Sebi Derivatives Panel Spells Out Dividend Terms

The Sebi advisory committee on derivatives said dividends which are below 10 per cent of the market value of the underlying stock, would be deemed to be ordinary dividends and no adjustment in strike prices of option contracts need be made.

However, for extraordinary dividends above 10 per cent of the market value of the underlying stock, the strike price would be adjusted.

The Sebi advisory committee on derivatives, which met here today to discuss issues related to adjustment of corporate action in the strike prices of option contracts, took these decisions.

To understand this concept the example of VSNL is given - on July 10, 2001 the company announced a total dividend of 500 per cent which amounts to Rs 50 per share including a normal dividend of Rs 10 per share. On the previous day the closing price of the scrip was Rs 309. Therefore the total dividend as a percentage of market price amounts to 16.18 per cent and therefore is considered extra-ordinary dividend. The strike price of all options contracts on VSNL would need to be adjusted.

To decide whether the dividend is extra-ordinary that market price would mean the closing price of the scrip on the day previous to the date on which the announcement of the dividend is made by the company. In cases where the announcement is made after market closing hours the same day's closing price would be taken.

In another scenario if the shareholders change the rate of dividend at the annual general meeting then to decide whether the dividend is extra-ordinary or not , would be based on the rate of dividend decided at the AGM and the closing price of the scrip on the day previous to the AGM.

Further it was also decided that in case of declaration of extra-ordinary dividend the total dividend amount would be reduced from all the strike prices of the option contracts on the relevant exchange. The revised strike prices would be applicable from the ex-dividend date specified by the exchange.

Based on this criteria in the case of VSNL the full value of the dividend - that is RS 50 would be deducted from all the cum-dividend strike prices on the ex-dividend date in the underlying market.