Review of the eligibility criteria of stocks for derivatives trading especially on account of corporate restructuring

Jan 20, 2006
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Circulars

N. PARAKH

CHIEF GENERAL MANAGER

DNPD/Cir-31/2006

January 20, 2006

 

To

The Managing Director of NSE, BSE and their Clearing House / Corporation

 

Review of the eligibility criteria of stocks for derivatives trading especially on account of corporate restructuring

 

Dear Sir,

 

  • This is in continuation of the SEBI circulars No.SMDRP/DC/CIR-8/01 dated June 21, 2001, SMDRP/DC/CIR-15/02 dated December 18, 2002 and no. SEBI/DNPD/Cir-28/2004/12/07 dated December 8, 2004 regarding adjustment in derivative contracts at the time of corporate action, it is advised that the exchanges shall apply the eligibility criteria in line with the principles followed in the case of introduction of derivatives on stocks of large companies immediately upon listing. The eligibility criteria for stocks for derivatives trading on account of corporate restructuring shall be as under:

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    1. All the following conditions shall be met in the case of shares of a company undergoing restructuring through any means for eligibility to re-introduce derivative contracts on that company from the first day of listing of the post restructured company/(s) ’s (as the case may be) stock (herein referred to as post restructured company) in the underlying market,

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    a)      the Futures and options contracts on the stock of the original (pre restructure) company were traded on any exchange prior to its restructuring;

    b)      the pre restructured company had a market capitalisation of at least Rs.1000 crores prior to its restructuring;

    c)      the post restructured company would be treated like a new stock and if it is, in the opinion of the exchange, likely to be at least one-third the size of the pre restructuring company in terms of revenues, or assets, or (where appropriate) analyst valuations; and

    d)      in the opinion of the exchange, the scheme of restructuring does not suggest that the post restructured company would have any characteristic (for example extremely low free float) that would render the company ineligible for derivatives trading,

     

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    1. If the above conditions are satisfied, then the exchange shall take the following course of action in dealing with the existing derivative contracts on the pre-restructured company and introduction of fresh contracts on the post restructured company

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    a)      In the contract month in which the post restructured company begins to trade, the Exchange shall introduce near month, middle month and far month derivative contracts on the stock of the restructured company.

     

    b)      In subsequent contract months, the normal rules for entry and exit of stocks in terms of eligibility requirements would apply. If these tests are not met, the exchange shall not permit further derivative contracts on this stock and future month series shall not be introduced.

     

  • The circular shall be implemented with immediate effect.

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  • This circular is being issued in exercise of powers conferred by section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with section 10 of the Securities Contract (Regulation) Act, 1956, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

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    Yours sincerely,

     

    (N. PARAKH)