In a letter dated May 23, 2011, the Securities and Exchange Board of India ("SEBI", and such letter, the "SEBI Letter") took the view that put/call options governing the shares of an Indian public listed company are unenforceable. This is consistent with the view SEBI had taken previously, in an unpublished letter dated March 18, 2011, issued in connection with the proposed acquisition by UK based Vedanta Resources Plc. (an English company) and others of a majority stake in Cairn India Limited.[1]

Background

The SEBI Letter was issued against the backdrop of a proposed acquisition by SIMEST SpA, an Italian financial institution controlled by the Italian Ministry of Economic Development ("SIMEST"), of 13.789% of the shareholding of an Indian public listed company, Vulcan Engineers Limited ("VEL"), through a preferential allotment. Previously, Terruzzi Fercalz SpA ("Terruzzi"), an Italian company, had acquired 66.91% of the shareholding of VEL. A proposed agreement ("Agreement") between SIMEST and Terruzzi contemplated the acquisition of shares in VEL by SIMEST. However, the Agreement also contained a put option in favor of SIMEST, whereby SIMEST could require Terruzzi to purchase all its shares in VEL at any time after June 30, 2015.

On February 24, 2011, VEL requested guidance from SEBI under the SEBI (Informal Guidance) Scheme, 2003, seeking clarification whether SIMEST and Terruzzi would be considered "persons acting in concert" under the Indian takeover regulations. The SEBI Letter was written in response to VEL's request. 

SEBI's View

SEBI examined the provisions of the Agreement in the light of the Securities Contracts (Regulation) Act, 1956 ("SCRA"). Broadly speaking, Indian law prohibits all contracts for the purchase and sale of securities, except derivatives traded on an exchange, or spot delivery contracts where payment and delivery both occur either on the same day as the date of the contract or on the next day.

SEBI found that since the put option would be exercised at a future date, the transaction would not qualify as a "spot delivery contract" under Section 2(i) of the SCRA. Equally, SEBI found that the option would not qualify as a legal and valid derivative contract under Section 18A of the SCRA as it was exclusively entered into between two parties and was not a contract traded on stock exchanges and settled at a clearing house of a recognized stock exchange. For this reason, SEBI concluded in this case that the put/call option as contemplated in the Agreement is not valid. 

Significantly, SEBI did not comment on the clarification requested by VEL relating to "persons acting in concert" under the Indian takeover regulations.