New route to ease merger and acquisition deals

Plan to legalise put & call options in such agreements via rules in new Companies Act, for contracts outside the bourses

The finance ministry intends to withdraw a Cabinet note on legalising of call and put options in merger and acquisition deals outside the stock exchanges. And instead, opt for making rules in this regard under the new Companies Act.

Legalising the options would have a bearing on the residual stake sale in Bharat Aluminium (Balco) and Hindustan Zinc (HZL) to Sterlite Industries.

"There is no need to take it to the Cabinet. It will be taken care of in the Companies Act," a finance ministry official said. The ministry is writing to the Cabinet secretariat to withdraw the earlier note.

Under the Securities Contracts (Regulations) Act, put and call options are treated as derivatives and not permitted for listed companies outside stock exchanges. There is a grey area in unlisted companies as well, since the issue is not specifically dealt in either the Companies Act, 1956, or the successor legislation.

So, a clarification would be made in the rules under the new Act to make these options legal.

The issue assumes importance since many investors had asked Finance Minister P Chidambaram for clarity on whether call and put options would be allowed outside the stock exchanges, when he went for road shows abroad to sell the India growth story. And, the Reserve Bank has been saying these options are void for non-resident Indians under the Foreign Exchange Management Act.

Companies affairs minister Sachin Pilot had recently stated he'd try to get the rules under the new Companies Act framed as soon as possible. Hardeep Sachdeva, partner with law firm AZB & Partners, said the SCRA jurisdiction should not cover private contracts. The rules should specify that unlisted companies, whether private or public, be out of any statute as these are private deals, he said.

Earlier, the government had decided to allow put and call options in share purchase agreements, to permit companies to buy or sell equity at a predetermined price in the future. The proposal was cleared by Telecom Minister Kapil Sibal within a day of his assuming additional charge of the law ministry.

Balco, 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 that 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 as the dispute arose out of the shareholder agreement, it should be resolved through the arbitration procedure 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 contract between two partners.

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