It is an impact initiated grenade. During flight, the propeller on the nose rotates down to arm. The grenade is actually a stick grenade, hidden by the cloth. The cloth is to help it orient itself nose forward in flight for the propeller.
However, it became apparent that the Mk 1 grenade was quite difficult to use in the field. The grenades were often not ignited properly before being thrown, and enemies would return the grenade, this time properly lit.