How the F&O contracts of Motherson Sumi Ltd will be adjusted

The NSE (in its circular) has laid out the process flow for adjustment of futures and options contracts of Motherson Sumi Ltd. The company had announced a 1:2 bonus via the capitalization of the free reserves of the company. The record date for the bonus eligibility has been fixed as 05th October, so the last cum-bonus date for the bonus eligibility will be 03rd October. The ex-date for this 1:2 bonus issue of Motherson Sumi Ltd has been fixed as 04th October, which means investors must have to buy the shares of Motherson Sumi Ltd latest by 03rd October to have it credited in their demat accounts by 05th October evening to be eligible for the bonus shares. On 04th October, the stock goes ex-bonus.

Let us first understand how an investor holding 100 shares of Motherson Sumi Ltd will be impacted by this corporate action. Let us look at the 1:2 bonus in this case. Due to the bonus via capitalization of reserves, the number of shares held will increase 50% from 100 shares to 150 shares. Thus the person holding 100 shares of Motherson Sumi Ltd on 03rd October will be holding 150 shares post the bonus issue.

How bonus will be adjusted in Futures & Options?

The total adjustment factor for the effect of the 1:2 (1 shares for every 2 share held) bonus would be an adjustment factor of 1.50. Obviously, we have seen that in the above illustration a person holding 100 shares will end up holding 150 shares post the bonus issue. As the number of shares go up 1.50 times, the market price of the stock will also get adjusted downward to about 1/1.50 or two-thirds of the pre-bonus price. That is because, bonuses are value neutral and do not have any impact on shareholder wealth. Let us first look at how the 1:2 bonus issue by Motherson Sumi Ltd will impact futures transactions.

How the bonus will impact futures contracts of Motherson Sumi Ltd?

Here is how the NSE Clearing will adjust the futures contracts outstanding of Motherson Sumi Ltd. All open positions in futures contracts with the underlying security as MOTHERSON as of the end of day on October 03rd, 2022 will be adjusted as under:

    • The adjusted positions will be arrived at by multiplying contract size in the pre-adjusted position by the adjustment factor of 1.50. Thus market lot of 4,500 shares would become market lot of 6,750 shares. 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 1.50 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 Motherson Sumi Ltd Futures (comprising of 4,500 shares) at a price of Rs120 as on 03rd October, then post the 04th of October, the position will get adjusted such that you are long on 1 lot of Motherson Sumi Ltd (6,750 shares) at an average price of Rs80.

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 October 04th, 2022 based on daily settlement price. These would be carried forward at the adjusted value. From 05th October, daily MTM settlement of futures contracts will continue as per regular procedure.

How the bonus issue will impact Options contracts of Motherson Sumi Ltd?

Here is how the open positions in options of Motherson Sumi Ltd 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 1.50. 

    • 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 1.50. 

    • Thus if you are long on 1 lot of Motherson Sumi Ltd (4,500 shares) call option of strike price 105, then post the adjustment, you will be long on 1 lot of Motherson Sumi Ltd (6,750 shares) at a revised strike price of Rs70.