In a move that should benefit investors, including private equity funds, the markets regulator on Thursday ruled that put and call options can be part of share purchase agreements. The RBI is understood to have been consulted on the rules, which will come into effect prospectively.
“Call and put options are now legal and if there is any foreign investment involved, the rules relating to foreign direct investment will need to be met,” Sebi chairman UK Sinha told FE. Sinha added that the number of such transactions, governed by FEMA (Foreign Exchange Management Act), were very few.
While allowing put and call options, Sebi said such transactions need to have been in place for at least a year; in other words, the seller should have owned the ‘underlying securities’ for at least one year from the date of the contract. Moreover, for a listed company, such products will be priced according to existing laws and the underlying securities must be delivered.
While Sebi has been disallowing such instruments as it believed they were in conflict with Section 18A of the Securities Contracts (Regulation) Act, the necessary amendments have now been made. Sebi has also said that entities can enter into contracts for the sale or purchase of securities or derivatives and also contracts for pre-emption including right of first refusal, tag-along or drag-along rights.
“Deal-making will be easier now, as the drag-along and tag-along rights in companies can be used irrespective of whether they are listed or unlisted,” says PRS Srinivasan, co-founder, Exponentia Capita.
“The PE firms do not have the fear of losing rights while taking the company public,” Srinivasan said.
Avinash Gupta, senior director, Deloitte, pointed out that the RBI has been treating such products as ECB rather than FDI since it is of the view that an investment with an element of fixed return has to be treated as debt. “Further clarity will be needed on the treatment of these options in the hands of the RBI, since it has so far maintained that put options should be treated as debt in the hands of a foreign investor and hence have to comply with ECB norms,” Gupta observed.
The lack of clarity on put options dates back to 2009-10 when DLF's plan to buy DE Shaw's stake in a subsidiary hit a roadblock. Recent high profile deals like the Diageo-United Spririts deal and the Cairn-Vedanta deal have also had to face regulatory hurdles due to the lack of clarity on such clauses.