Put and call options are an option now

In what can be perceived as a paradigm shift in a long held position, the Securities and Exchange Board of India (SEBI) on 3 October issued a notification allowing investors to include pre-emptive rights and put/call options in shareholders’ agreements and articles of association of companies. Prior to this, much confusion existed with respect to the validity of options and the issue has been the subject matter of a number of cases (Niskalp Investments, Vulcan Engineers, MCX Stock Exchange, USL Diageo, Cairn Vedanta, etc.).

SEBI was earlier of the view that a put/call option to foreign investors would amount to a one-to-one derivative contract, and such contracts were largely not enforceable pursuant to the Securities Contracts (Regulation) Act, 1956.

Pursuant to the above notification, which supersedes the earlier notification dated 1 March 2000, in addition to spot delivery contracts and sale and purchase contracts of securities or derivatives through a recognized stock exchange (which were already permitted earlier), contracts for pre-emption – including right of first refusal and tag-along/drag-along rights contained in shareholders’ agreements or articles of association of companies – will now be valid without requiring prior permission of SEBI.

Pankaj Agarwal is a partner, Hrishikesh Waghela is a senior associate and Amit Kumar is an associate at Amarchand & Mangaldas & Suresh A Shroff & Co, Ahmedabad. The views expressed in this article are those of the authors and do not reflect the position of the firm.