Indiamart Intermesh: Bonus adjustment in F&O

Does a bonus issue impact the F&O contracts in terms of contract size and the contract price. Obviously it would. In a bonus what happens is that the company draws on the free reserves of the company and converts them into free bonus shares for the shareholders. These free reserves can either be the general reserves created out of profits or the share premium account created out of issuing an IPO at a premium to the face value. When a bonus is issued, it is free for the shareholder, but it does expand the number of shares held and reduces the price proportionately. So, the bonus is largely value neutral. Before we go to the specific case of Indiamart Intermesh Ltd, let us first look at how record date will be the first step to understanding the bonus issue treatment.

Record date for Indiamart Intermesh Bonus Issue

In its board meeting held on 28th April 2023, Indiamart Intermesh Ltd announced a bonus issue in the ratio of 1:1. That means, shareholders will get 1 share as bonus for every 1 share held on the record date. The record date for the bonus issue has been fixed at 21st June 2023. How can investors become eligible for the bonus issue? Since the record date for the bonus issue has been fixed as 21st June 2023, an investor seeking to get the bonus will have to possess the shares in demat account by the close of 21st June 2023. Obviously, if the shares have to be in the demat account by 21st June 2023, then the shares have to be purchased latest by T-1 date to be eligible for delivery. (Please note that effective February 2023, all F&O stocks have also shifted to T+1 delivery settlement cycle).

Now, since 21st June 2023 is a Wednesday, the T-1 trade date will be Tuesday, 20th June 2023 which will enable delivery by the close of 21st June 2023. That means, the investor intending to get this bonus issue in the ratio of 1:1 must purchase the shares latest by 20th June 2023 so that the shares are in the demat account by 21st June 2023, which is the record date for bonus eligibility. That means, 20th June 2023 will be the last cum-bonus date and on the next trading day i.e., 21st June 2023, Wednesday, the stock of Indiamart Intermesh Ltd will go ex-bonus. Normally, the price adjustment for any corporate action like bonus, split or dividends, happen on the ex-date. The exchange gives effect to the change after close of trading on the cum-bonus date.

Adjustment factor in Bonus issue of Indiamart Intermesh Ltd

One of the most important aspects in a bonus issue is the calculation of the adjustment factor since it goes into the F&O adjustment calculation. Let us first look at how the adjustment factor is calculated in the case of bonus and then look at how the adjustment is done for the F&O contracts of Indiamart Intermesh.

The first step is to calculate the adjustment factor. If the bonus ratio is A:B, then the adjustment factor is calculated as (A+B)/B. In the case of Indiamart Intermesh, the bonus ratio is 1:1, which means shareholders get 1 share for every 1 share held. As per the formula, the adjustment factor will be (1+1)/1 = 2. Having known the adjustment factor as “2”, let us look at how it will be adjusted for F&O contracts of Indiamart Intermesh Ltd.

• Let us first look at how the options strike price will get adjusted in the case of Indiamart Intermesh Ltd. The new strike price shall be arrived at by dividing the old strike price by the adjustment factor. Here the adjustment factor is 2.
   
• What about the futures base price? The adjusted futures base price shall be arrived at by dividing the old futures price by the adjustment factor. Here the adjustment factor is 2, so the old futures price will have to be halved in this case.
   
• Finally, what about the market lot of the futures contract. The new market lot for futures and options will be arrived at by multiplying the old market lot by the adjustment factor of 2, so in case of Indiamart Intermesh Ltd, it will be doubled.

Let us rehash this methodology with a live example. The lot size of Indiamart Intermesh in F&) is 150 shares. If you are long on Indiamart Intermesh Ltd 1 lot futures (150 shares) at ₹5,800, then post the bonus you are long on 1 lot futures (300 shares) at ₹2,900. The lot size has doubled and the futures price has been halved due to the adjustment factor of 2 in the case of Indiamart Intermesh Ltd.

Adjusting options contracts of Indiamart Intermesh Ltd for 1:1 bonus

Here is how the adjustment for options contracts of Indiamart Intermesh would happen for the 1:1 bonus.

1. Adjustment of strike price would be done as under. The adjusted strike price for the options contracts shall be arrived at by dividing the old strike price by the adjustment factor of 2. So, the old strike price of ₹5,900 will become strike price of ₹2,950.
    
2. Market Lot: The adjusted market lot shall be arrived at by multiplying the old market lot by the adjustment factor. Since the old market lot of Indiamart Intermesh was 150 shares per lot, that would not stand revised to 300 shares per lot.

Adjusting Futures contracts of Indiamart Intermesh Ltd for 1:1 bonus

Here are how the futures contracts of Indiamart Intermesh Ltd would be adjusted in the case of the 1:1 bonus issue.

• Adjustment of the Futures price would be as under. The adjusted futures price shall be arrived at by dividing the old futures price by the adjustment factor of 2. Thus, the old futures price of ₹5,800 would automatically become ₹2,900.
   
• Adjustment of the market lot would be as under. The adjusted market lot shall be arrived at by multiplying the old market lot by the adjustment factor of 2. Thus, the old lot size of 150 shares would stand modified to 300 shares per lot.

All the above changes would be implemented by the exchange after the close of trade on the cum-bonus date and will be applicable from the ex-bonus date or the record date.