Wednesday, January 15, 2014


Coal India futures are outperforming the stock by 4% and today is not even ex-date. So what really happened here?

The essence of the situation lies in the special situation rule that exchanges have in treating futures and options contract. Normally the stock is adjusted for dividend in cash market but the same adjustment is not carried out in futures and hence, in earnings season, some of the index stocks tend to go into discount as they factor in the dividend impact. However, if the dividend is more than 10% of the market price, this falls into special category and even the futures prices are adjusted to reflect that.

What this means in simple terms is that come the ex-date, Coal India future price will also be deducted by 29 Rupees to arrive at previous day’s price. If you shorted Coal India and hence on ex-date you see the price lower by 29 Rupees, don’t cheer it – you are not getting this money.

The case of Coal India was curious. By late afternoon the gap between spot and futures was over 20 points but by the time the trade wound up the discount had narrowed to 12 points. So clearly, there was some big buying in Coal India futures before the markets closed yesterday. Were some of these market participants sure of an over 10% dividend? And if you had bought the future yesterday, you would be sitting on a gain of nearly 40-50% on your margin money given the big move in future.

What makes it even more interesting is the dividend component. A dividend of Rs 29 is 10.03% of the market price of Coal India. Even 10 paise lower and the dividend would have been less than 10% and miraculously, the discount would have widened again today to nearly 28 Rupees instead of converging with future price.

So really, should a 10% move on future price be dependent on a differential of 10-50 paise in dividend? And what would have been the reaction if this was a private company? These are some important questions. May be time has come for the exchange to do away with this special situation rule being applied only if the dividend exceeds a certain percentage. Let them do it for all dividends. It will take away some fun on stock futures trading but it will make the process a lot more transparent.