Securities and Exchange Board of India (SEBI) is considering reviewing adjustment rules for dividend in Futures and Options (F&O) scrips. In a recent meeting of a SEBI committee, the issue was discussed and finally a consensus emerged, to review and bring it down, to 2 percent and above. 

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Currently, dividends that are below 5 per cent of the market value of the underlying stock are deemed ordinary dividends and no adjustment in the strike price is made. As per sources aware of the development the “The report of the working group was presented, and it came out that majority of the dividends were less than or equal to 2 percent of the market price of the scrip, so the committee agreed to bring it down to 2 percent and above". 

Experts believe that such move will be good for F&O position holders. Vikas Sethi of Sethi Finmart says that” This is a welcome step and there is no justification for not passing benefits of the corporate action to F&O position holders, in cases where the dividend is less than 5 percent of market price of scrip.”   

The committee also discussed to bring it further up to zero, but the issue will be taken later. SEBI may come up with revised circular on the issue. SEBI may also consider forming a working group for reviewing adjustments of all corporate actions in the F&O shares. To decide if the dividend is extraordinary, the closing price of the share on the previous day is taken. But when announcement of dividend is made post market hours, the same day’s closing price is considered as the market price.  

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Impact of dividend on F&O Position  

Declaration of dividend results in adjustment in the F&O contracts of the underlying stock. The basis for any adjustment for corporate actions is usually such that the value of the position of the trader on the cum and ex-date of the dividend, continue to remain the same as much as possible. The adjustments for dividend will be on all open positions. 

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How the dividend gets adjusted? 

Adjustments for F&O Contracts, usually base price of the Futures Contract on ex-date acts as a reference rate minus aggregate amount of dividend. The reference rate to be reckoned for this purpose is the daily mark to market settlement price of the relevant futures contract. In case of adjustments for Options Contracts, the full value of dividend is deducted from all the cum-dividend strike prices on the ex-dividend date.