SEBI on Put and Call Options

The Vedanta/Cairn Energy deal brings the issue of put and call options back into the spotlight as SEBI has sought removal of those clauses from the agreement regarding sale of shares in Cairn India. Curiously enough, SEBI has adopted a strict stance on an issue that is far from being clear under Indian law. As we have discussed earlier, the enforceability of put and call options hinges upon a number of statutory provisions and subsidiary legislation to regulate forward contracts (and speculation in securities) that date several decades.

There has been an extensive debate on this issue lately:

Discussion on The Firm – Corporate Law in India;

A column by Ashwin Mathew on The Firm – Corporate Law in India; and

Comments by Sandeep Parekh.

SEBI’s view is consistent with the approach it previously adopted in the order pertaining to the MCX Exchange where it found buyback arrangements in securities of a company to be unenforceable under law (although options do carry certain material differences with plain-vanilla forward contracts). In that case, SEBI went into a fairly detailed analysis of the law on the topic.

The immediate question is whether the Cairn Energy case would represent a precedent as far as SEBI’s regulatory opinion is concerned. If so, similar directives can be expected in other cases where agreements contain put and call options and pre-emption clauses. The position is likely to be resolved only when there is a definitive ruling from an appellate body if SEBI’s stance were to be challenged. A similar saga played out in the past when SEBI adopted a stringent stance on the meaning of “control” under the Takeover Regulations, and the matter appears to have been resolved, at least temporarily, after the judgment of the Securities Appellate Tribunal (SAT) in the Subhkam Case.

About the author

Umakanth Varottil

Umakanth Varottil is a 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.


  • SEBI's view has far reaching consequences. Given that SC in 2010 endorsed the view taken by certain high courts that securities contracts regulation act extends to unlisted securities of public companies, enforceability of put and call option arangements in shareholders' agreements of would-be-listed public companies becomes doubtful. This will reduce the exit routes for pre-IPO investors. However, what is interesting is that SEBI has been clearing draft red herring prospectuses which have put options or tag-along rights in investors agreements and these rights have continued even after listing!

  • The recent Vodafone- Essar deal is an interesting study in this reagrd.Essar had a put option over 22 per cent of Vodafone Essar Limited (VEL) with Vodafone and the same option was also successfully exercised by Essar to sell its 22 per cent to Vodafone. Similarly Vodafone also had a call option over the remaining 11 per cent of VEL owned by the Essar Group. This call option was also exercised by Vodafone and by the virtue of maturity of both these options Vodafone acquired 33% shares of VEL owned by Essar and its group companies for a consideration of $ 5 Billion. These options are not spot contracts as envisaged in the Securities Contracts(Regulation) Act,1956 as both these options were entered into in 2007 in the agreement between the two parties.

    These are 'forward contracts' and if one is to go by the 1 March 2000 Notification of SEBI(under Section 16 of SCRA) and the recent decision of SEBI regarding call and put options in the Cairn Vedanta deal these are not good in the eyes of law. Yet both the options have been honoured by the parties and no question has been raised with respect to legality.

  • Does a put option by a resident on equity shares investment made by an NR make it in the nature of debt/STRUCTURED obligations/ECB for the purposes of RBI?

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