With the issuance on 3 October of a notification under the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India (SEBI) provided much needed clarity on the validity of contracts relating to the right of first refusal, tag-along and drag-along rights, and options to buy or sell securities (collectively referred to as “contractual rights”) contained in shareholders’ agreements or articles of association of companies.
On 1 March 2000, SEBI issued a notification prohibiting “all contracts for sale or purchase of securities”, other than spot delivery contracts or contracts for cash or hand delivery or special delivery or permitted contracts in derivatives. This created considerable difficulties for domestic as well as foreign investors, as contractual rights in one form or another were considered essential for deal-making.
The validity of contractual rights has also been the subject of litigation, with Bombay High Court holding in 2005 that a provision relating to buy-back of shares in a share purchase agreement would be invalid as it was not a spot delivery contract.
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Ranjana Roy Gawai is the managing partner and Vasudha Sen is a team leader at RRG & Associates.
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