PUT & CALL OPTION IN SHARE PURCHASE PACTS

Foreign investment in Indian firms is all set to get a boost as government has decided to move ahead with a proposal to allow "put" and "call" options in share purchase agreements to permit listed companies to buy or sell equity at a predetermined price in future.Under the Securities Contracts (Regulations) Act (SCRA), put and call options are treated as derivatives and are not permitted outside stock exchanges. The unlisted companies, however, can go for put and call options. "Strategic investors as well as private equity funds will benefit from the decision," said Bhavin Shah, partner KPMG India, while commenting on the decision of the Law Ministry to approve the proposal which has been pending for the past several months. According to Avinash Gupta, Leader, Financial Advisory Services, Deloitte India "this will definitely create a positive sentiment among investors... We will have to wait for notification to see the finer points". The proposal to permit put and call options in the share purchase agreement was cleared by Telecom Minister Kapil Sibal within a day of his assuming additional charge of the Law Ministry. The proposal will come into force after approval by Finance Ministry and Securities and Exchange Board of India (Sebi).
Sibal told reporters that he cleared the proposal along with with Finance Ministry's request for conciliation of tax dispute with British telecom giant Vodafone. "Put" option gives shareholder the right to sell a certain amount of shares at a specific price and within a given time-frame. In "call" option, the buyer has the right to purchase specific amount of shares at a certain price and specified time. The Law Ministry's nod to the proposal comes at a time when the government takes steps to promote investments. Finance Minister P Chidambaram, who is travelling the world to sell India's growth story, has been assuring the investors about India's commitment to economic reforms. Once approved, Shah said, "put and call options become enforceable contracts outside exchanges enabling the companies to restructure merger and acquisition deals to suit the their requirements." In view of the ambiguity, investors have been demanding clarity over the issue with a view to facilitating merger and acquisition operations. In recent times, there have been issues on put and call options in share purchase agreements related to some mega deals including United Spirits-Diageo and Cairn-Vedanta.
The ambiguity over put and call options is also believed to be adversely impacting overall investor sentiment. According to Gupta, the clarification would encourage conservative investors to incorporate put and call options as part of the share purchase agreements with regard to listed companies.