Nod unlikely for stake increase in HZL, Balco

Attorney-General Vahanvati has advised govt to only prospectively allow listed firms to buy or sell stake through contracts, say sources

Anil Agarwal's Sterlite Industries might not gain in the dispute with the government over its exercise of a call option in Bharat Aluminium Company (Balco) and Hindustan Zinc (HZL) in the light of the proposed move to allow call and put options in listed companies outside the stock exchanges. Attorney-General G E Vahanvati has told the finance ministry the move should come with a clause that it would be prospective and wouldn't affect ongoing court disputes, said those in the know of the development.

The government has decided 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. The proposal was cleared by Telecom Minister Kapil Sibal within a day of his assuming additional charge of the law ministry. It will come into force after approval by the finance ministry and the Securities and Exchange Board of India (Sebi). It will be implemented through a Sebi notification. Under the Securities Contracts (Regulations) Act, put and call options are treated as derivatives and are not permitted in listed companies outside stock exchanges. Unlisted companies, however, can go for put and call options. When the finance ministry sought the attorney general's opinion on the proposal, he said a notification allowing the option could be issued by invoking the powers conferred under section 16 and 28 (2) of the Securities Contracts (Regulation) Act, 1956. He also said the notification didn't suffer from any infirmity under the Companies Act, 1956, and the Indian Contract Act, 1872.

However, he said a suitable provision might be inserted in the notification that it wouldn't affect or validate past contracts or those which were in courts due to disputes. This specific opinion was to address the concerns of the ministry of mines about the litigation pending with regard to Balco and HZL. Call and put options were one of the major clauses in the agreement with Sterlite Industries, an arm of London-based Vedanta Resources, when it bought majority stakes in HZL and Balco. Sterlite had bought 51 per cent stake in Balco for Rs 551.50 crore in 2000-01 and 26 per cent in HZL for Rs 445 crore in 2002-03, when the Bharatiya Janata Party-led National Democratic Alliance was in power at the Centre.

Sterlite later invoked the call option to acquire another 18.92 per cent in HZL for Rs 323.8 crore. Subsequently, it increased its stake to 64.92 per cent.

However, the government held Sterlite's call option was invalid and could not be used to acquire further stake in HZL. Then Attorney General Milon Banerji had said the country's laws didn't allow for call and put options to be included in shareholders' agreements.

When Sterlite chose to exercise this option in the case of HZL in 2004, the Congress-led United Progressive Alliance government didn't reciprocate with a put option. The company moved court against the government's decision in 2007; the court held since the dispute arose out of the shareholder agreement, it should be resolved through arbitration prescribed in the agreement. While rejecting Sterlite's plea in early 2011, the arbitration panel said the law of the land should be considered first, followed by the articles of association of a company and then the mutual contract between two partners.

Later, the government and Sterlite decided to approach the Delhi High Court. Subsequently, Vedanta Resources offered to the government to buy the residual stakes in HZL and Balco for about Rs 17,000 crore.

NO OPTION FOR STERLITE

* The government might not allow listed companies to buy or sell equity through options; past contracts or those in courts might also not be allowed
* Options were one of the major clauses in the agreement with Sterlite Industries, an arm of London-based Vedanta Resources, when it bought majority stakes in Hindustan Zinc (HZL) and Balco
* The government had held Sterlite’s move in 2004 to increase its stake in the companies through options invalid