How the NMDC F&O contract is adjusted for demerger issue

The stock of NMDC (National Minerals Development Corporation) goes ex-demerger on 27th October since 28th October is the record date for the demerger. That means the demerged shares would be an entitlement for all the shareholders of NMDC whose name appear on the roster of shareholders as of the close of 28th October, the record date. That would mean that any shareholder desirous of getting the shares of the demerged company should have the delivery of the shares as of the close on 28th October. That would only be possible if the shares were purchased latest by T-2 days to provide for demat delivery.

Since the T-2 date of 26th October is a trading and settlement holiday, the shares will have to be purchased latest by 25th October 2002 to be eligible to get the shares of the subsidiary as part of the scheme of arrangement for the demerger. Hence, 25th October would be last cum-date for the shares to be eligible for the demerger scheme. On the next trading day i.e. on 27th October, the shares would go ex-demerger and would start trading with the price adjusted accordingly. In short, from the 27ths October onwards, the price of NMDC Ltd will be adjusted downwards by the market for the demerger of the unit.

Here is what you need to know about the demerger scheme

The scheme of demerger will be executed as under.
    • The scheme of demerger will entail the demerger of the iron and steel business of NMDC with the mining business staying back in the original company, NMDC Ltd. The demerger scheme of arrangement was approved at the meeting on 13th October.

    • Under the scheme of arrangement, the record date has been fixed as October 28th, 2022 for the purpose of issuance and allotment of the shares of the demerged entity to the original eligible shareholders of NMDC as on the record date.

    • Under the scheme of arrangement, the shareholders whose names appear on the roster of shareholders at the close of 28th October, will be allotted 1 (one) equity share of Rs.10/ face value each of NMDC Iron & Steel Ltd for every 1 (one) equity share of face value of Rs10 /- to the shareholders of NMDC Limited.

    • Consequently, the ex-date for this demerger transaction would be October 27th, 2022 and the cum date would be October 25th 2022. These dates would be applicable even for F&O adjustment of the F&O contracts of NMDC as on the ex-date. Here is how the adjustment will be done for the demerger.

    • All existing open F&O contracts in the underlying shares of NMDC Ltd which are expiring on or after October 25th 2022 would be impacted. This include the contracts expiring for the months of October 2022, November 2022 and December 2022, typically referring to the monthly expiries on the last Thursday of each of these months.

    • In the case of all these 3 contracts, the existing open contracts will automatically expire on October 25th, 2022 and the same shall be physically settled as per the regular mechanism adopted in such cases. The settlement price in all these cases for the purpose of settlement will be the weighted average price of NMDC as determined by the clearing corporation under the interoperability framework.

    • It may be noted that all positions in the existing futures and options contracts on the underlying NMDC will cease to existing pursuant to the final settlement of these contracts on October 25th, 2022. Consequently, the respective pay-in and pay-out of final MTM settlement of all F&O contracts on NMDC shall be on October 27th, 2022 which is the T+1 day. In addition, the physical settlement shall be effected on October 28th, 2022 which is the T+2 day.

There will be no price adjustment done by the exchange since this is a demerger and not exactly value neutral. Hence the price would be adjusted automatically  by the forces of market interpretation. In this case, it must be noted that as per the scheme of demerger, assets worth Rs18,650 crore and liabilities worth Rs1,602 crore will be demerged from NMDC into NMDC Steel. To that extent, the valuation and price of NMDC will be adjusted downward. However, the lot size of NMDC will continue to remain at 3,350 shares. Shares of NMDC Iron & Steel will be subsequently listed on the stock exchanges.