India: Put And Call Options For Directors And Key Managerial Personnel Under The Companies Act, 2013 – A Closer Look

Section 194 of the Companies Act, 2013 (the 'Act') prohibits directors and key managerial personnel ('KMPs') from executing contracts / arrangements that permit them to exercise a 'right to call for delivery or a right to make delivery' of shares of a company in which they are directors and KMPs ('Relevant Company'). The aforesaid restriction also extends to securities in the holding company, associate company and subsidiary of the Relevant Company.

For the sake of clarity, Section 194(1) of the Act reads as follows:

No Director of a company or any of its key managerial personnel shall buy in the company, or in its holding, subsidiary or associate company—

(a) a right to call for delivery or a right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or

(b) a right, as he may elect, to call for delivery or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.

The legislative intent behind Section 194 of the Act is aimed at preventing directors and KMPs from acquiring the right to exercise call / put options in respect of shares of the Relevant Company, as they are likely to have access to insider information, which are potentially price sensitive in nature, and can therefore provide directors and KMPs undue advantage over outsiders (including other shareholders). Permitting directors and KMPs with access to confidential / insider information to enter into forward contracts in securities of the Relevant Company could induce them to act for their personal gains, rather than the benefit of the Relevant Company, and induce speculation in securities of the Relevant Company, which is sought to be curbed under Section 194 of the Act.

While the intention of Section 194 of the Act is to ensure directors and KMPs adhere to their fiduciary duties, the current wording of the said provision gives rise to certain interpretational ambiguities. This article is intended to provide a brief insight into some of the technical interpretation issues lawyers may face when interpreting the provisions of Section 194 of the Act.

At the outset, the language set out in Section 194(1)(a) and Section 194(1)(b) appear to be almost identical. In fact, the only difference between the said provisions appears to be the usage of the phrase "as he may elect", which has been used in Section 194(1)(b). Further, it is to be noted that Section 194(1)(a) prevents a director or KMP from buying in the Relevant Company, "a right to call for delivery" or a "right to make a delivery", the securities of the Relevant Company. Therefore, it is reasonable to assume that sub-clause (a) prevents the director / KMP from acquiring a right to call or put shares of the Relevant Company, and such 'right' will be exercised by such director / KMP 'as he / she may elect', which is also provided for in sub-clause (b). In light of the foregoing, prima facie, there appears to be little difference between the scope of the provisions in sub-clause (a) and (b).

Secondly, while Section 194(1) applies to all 'directors' and key managerial personnel, the Explanation to the said provision uses the term 'whole-time director', and appears to suggest that the restriction set out in Section 194(1) of the Act applies only to whole-time directors. Therefore, there appears to be a little ambiguity on the scope of Section 194 of the Act, to the extent as to whether the said restriction applies to all directors of a company (including non-executive and independent directors), or whether the said provision only applies to whole-time directors. Given that the legislative intent of the said provision appears to ensure that persons with insider information / confidential information do not enter into forward contracts in respect of the shares of the Relevant Company, there would be no apparent reason for the said provision to apply only to whole-time directors, and not to other directors.

Thirdly, the restriction set out in Section 194(1) applies in case the call option / put option available to the directors / KMP, is exercisable at a specified price and within a specified time period. Therefore, it is clear that the restriction in the said provision will apply only in case the call / put option is subject to a specified price and is required to be exercised within a specified time period. In the considered view of the authors, the aforesaid requirements could potentially provide some loop holes / leeway for directors / KMPs to enter into put / call option contracts in respect of shares of companies they are directors / KMPs of, without providing for a specified price or a specific time period, and look to avoid the restrictions set out in Section 194 of the Act. However, not providing for a specified price or a specified time period could potentially render such option contracts void due to uncertainty under the Indian Contract Act, 1872.

Further, put / call options in shareholder agreements are often subject to a formula and not necessarily a fixed price / price range, expressed in numerical terms. Therefore, there does appear to be uncertainty as to whether directors / KMPs can acquire put / call options in respect of shares of the Relevant Company based on a formula based pricing mechanism, and fall out of the rigours of Section 194 of the Act. Having said that, given the legislative intent behind Section 194 of the Act, such an approach is unlikely to be viewed favourably by the regulatory authorities, and such an approach can be said to defeat the spirit and intent of the said provision, and therefore, not advisable.

It is noteworthy to mention that Section 194 of the Act continues to apply to directors and KMPs of even private companies, and not just public companies. Restrictions on forward dealing are intended to prevent speculation on prices of shares, and is more relevant in listed public companies, rather than private companies; which are often closely held. Therefore, the legislative intent behind extending the scope of Section 194 of the Act to private companies continues to be confounding. In fact, the Companies Law Committee has taken cognizance of the foregoing, and has noted that the regulations formulated by Securities and Exchange Board of India are comprehensive in restricting forward dealing, as they also apply to companies intending to get listed1, and has proposed to remove Section 194 from the Act altogether (which would consequently render the provision inapplicable to private companies). However, no such decision appears to have been made and as on date, the said provision applies to all Indian companies, including private companies.

* The contents of this article do not necessarily reflect the views / position of Khaitan & Co, but remain solely those of the authors.


[1] Report of the Companies Law Committee, Ministry of Corporate Affairs, Government of India dated 1 February 2016 at Para 12.23

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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