How the F&O contracts of BEL will be adjusted today

The NSE (in its circular) has laid out the process flow for adjustment of futures and options contracts of Bharat Electronics Ltd (BEL). The company had announced a 2:1 bonus via the capitalization of the free reserves of the company. The record date for the bonus eligibility has been fixed as 16th September, so the last cum-bonus date for the bonus eligibility was 14th September. The ex-date for this 2:1 bonus issue of Bharat Electronics Ltd (BEL) has been fixed as 15th September, which means investors must have the shares of Bajaj Finserv credited in their demat accounts by 14th September evening to be eligible for the bonus shares. On 15th September, the stock has gone ex-bonus.

Let us first understand how an investor holding 100 shares of Bharat Electronics Ltd (BEL) will be impacted by this corporate action. Let us look at the 2:1 bonus in this case. Due to the bonus via capitalization of reserves, the number of shares held will increase 3-fold from 100 shares to 300 shares. Thus the person holding 100 shares of Bharat Electronics Ltd (BEL) on 15th September will be holding 300 shares post the bonus issue.

How bonus will be adjusted in Futures & Options?

The total adjustment factor for the effect of the 2:1 (2 shares for every 1 share held) bonus would be an adjustment factor of 3. Obviously, we have seen that in the above illustration that a person holding 100 shares will end up holding 300 shares post the bonus issue. As the number of shares go up 3-fold, the market price of the stock will also get adjusted downward to about one-third of the pre-bonus price. That is because, bonuses and splits are value neutral and do not have any impact on shareholder wealth. Let us first look at how the 2:1 bonus issue by Bharat Electronics Ltd (BEL) will impact futures transactions.

How the bonus will impact futures contracts of Bharat Electronics Ltd (BEL)?

Here is how the NSE Clearing will adjust the futures contracts outstanding of Bharat Electronics Ltd (BEL).  All open positions in futures contracts with the underlying security as BEL as of the end of day on September 14th, 2022 will be adjusted as under:

    • The adjusted positions will be arrived at by multiplying number of contracts in the pre-adjusted position by the adjustment factor of 3. Thus 1 lot would become 3 lots and this logic will apply irrespective of whether it is a long position or a short position in futures.

    • The adjusted price will be arrived at by dividing the pre-adjustment price by the factor of 3 so that it is reflective of the bonus. However, this is just an approximate benchmark and the actual market price will hover around these levels based on supply and demand.

    • Let us look at the impact. If you are long on 1 lot of Bharat Electronics Ltd (BEL) Futures (comprising of 3,800 shares) at a price of Rs270 as on 14th September, then post the 15th of September, the position will get adjusted such that you are long on 3 lots of Bharat Electronics Ltd (BEL) (11,400 shares) at an average price of Rs90.

There is one point to note in this adjustment of futures. To avoid differences arising due to rounding off adjusted settlement price, all open positions in futures of BEL will be marked-to-market (MTM) on September 14th, 2022 based on daily settlement price. These would be carried forward at the adjusted value. From 15th September, daily MTM settlement of futures contracts will continue as per regular procedure.

How the bonus issue will impact Options contracts of Bharat Electronics Ltd (BEL)?

Here is how the open positions in options of Bharat Electronics Ltd (BEL) will be adjusted for the bonus issue. 

    • Firstly, the strike price will be adjusted by dividing the old strike price by the adjustment factor of 3. 

    • Subsequently, the adjusted positions in options will be arrived at by multiplying the number of contracts in the pre-adjusted position by the factor of 3. 

    • Thus if you are long on 1 lot of Bharat Electronics Ltd (BEL) (3,800 shares) call option of strike price 300, then post the adjustment, you will be long on 3 lots of Bharat Electronics Ltd (BEL) (11,400 shares) at a revised strike price of Rs100.