Implications of Bonus Shares on NMDC Limited

NMDC Limited has announced a bonus share in the ratio 2:1. The Company has fixed Friday, December 27, 2024 as the Record Date.

What is adjustment factor in NMDC Limited?

Adjustment factor for Bonus share of A: B is defined as (A+B)/B.

In the case of NMDC LIMITED, the adjustment factor is (2+1)/1 = 3

What will be the new Strike price & lot size for Options?

Strike Price: The adjusted strike price will be arrived at by dividing the old strike price by the adjustment factor i.e., 3.

Lot Size: The adjusted lot size will be arrived at by multiplying the old market lot by the adjustment factor.

Old lot size=4500

Adjustment factor = 3

New lot size = 4500*2= 13500

What is the new price for future contracts?

You can calculate the same as follow

= (Closing price / Adjustment factor) *New lot size 

= (Closing price / 3) * 13500

What will happen to F&O open positions in NMDC Limited?

For clients holding F&O contracts expiring on 30^th January, 2025, 27^th February, 2025, 27^th March, 2025: These contracts shall expire on respective expiries & will be adjusted according to the framework prescribed by SEBI. The adjustment for Futures will be Price and Lot Size & for Options will be Strike Price and Lot Size and option premium.

How price is calculated?

Let’s walk through an example to demonstrate the impact of the 2:1 bonus share issue on both Futures and Options positions in NMDC.

Scenario: Pre-bonus

NMDC Stock price: ₹215

Lot Size for Futures & Options: 4500 shares per lot

Option Strike Price (Call Option): ₹220

Option Premium: ₹12 per share

Position:

1 lot of NMDC Futures (Long) at ₹215

1 lot of NMDC Call Option (Long) with ₹220 strike price and premium of ₹12

Post-bonus: Impact on Position

Impact on Futures Position: 

Price Adjustment: Post the 2:1 bonus issue, the price of the futures contract will be adjusted downward. If the pre-bonus price was ₹215, the post-bonus price will be approximately 3 times lower to ₹71.6666 (subject to market behaviour).

Lot Size Adjustment: The lot size will double from 4500 shares to 13500 shares.

Value of Position:

Pre-bonus Value of Futures: ₹215 × 4500 = ₹9,67,500

Post-bonus Value of Futures: ₹71.6666 × 13500 = ₹9,67,500

The notional value of the futures contract remains the same at ₹6,75,000, so the value of your position is not affected in terms of total worth.

Impact on Options Position:

Value of Position:

Pre-bonus Value of Options: ₹12 (premium) × 4500 (shares) = ₹54,000

Post-bonus Value of Options: ₹4 (premium) × 13500 (shares) = ₹54,000

Like the futures, the notional value of your options position remains the same at ₹54,000.

Summary of Impact:

1. Futures:

The price will be 3 times lower (from ₹215 to ₹71.66), but the lot size will double (from 4500 to 13500).

The overall value of your futures position remains the same.

2. Options:

The strike price and premium will be changed (strike price from ₹220 to ₹73.33, premium

from ₹12 to ₹4), and the lot size will double (from 4500 to 13500).

The total value of your options position also remains unchanged.

What is the impact on my mark to market settlement?

Since the futures price will be adjusted, clients' MTM values will also reflect this change. However, the overall position in value terms should remain neutral because both the price and the lot size change in proportion.

Will the open interest change after the bonus share, and how is it adjusted?

The open interest in terms of the number of contracts or lots held remains the same, but the actual number of shares in each contract changes. So, while the contract count doesn't change, the shares per contract do, ensuring the overall position value is unaffected.

Is there any change in margin requirements due to the bonus share?

Typically, the margin requirements are adjusted to reflect the new lot size and contract price. Since the value of the position remains the same, there is no significant change in the total margin required. However, brokers may notify any minor adjustments for operational purposes.

What is the margin required for revised RELIANCE INDUSTRIED LIMITED contracts?

Margin will be as per the exchange rule of SPAN + ELM

Can I carry over my existing F&O positions after bonus shares, or do I need to take any action?

Yes, you can carry over your existing F&O positions after bonus shares. The exchange automatically adjusts the strike price, lot size, and contract terms, so you don’t need to take any specific action. However, it’s essential to monitor any notifications from your broker or the exchange for smooth handling of the adjustment.

When will the adjustment be reflected?

The adjustments in F&O positions will be made by the exchange at the time of the ex-bonus date (27^th December 2024). The expected changes to be seen on the next trading day.

What happens if I exit my position before the ex-bonus date?

If you exit F&O position before the ex-bonus date, they will not be affected by the bonus adjustment. The exit will occur at the market prices prior to the adjustment.

How one can check corporate action while having an open position?

It is shown in order book in offline mode. The changes will reflect before the execution date, on your F&O open position as shown in example below:

Will it impact my profit / losses?

No, it does not affect your profit and losses as the contract value remains unchanged.

Only strike prices, lot size and premium will be adjusted accordingly.

What will be the impact on portfolio?

The portfolio will show the following transactions.

Adjustments in portfolio are shown as below for the reference:

For Example - 550-PE, 540-PE, 520-PE strikes is valued at 110-PE, 108-PE, 104-PE respectively as shown above in portfolio details.

Transactions will show the price adjustment at ₹0.05 with adjusted strike price with adjusted lot size as shown below:

 Overall Trading impact on 27^th November,2024

Your total position value is unaffected by the bonus; it's just the numerical parameters (strike price, lot size, and premium) that are adjusted accordingly. One can exit its position partially as the number of lot size is increased.

In summary, the bonus shares only adjust the numerical values of strike prices, lot sizes, and premiums while keeping the overall value of F&O positions unchanged.

Points to Remember:

-Review Portfolio: Clients should be advised to review their portfolio post-adjustment to ensure everything is in order.

-Monitor Volatility: Bonus issues can lead to some short-term volatility in stock prices, which may affect options premiums and futures prices.

-The bonus issue is a neutral event in terms of your position value.

-Take actions accordingly if you want to modify or exit your position or you can partially square off too.

It is advisable to monitor F&O positions in NMDC LIMITED and take timely action.