What Happens To F&O Holdings In A Bonus Issue? LIC's 1:1 Bonus Issue Explained

After the shares of Life Insurance Corporation of India (LIC) turned ex-bonus on May 29, many investors noticed that its stock price had nearly halved. However, this does not mean shareholders suffered a loss. The price adjustment is a normal part of a bonus issue, where investors receive additional shares, while the stock price is adjusted accordingly. As a result, the overall value of their investment remains largely unchanged.

But what exactly changes in your portfolio after a bonus issue? How should investors calculate their gains or losses? And what happens if they hold futures and options (F&O) positions in the stock? That’s what we are going to discuss here.

How Equity Holdings Get Adjusted

A bonus issue involves a company distributing additional shares to existing shareholders by capitalising a portion of its reserves. In LIC's case, shareholders became eligible to receive one additional share for every share held on the record date.

The adjustment works through a simple mathematical process. Suppose an investor owned one LIC share trading at Rs 830 before the stock turned ex-bonus.

Before the bonus issue:

1 share × Rs 830 = Rs 830

Following the 1:1 bonus issue, the investor receives one additional share. The total shareholding rises to two shares. Since the number of shares has doubled, the stock price is adjusted proportionately by exchanges.

After the bonus adjustment:

2 shares × Rs 415 = Rs 830

While the market price per share falls by around 50 per cent, the investor's total investment value remains the same immediately after the adjustment.

The bonus shares are generally credited to investors' demat accounts within the prescribed settlement cycle after the record date. Until the credit is completed, investors may temporarily see a mismatch between the adjusted stock price and the number of shares reflected in their portfolio.

Impact on Profit & Loss (P&L)

One of the most common misconceptions around bonus issues is that the sharp decline in share price results in a loss for shareholders.

In reality, investors need to evaluate their gains or losses after accounting for the increased share count and the revised acquisition cost.

Consider an investor who purchased one LIC share at Rs 700 before the bonus issue.

Before bonus:

Cost = 1 share × Rs 700 = Rs 700

After a 1:1 bonus issue, the investor owns two shares. Since the original investment cost remains Rs 700, the effective acquisition cost gets spread across both shares.

Revised cost per share:

Rs 700 ÷ 2 = Rs 350

If the adjusted market price is Rs 415 per share, the holding value becomes:

2 shares × Rs 415 = Rs 830

Total gain:

Rs 830 − Rs 700 = Rs 130

Therefore, investors should compare the current value of their entire holding with their total acquisition cost rather than focusing solely on the adjusted share price.

This is also why the apparent 50 per cent decline in the stock price on the ex-bonus date should not be interpreted as an actual loss. The fall merely reflects the increased number of shares in circulation.

Impact on F&O Holdings

Bonus issues also require adjustments in F&O contracts to ensure that traders with open derivative positions are not adversely affected.

These changes are carried out through a corporate action adjustment mechanism prescribed by exchanges. The purpose is to maintain the economic value of open derivative positions before and after the bonus issue. In other words, traders should neither gain nor lose simply because the company has issued bonus shares.

In a 1:1 bonus issue, the adjustment factor is two because the number of shares doubles.

Accordingly, futures prices and option strike prices are reduced proportionately, while the market lot size is increased in the same ratio. These changes are designed to keep the overall contract value broadly unchanged.

As a result, although the contract specifications may look different after the adjustment, the underlying economic exposure of the trader remains largely the same. Any subsequent profit or loss depends on the stock's price movement after the bonus issue and not on the corporate action itself.

Consider a hypothetical example based on a 1:1 bonus issue.

Assume an options contract has:

Strike price: Rs 100

Market lot: 500 shares

Following the bonus adjustment:

Revised strike price = Rs 100 ÷ 2 = Rs 50

Revised lot size = 500 × 2 = 1,000 shares

Before adjustment, the notional contract value was:

500 × Rs 100 = Rs 50,000

After adjustment:

1,000 × Rs 50 = Rs 50,000

The contract value remains unchanged despite changes in strike price and lot size.

The same principle applies to futures contracts. Exchange adjustments ensure that traders neither gain nor lose merely because the company has issued bonus shares. Any profit or loss continues to depend on subsequent movements in the underlying stock price.

Without such adjustments, derivative holders could face artificial gains or losses arising solely from the corporate action rather than market movements.

What Shareholders Need To Know

A bonus issue is primarily an accounting exercise that converts a portion of a company's reserves into share capital. Existing shareholders receive additional shares, while the stock price adjusts proportionately to reflect the larger share base.

For equity investors, the total value of their holdings remains broadly unchanged immediately after the adjustment. For derivative traders, exchanges modify futures prices, option strike prices and market lot sizes to preserve the economic value of open contracts.