CHIEF GENERAL MANAGER

DERIVATIVE CELL

SMDRP/DC/CIR-15/02

December 18, 2002

To,

The Chief Executive Officer/ Managing Director of Derivative Segment of NSE & BSE and their Clearing House / Corporation.

Dear Sir,

Sub: Adjustment in Stock Option Contracts and Single Stock Futures Contracts at the time of Corporate Action.

This is in continuation with SEBI Circular No.SMDRP/DC/CIR-8/01 dated June 21, 2001 and SEBI Circular No.SMD/DC/Cir-10/01 dated November 2, 2001 regarding adjustment in derivative contracts at the time of corporate action. The aforesaid circulars were addressed to SEBI approved Derivative Exchange / Segment and their Clearing House / Corporation (hereinafter collectively referred to as Exchange).

SEBI had setup an Advisory Committee on Derivatives (ACD) headed by Prof. J. R Varma to inter alia, recommend appropriate policy for adjustment in derivative contracts at the time of corporate action. The Advisory Committee gave its recommendation in its report on “Development and Regulation of Derivative Markets in India”. The report of the Advisory Committee was placed on the SEBI website for public comments. The SEBI Board in its meeting on November 29, 2002 considered the recommendations made in the report and also considered the comments received from the public.

In view of the experience already gained by the Exchanges (The Stock Exchange, Mumbai (BSE) and The National Stock Exchange of India Ltd (NSE)) in the treatment of corporate actions, the sub-committee of the ACD constituted to determine the manner of adjustment in derivative contracts at the time of corporate action, is being dissolved.

The Exchanges may now determine the manner of adjustment in derivative contracts at the time of corporate actions in conformity with the following principles:-

The basis for any adjustment for corporate action shall be such that the value of the position of the market participants on cum and ex-date for corporate action shall continue to remain the same as far as possible.
The exchanges shall take into account best practices followed internationally.
The exchanges shall act consistent with SEBI Circular No. SMDRP/DC/Cir-8/01 dated June 21, 2001 on adjustment for corporate actions as well as the decisions of the erstwhile sub-committee on corporate actions.
The Exchanges shall consider the circumstances of a particular case and the general interest of investors in the market.
The Exchanges shall ensure that the adjustment methodology for a corporate action is uniform across all exchanges.
Yours sincerely,

N. PARAKH

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