Enforcing put options as a method of investor exit

Much has been written about the enforceability of put options generally, and as a means of investor exit. The Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have both questioned the enforceability of put options at different points in time but the enforceability of these instruments remains uncertain.

Joint venture and investment agreements often contain put option arrangements among shareholders. A put option contract is a key liquidity right for investors, and is often the only form of exit available for an investment in an unlisted company.

Early prohibitions

Enforceability of put options first came under the scanner when the Securities Contracts (Regulation) Act, 1956 (SCRA), prohibited options in securities and declared all such options to be illegal. This restriction was removed in 1995, reflecting the legislative intent to legalize options in securities. However, the 1995 amendment did not remove all ambiguities, as put options in securities became the subject of a legal debate on the sale and purchase of securities on a spot delivery basis.

Shilpa Mankar Ahluwalia is a partner and Kushagra Priyadarshani is a senior associate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.