Oracle Financial Services Software F&O contracts dividend adjustment

In its meeting held on 26th April 2023, the board of directors of Oracle Financial Services Software (OFSS) Ltd has approved an Interim Dividend pay-out of Rs 225/- per equity share of face value of Rs. 5/- each. For the purpose of interim dividend eligibility, the record date has been fixed as 09th May 2023. That means an investor seeking to get the interim dividend will have to possess the shares in his / her demat account by the close of 09th May 2023. Obviously, if the shares have to be in the demat account by 09th May 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 09th May 2023 is a Tuesday, the T-1 trade date will be Monday, 08th May 2023 which will enable delivery by the close of 09th May 2023. That means, the investor intending to get this interim dividend of Rs225 per share has to purchase the shares latest by 08th May 2023 so that the shares are in the demat account by 09th May 2023, which is the record date for dividend eligibility. That means, 08th May 2023 will be the last cum-dividend date and on the next trading day i.e., 09th May 2023, Tuesday, the stock of Oracle Financial Services Software (OFSS) Ltd will go ex-dividend. Normally, the price adjustment for any corporate action happens on the ex-date depending on the type and the size of the corporate action.

Corporate action adjustment in F&O contracts?

This is a slightly nuanced issue. But before we get into the dividend part of it, remember that all corporate actions like bonus issues, rights and stock splits require the F&O adjustment to take place automatically. The F&O adjustment takes place in terms of the strike price of the options contract, the market lot or the market multiplier and the size of the position held by the investor in the futures market. While the adjustment for bonuses and splits are fairly straightforward, the F&O adjustment for dividend payments is slightly more nuanced and convoluted due to different definitions of dividend. Eventually, it boils down to whether the dividend so declared is classified as an ordinary dividend or it is an extraordinary dividend. Here is how it is done.

How and when are dividends adjusted in the case of F&O contracts?

That brings us to the basic question how and when are dividend adjustments made to the F&O contracts. It depends on whether the dividend so declared is an ordinary dividend or an extraordinary dividend. Here is how this decision is made. If the dividend declared is below 2% of the market value of the underlying stock, it would be deemed to be ordinary dividends. In such cases, no adjustment in the Strike Price would be made for ordinary dividends. However, in case the dividend is above 2% of the market value, then the adjustment is made to the strike price of the F&O contract and to futures price.

There is a slight background to this that we need to understand on how the dividend definition has evolved. Initially, when the extraordinary dividend rule was set by SEBI, it was decided to keep 10% of the market value worth of dividends as the cut-off for extraordinary. However, this created a problem since today most of the large companies (especially F&O companies) pay interim dividends. Hence it may be tough to get a cumulative picture. Hence, the threshold was first reduced from 10% to 5% and then to 2%, which is where it stands now. In the case of Oracle Financial Services Software (OFSS) Ltd, the relevant price was Rs3,467.25 and the dividend of Rs225 per share works out to 6.49%. Since this exceeds 2%, it would be classified as a case of extraordinary dividend.

The other question is what is the cut-off date considered to decide whether the dividend is ordinary or extraordinary? Here, the market price would mean the closing price of the stock on the day previous to the date on which the announcement of the dividend was made by the Company post the meeting of the Board of Directors. However, in case where the announcement of dividend is made after market hours, same day's closing price is taken as the market price. In the case of ordinary dividends i.e., less than 2% of the price, no adjustment is made by the exchange and the dividend gets adjusted in the market price. Let us now turn to how the adjustment is made in the case of extraordinary dividends.

Adjustment process for dividends in F&O

In case the dividend is classified as extraordinary dividend based on the criteria above, the total dividend amount would be reduced from all the strike prices of the option contracts on that stock. Therefore, the revised strike prices would be applicable from the ex-dividend date, which is now also the record date under the T+1 rolling settlement cycle system. Here are some of the key points that you need to be aware of.

1. In the case of futures contracts on Oracle Financial Services Software (OFSS) Ltd, the base price of the Futures contracts on 09th May 2023 will be the reference rate less the aggregate amount of Rs225 per share. The reference rate will be the daily MTM settlement price. If you are long on Oracle Financial Services Software (OFSS) Ltd futures at a price of Rs3,525; then post the extraordinary dividend of Rs225, you are long on Oracle Financial Services Software (OFSS) Ltd futures at Rs3,300 effective price.
    

2. In the case of options contract, the dividend i.e., Rs225/- per share will be deducted from all the cum-dividend strike prices on the ex-dividend date. Therefore, the strike price of Rs3,500 will become strike price of Rs3,275, while Rs3,600 becomes Rs3,375, and so on.
    

3. All such adjustment for corporate actions would be carried out on the last day on which a security is traded on cum-basis (T-1 day) in the underlying equities market, after the close of trading hours.