India: Sebi Lifts Restriction On Call And Put Options In Shareholder’s Agreement

The Securities and Exchange Board of India (SEBI) had issued a notification in the year 2000 (Notification Number S.O.184 (E), dated the 1st March, 2000) by which it permitted only spot delivery contract or contract for cash or hand delivery or special delivery or contract in derivatives among the Shareholders of a Public Company imposing restriction on other forms of Contracts like contract imposing future purchase or sale obligation of Shares on the promoter or Investor of the Company respectively. The restrictions were imposed in order to prevent undesirable speculation in securities of Public Companies. Due to the restriction imposed, enforceability of clauses such as Call and Put options and preemption rights like Right of First Refusal, Tag along Rights, Drag along Rights, etc., inserted into Shareholders Agreements or Articles of Association of Public Companies, became a subject matter of litigation as they were not in line with 2000 Notification of SEBI.

SEBI in the case of Cairn-Vedanta deal and other cases was of view that put option and call option arrangements and the Right of First Refusal do not conform to the requirements of a spot delivery contract nor with that of a contract of Derivatives as provided under section 18A of the Securities Contracts (Regulation) Act, 1956 therefore they are in violation of Notification No. SO 184(E) dated March 1, 2000. However, lately a need was felt to legalise put /call option and other rights in the Agreements between Shareholders/Investors and Articles of Association of the Company as parties involved preferred such clauses in order to protect their interest. Keeping in mind the same, SEBI on 3rd October, 2013 issued Notification under section 16 and 28 of Securities Contracts (Regulation) Act, 1956 vide which it lifted the restriction imposed on insertion of clauses with respect to call and put options in Shareholders Agreements or Articles of Association of Companies. Along with call and put options, SEBI also allowed insertion of pre-emption rights like Right of First Refusal, Tag along Rights, Drag along Rights, etc. in the Shareholders Agreements or Articles of Association of Companies.


  • a. spot delivery contract;
  • b. contracts for sale or purchase of securities or
  • c. contracts in derivatives, as permissible under the Securities Contracts (Regulation) Act, 1956 or the Securities and Exchange Board of India Act, 1992 and the rules and regulations made under such Acts and rules, regulations and bye-laws of a recognized stock exchange;
  • contracts for pre-emption including right of first refusal, or tag-along or drag along rights contained in shareholders agreements or articles of association of companies or other body corporate;
  • d. contracts in shareholders agreements or articles of association of companies or other body corporate, for purchase or sale of securities pursuant to exercise of an option contained therein to buy or sell the securities, where;,/li>
    1. the title and ownership of the underlying securities is held continuously by the selling party to such contract for a minimum period of one year from the date of entering into the contract;
    2. the price or consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained therein, is in compliance with all the laws for the time being in force as applicable; and
    3. the contract is settled by way of actual delivery of the underlying securities:

The contracts specified in clauses (a) to (d) above, will have to be in accordance with the provisions of the Foreign Exchange Management Act, 1999 and rules or regulations made thereunder:

The Notification also provided that any contract for sale or purchase of government securities, gold related securities, money market securities, contracts in currency derivatives, interest rate derivatives and ready forward contracts in debt securities entered into on the recognized stock exchange shall be entered into in accordance with, —

  • the rules or regulations or the bye-laws made under the Securities Contracts (Regulation) Act, 1956 (42 of 1956), or the Securities and Exchange Board of India Act, 1992(15 of 1992) or the directions issued by the Securities and Exchange Board of India under the said Acts;
  • the rules made or guidelines or directions issued, under the Reserve Bank of India Act, 1934 (2 of 1934) or the Banking Regulations Act, 1949 (10 of 1949) or the Foreign Exchange Management Act, 1999 (42 of 1999), by the Reserve Bank of India;
  • the notifications issued by the Reserve Bank of India under the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

The 3rd October, 2013 Notification rescinded the 2000 Notification. It became effective from 3rd October, 2013 and will have a prospective effect i.e. it will be applicable only to those Agreements which are made on or after 3rd October, 2013.

Apart from the 2000 Notification of SEBI and provisions of Securities Contract (Regulation) Act, 1956, call/put options and other rights were also hit by provisions of Companies Act, 1956 and Reserve Bank of India (RBI) regulations in case of overseas investors. The new Companies Act i.e. the Companies Act, 2013 has allowed the insertion of clauses relating to options and other rights in the Articles of Association however a clarification in this regard is awaited from RBI because in case of overseas investment, RBI terms the investment as debt i.e. External Commercial Borrowings (ECB) and not equity as call/put options guarantee returns to the Investors. It is pertinent to note that the notifications and provisions of Securities Contracts (Regulation) Act, 1956 are applicable to Listed Companies as well as Unlisted Public Companies. The Hon'ble Supreme Court of India in the case of Bhagwati Developers Pvt. Ltd. vs Peerless General Finance & Investment Company Ltd and Anr. [Civil Appeal No.7445 of 2004, Judgment date 15th July, 2013], made the following observations with regards to applicability of Securities Contracts (Regulation) Act, 1956 to Unlisted Public Companies.

"When the word 'Securities' has been defined under the Regulation Act, its meaning would not vary when the same word is used at more than one place in the same Statute, otherwise it will defeat the very object of the definition Section. Accordingly, our answer to the first question set out earlier is that the provisions of the Regulation Act would cover unlisted Securities of Public Limited Company. In other words, shares of Public Limited Company not listed in the stock exchange is covered within the ambit of Regulation Act."


SEBI vide its present Notification has granted a big relief to the Companies which are planning to enter into Shareholders Agreements, Merger and Amalgamation Transactions and Private Equity (PE) deals, which fall within the ambit of Securities Contract (Regulation) Act, 1956. The relaxation was required in order to provide an exit route to the parties and to assure them of returns on their investment. The relaxation will promote domestic as well as foreign investment in Indian Companies however a clarification from RBI is awaited in this Matter.

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