratio 1:1 on 31 May 2018. The company has fixed 02 June as the record date to determine the eligibility of shareholders.
Effect on Holdings:
When a bonus is issued, the share price drops, in this case by a factor of 2. So if you held TCS shares at an average price of Rs.3585, the price of each share after bonus would adjust to 3585/2 = Rs.1792.5. You’ll be given 1 share at Rs.0 for every 1 share you hold.
Please note that a bonus issue only increases liquidity and not your investment value.
P&L drop:
Until the bonus shares are credited to your Demat, your Holdings will show an artificial drop in P&L. Once the bonus shares are credited at an avg price of Rs.0, your P&L in Kite/Q will be restored to its correct value.
You will receive an SMS from CDSL when your bonus shares are credited to your Demat which could take up to 2 weeks.
Adjustment factor:
Adjustment factor for Bonus issue of A: B is defined as (A+B)/B. In the case of TCS, the
adjustment factor is (1+1)/1 = 2, since the bonus issue ratio is 1:1.
Adjustments for Options Contracts:
- Strike Price: The adjusted strike price shall be arrived at by dividing the old strike price by the
adjustment factor. - Market Lot: The adjusted market lot shall be arrived at by multiplying the old market lot by the
adjustment factor. The revised market lot would be 500.
Adjustments for Futures Contracts:
- Futures base price: The adjusted futures base price shall be arrived at by dividing the old futures
price by the adjustment factor. - Market Lot: The adjusted market lot shall be arrived at by multiplying the old market lot by the
adjustment factor. The revised market lot would be 500.
To know more about corporate actions and its impact on stock prices, do read this Varsity article.