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Corporate Action Adjustments
Key Action Points
Corporate Action Classification
- The basis for any adjustment for corporate action shall be such that the value of the position of the market participants on cum and ex-date for corporate action shall continue to remain the same as far as possible. This will facilitate in retaining the relative status of positions viz. in-the-money, at-the-money and out-of-money. This will also address issues related to exercise and assignments.
- Any adjustment for corporate actions would be carried out on the last day on which a security is traded on a cum basis in the underlying cash market.
- Adjustments would mean modifications to positions and/or contract specifications as listed below such that the basic premise of adjustment laid down in para a. above is satisfied :
- Strike Price
- Market Lot/Multiplier
- The adjustments would be carried out on any or all of the above based on the nature of the corporate action. The adjustments for corporate actions would be carried out on all open, exercised as well as assigned positions.
The corporate actions may be broadly classified under stock benefits and cash benefits. The various stock benefits declared by the issuer of capital are:
Methodology for Adjustment
- Warrants, and
- Secured Premium Notes (SPNs) among others.
- Extraordinary dividends (Cash Dividend- Cash benefit)
The methodology proposed to be followed for adjustment of various corporate actions to be carried out will be as follows:
- Bonus, Stock Splits and Consolidations
- Strike Price: The new strike price would be arrived at by dividing the old strike price by the adjustment factor as under.
- Market Lot / Multiplier: The new market lot/multiplier would be arrived at by multiplying the old market lot by the adjustment factor as under.
- Position: The new position would be arrived at by multiplying the old position by the adjustment factor as under.
Ratio – A: B Adjustment factor: (A+B)/B
Stock Splits and Consolidations
Ratio – A: B Adjustment factor: A/B
The above methodology may result in fractions due to the corporate action e.g. a bonus ratio of 3:7. With a view to minimizing fraction settlements, the following methodology is proposed to be adopted:
- Compute value of the position before adjustment
- Compute value of the position taking into account the exact adjustment factor
- Carry out rounding off for the Strike Price and Market Lot
- Compute value of the position based on the revised strike price and market lot
The difference between a and d above, if any, shall be decided in the manner laid down by the group by adjusting Strike Price or Market Lot, so that no forced closure of open position is mandated.
- Dividends which are below 5% of the market value of the underlying stock would be deemed to be ordinary dividends and no adjustment in the Strike Price would be made for ordinary dividends. For extra-ordinary dividends, above 5% of the market value of the underlying stock, the Strike Price would be adjusted.
- To decide whether the dividend is extra-ordinary the market price would mean the closing price of the scrip on the day previous to the date on which the announcement of the dividend is made by the Company after the meeting of the Board of Directors. However, in cases where the announcement of dividend is made after the close of market hours, the same day's closing price would be taken as the market price. Further, if the shareholders of the company in the AGM change the rate of dividend declared by the Board of Directors, then to decide whether the dividend is extra-ordinary or not would be based on the rate of dividend communicated to the exchange after AGM and the closing price of the scrip on the day previous to the date of the AGM.
- In case of declaration of extra-ordinary dividend by any company, the total dividend amount (special and / or ordinary) would be reduced from all the strike prices of the option contracts on that stock.
- The revised strike prices would be applicable from the ex-dividend date specified by the exchange.
- On the announcement of the record date for the merger, the exact date of expiration (Last Cum-date) would be informed to members.
- After the announcement of the Record Date, no fresh contracts on Futures and Options would be introduced on the underlying, that will cease to exist subsequent to the merger.
- Un-expired contracts outstanding as on the last cum-date would be compulsorily settled at the settlement price. The settlement price shall be the closing price of the underlying on the last cum-date.
- GTC/GTD orders for the futures & options contracts on the underlying, outstanding at the close of business on the last cum-date would be cancelled by the Exchange.
Ratio – A: B and Issue price of rights is S.
Adjustment factor: (P-E)/P
Where P = Spot price on last cum date
E = (P-S) x A / (A+B)
Strike Price: The new strike price would be arrived at by multiplying the old strike price by the adjustment factor as under.
Market Lot / Multiplier: The new market lot/multiplier would be arrived at by dividing the old market lot by the adjustment factor as under.