Sebi allows put and call options in M&A deals

The move, which is likely to benefit investors, will spur investment activity in the country

GN Bureau | October 4, 2013



In a major fillip to investment activity, the securities and exchange board of India (Sebi) has allowed investors to buy and sell shares under share purchase agreements (mergers and acquisitions). The move to legalise put and call options in shareholders’ agreement is likely to benefit investors including private equity funds.

According to a statement issued by the markets watchdog on Thursday, the 10-year-old curbs on merger and acquisition deals were acting as a deterrent and the new norms will encourage investment activity.

"SEBI has issued a notification today, inter alia, permitting contracts for pre-emption including right of first refusal, tag-along or drag-along rights contained in the shareholders agreements or articles of association of companies. SEBI has also permitted contracts containing an option for purchase or sale of securities," Sebi said.

However, the regulator has allowed these facilities subject to various conditions which include— the seller should hold the ownership of the securities for at least a one-year period from the date of the contract, the pricing of the securities should be as per all the extant laws, and finally, the contract can be settled only after actual delivery of the securities.

Understanding the jargon

Put Option: Under this option, an investor has the right to sell his/her shares back to the company or to its promoter at a price that has been fixed before.

Call Option: Under this option, an investor has the right to buy shares held by the company or promoter at a pre-determined price.

Tag along rights: This gives a minority shareholder the right to sell his/her shares of a company on similar terms as those of the majority shareholders.

Drag along rights: This gives the majority shareholders a right to force minority shareholders to come together to off-load their shares on similar terms during the sale of a company.

Right of first refusal: Under this, an investor reserves the right to make a commitment (investment) at a later date after he/she is assured that the business will do well. Thus, they need not make an investment upfront.
 

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