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.