InvestorQ : How will the F&O contracts of REC Ltd get adjusted for the interim dividend payout?
Aditi Sharma made post

How will the F&O contracts of REC Ltd get adjusted for the interim dividend payout?

Mahima Roy answered.
3 weeks ago

Do dividends get adjusted to the F&O contracts and how do they get adjusted. Here is a quick case study of how it was done in the case of REC Ltd, which just declared interim dividend of Rs5 per share. In its meeting on 27th October 2022, the board of directors of REC approved an Interim Dividend of Rs 5/- per equity share. The record date was fixed at November 09th, 2022. Since 09th November is a Wednesday, the T-2 trade date will be Friday 04th November 2022. Investor intending to get interim dividend of Rs5 per share had to buy the shares latest by 04th November to get shares in demat by end of 09 November.

The adjustment of rights, bonuses and splits on F&O contracts is fairly straightforward. The idea is to keep the value neutral. However, dividend is slightly more complicated and there are different cases available. Let us now look at how the dividends will be adjusted to the F&O contracts. If the dividend declared is less than 2% of the market value of the underlying stock, it is deemed to be ordinary dividend. In such cases, no adjustment to the Strike Price would be made. Only if the dividend is above 2% of the market value, it is classified as extraordinary dividend and then the adjustment is made to the strike price of F&O contract.

Originally, when this rule was introduced, SEBI had fixed 10% of the market value of dividends as the cut-off for extraordinary dividends. This created a problem since most large companies announce interim dividends, so the cumulative picture was hard to fathom. That is why this cut-off was reduced from 10% to 5% and then to 2%, which is where it stands now. In the case of REC Ltd, the relevant price is Rs96.50 which is the price on the close of the day on which this dividend was announced after the board meet. Now this dividend of Rs5 per share works out to 5.18%. Since it exceeds 2%, it is extraordinary dividend.

Let us now move to the actual adjustment for such extraordinary dividends. In case of extraordinary dividends, total dividend amount will be reduced from all the strike prices of the option contracts on that stock and the revised strike prices will apply from the ex-dividend date onwards. Here is how it is done.

a) In case of futures contracts on REC, the base price of the Futures contracts on November 04th, 2022 will be the reference rate less the aggregate amount of Rs5 per share.

b) In the case of options contract, the dividend of Rs5/- per share will be deducted from all the cum-dividend strike prices on the ex-dividend date to arrive at ex-dividend strikes.

These adjustments will be implemented on the last day on which a security is traded on cum-basis in the equities market, after the close of trading hours.