Enforceability of Options in Securities

The Mint carries an article by Archana Rajaram and Amrita Singh that discusses the current position on the enforceability of put and call options on securities of an Indian company. The Securities Contracts (Regulation) Act, 1956 (SCRA) and the notifications issued under that permit only ‘spot delivery’ contracts in securities transactions outside the exchange. A spot delivery contract is one where the transfer of securities and payment of consideration take place on the same or next day. There is one school of thought that views options as only contingent contracts and they become completed contracts only when the option is exercised (in which case they need to be settled the same day or next day). But, the authors helpfully point to a judgment of the Bombay High Court in Niskalp Investments and Trading Co. Ltd. v. Hinduja TMT Ltd where the court refused to accept that a contingent contract is outside the purview of SCRA’s proscription. This creates further ambiguity on the enforceability of options in securities and, as the authors point out, may require clarification from SEBI.
This also brings to mind a column in the Economic Times I co-authored a few years ago on this issue, which had disappeared into cyberspace for a while but has now resurfaced (here). The difficulties in enforceability of options that appeared to exist then continue even now, but in a further compounded form owing to the Niskalp judgment.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • Sir,

    Somehow, omission of section 20 (prohibition of option on securities) of the SCRA does not find a mention in the Niskalp judgment. Also, had the scope of “marketable” with respect to securities of a private company (as you have noted in your article) been examined, the plaintiff could have had a better case.

    The judgment also does not seem to suggest the existence of an arbitration clause.

    Assuming the SCRA applies even to private companies, Sir i wonder how forward contracts executed by private companies, in the course of their business for purposes of hedging currency risks work.

    The article on ET was a highly absorbing one and offered an interesting read, thanks.


  • Krishnan, thanks for your comments. The SCRA does not apply to private companies as their securities are “marketable”. The issue relates to public unlisted companies whose securities are not listed on a stock exchange but are freely transferable on account of Sec. 111A(2) of the Companies Act. Also, the SCRA covers on contracts in “securities”. So, to the extent that hedging in currency, etc. do not involve “securities”, the SCRA has no role to play.

  • Sir,

    Thanks for your reply. I misunderstood “closely held” unlisted companies (as mentioned in your article) for a private company.

    Had I also taken a closer look at the name of the plaintiff in the Niskalp case (being a public company), I could have avoided making this huge error.

    Thankfully, the redeeming point is that I was clear on the aspect of non marketability of shares of a private company.

    Extremely sorry Sir.


  • Is there any other authority except the Bombay High Court judgment in Dahiben Umedbhai Patel v. Norman James Hamilton (1982) which states that Securities Contract Regulation Act will not apply to private companies?

  • Sir,
    I would like to clarify a doubt.
    If a private company is a subsidiary of a public company then as per s. 3(1)(iv)(c) of the Companies Act, it would be a public company.

    Now to such a company does the SCRA apply? This would be an unlisted public company
    Can the shares of such a "public" company can be said to be 'marketable' and thus under the purview of SCRA?

  • Under sec. 3(1)(iv)(c) of the Companies Act, any subsidiary of a public company would also taken on all the characteristics of a public company. In that sense, going by current trend in case law, the shares of such a company can be said to be 'marketable' in nature. However, a more restrictive view of sec. 3(1)(iv)(c) has been adopted by the Company Law Board in Hillcrest Realty Sdn Bhd v. Hotel Queen Road.

  • The SEBI Informal Guidance to Vulcan Engineers(23 May), clearly puts forth SEBI's views on this.

    Albeit the guidance was sought on whether persons entering into call/put arrangements, amongst others, with respect to shares of a listed company, would be deemed persons acting in concert; SEBI held that as the call/put arrangements were not ‘spot delivery’ contracts under the SCRA, the arrangements were invalid, without even considering the point on which informal guidance was being sought.

    This view of SEBI’s is not entirely unknown but, probably, this is the first time SEBI has put its view out, in writing, in the public.


    Jay Parikh

  • Is there is restrcition on a private limited company to insert call and put options in its shareholders or JV agreement? Will they be legally enforceable? Your urgent reply shall be highly appreciated.

  • @Aavyan. The SCRA does not apply to private companies as their securities are not "marketable". Hence the restrictions in the SCRA against put and call options in securities will not apply to private companies.

  • Dear Sir,

    I understand that this was written a while back, but I came across this article recently and have a few clarifications.
    1. The Companies Act, 2013 makes several references to the SCRA, 1956. E.g. definition of securities and derivative. Therefore, in order to determine the validity of options contracts entered into by private companies, is there still no requirement to refer to the SCRA?
    2. Can private companies enter into options contracts with private individuals/investors regardless of the restrictions under Section 18A (excluding ESOPs and assuming everyone is Indian in the said transaction)?

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