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Monday, July 16, 2018

Sebi allows call,put options in M&As

A call option gives the holder the right to buy shares in a transaction in the future.

Written by ENS Economic Bureau | New Delhi | Published: October 4, 2013 3:33:47 am

Market regulator Securities and Exchange Board of India (Sebi) on Thursday allowed companies entering into mergers and acquisitions deals to include put and call options in their documents.

This will bring M&A regulations in India on par with the best international practices and encourage local companies to work their deals through Indian courts than abroad.

The Sebi notification issued said put and call options as well as clauses like “right of first refusal,tag-along and drag-along” will now be valid legal expression in share purchase agreements. A call option gives the holder the right to buy shares in a transaction in the future while a put option is the reverse of it. The options increase the bargaining powers of the parties to a deal.

Several major M&A involving Indian parties had got stuck on these issues including the Diageo-United Spririts deal and the Cairn-Vedanta deal. These faced regulatory hurdles since there was no clarity on the legal validity of these clauses in the papers approved by the parties to the deal.

Lalit Kumar,partner J Sagar Associates,one of India’s major corporate law firms said the Sebi notification was welcome. “It certainly makes India a preferred option for corporate deals. The amendments were put into motion by the Sebi and the law ministry some months ago”.

Right of refusal gives one of the parties in an M&A deal the first option to buyout its partner in the event of the latter wishing to exit from the agreement at a later stage.

Tag-along and drag-along clauses allow one of the partners to join the other party in cases like further acquisition or sell out deals.

Such rights to the parties entering into M&A deals are also covered under ‘put and call’ options,which allow one party to sell or buy the securities or assets involved in a transaction.

The Sebi notification permitting the use of such clauses in share purchase agreements was made by amending the Securities Contracts (Regulation) Act. The amendments would be effective prospectively and not to the deals that have already taken place.

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