This content is from: Local Insights

Clarity on Indian exit options

Dinesh EediKaran Talwar
There has been lot of uncertainty on the enforceability of exit options in shareholders' agreements (SHAs) of public limited companies (PLCs), especially those listed in India. Conflicting decisions of various High Courts regarding restrictions on the free transferability of securities, orders of the Securities and Exchange Board of India (Sebi) on the legality of put and call options and the intransigence of the government on the same issue created havoc and confusion among the investor community.

In an attempt to enhance its business image and clear all ambiguities, sections 5 and 58 of the Companies Act 2013 provide clarity on the validity and enforceability of such provisions in the SHA and Articles of Association (AoAs) of PLCs. The provisions, however, have not yet come into force. Section 5 envisages provisions in the AoA which can only be altered with conditions or procedures that are even stricter than those required for special resolution. Section 58(2) provides that, as a general rule, securities of PLCs shall be freely transferable, but any contract or arrangement for the transfer of securities between two parties shall be enforceable as a contract, implying that contracted restrictions on the transfer of securities (such as right of first refusal, and drag- and tag-along rights) are valid even if they are not specifically spelt out in the AoA.

Sebi has also, through an October 2013 notification, discontinued the requirement of its prior approval for inclusion of preemptory rights like right of first Refusal, drag-along or tag-along in SHA and AoA of listed PLCs. Provisions allowing the transfer of securities through options (call and put) may also be included so long as: (a) the title and ownership of the securities is held by the selling party for a minimum of one year from date of SHA on the transfer date; (b) the consideration payable for the securities is in compliance with applicable laws; and (c) the contract is settled by actual delivery of securities, and is in line with foreign exchange laws. Further, the Reserve Bank of India, through a notification published on December 30 2013, has aligned Foreign Exchange Management (the transfer or issue of security by a person resident outside India) Regulations 2000 and through a circular dated January 9 2014, permitted the issue of securities to non-residents with (call and put) options, subject to certain conditions.

Dinesh Eedi and Karan Talwar

© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.

Instant access to all of our content. Membership Options | 30 Day Trial