Put and call options to be allowed soon in M&A deals

Such options give the investor an option to either sell the shares or to buy additional shares at a future date

Foreign and domestic entities may soon get larger leg-room in structuring merger and acquisition deals in the country, as the government is considering allowing put and call options in share-purchase agreements.

Such options in shareholder agreements give the investor an option to either sell the shares (put option), or to buy additional shares (call option) at a future date.

According to sources, Law Minister Kapil Sibal has cleared a proposal to amend the nearly six-decade old Securities Contracts (Regulation) Act (SCRA) to allow put and call options in shareholder agreements.

The proposal was mooted by the capital markets regulator Sebi and it was forwarded to the Law Ministry through Finance Ministry.

The proposal to amend the SCRA regulations for allowing put and call options, as also to enable some other provisions to give special rights to investors, would now be presented before the Union Cabinet, sources said.

Sebi had proposed changes in the SCRA after certain merger and acquisition deals, including the Diageo-United Spririts deal and Cairn-Vedanta deal, faced regulatory hurdles due to lack of clear regulations for allowing put and call options.

In both the above cases, Sebi had asked the acquirers to amend their share purchase agreements to remove any put or call options, as the existing regulations treated such rights to the investors as forward contracts.

According to market experts, specific provisions for put and call options in the SCRA would remove the ambiguity and help attract the foreign investors, especially the private equity funds who generally insist on clauses like put and call options as an exit opportunity at a later stage.