SEBI allows shareholders’ options/pre-emptive rights

By Ranjana Roy Gawai and Krishna Keshav, RRG & Associates
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The question as to a shareholder’s right to enter into a private arrangement in relation to transfer of shares of a public company was resolved by a decision of Bombay High Court in Messer Holdings Limited v Shyam Madanmohan Ruia and Ors (September 2010), which held that a right of first refusal in a share purchase agreement was valid and not in violation of section 111A of the Companies Act, 1956. This decision by a division bench overruled a single bench judgment of the same court in Western Maharashtra Development Ltd v Bajaj Auto Ltd (February 2010), in which pre-emptive rights over shares of a public company were held to be illegal.

The legal proposition laid down in Messer Holdings in respect of transfer of shares of a public company has been given statutory recognition in the proviso to section 58(2) of the Companies Act, 2013, which provides that “any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract”. This provision implicitly provides legal sanctity to put and call options.

Ranjana Roy Gawai
Ranjana Roy Gawai

SEBI notification

The Securities and Exchange Board of India (SEBI), after taking an unfavourable stand towards options for many years, by way of a notification dated 3 October 2013, has rescinded its previous notification dated 1 March 2000 which restricted the scope of permissible securities contracts to spot delivery and derivative contracts. Now SEBI has broadened the scope of permissible securities contracts by permitting contracts for: (a) pre-emption including right of first refusal or tag-along or drag-along rights contained in shareholders agreements (SHA) or articles of association (AOA) of companies or other corporate bodies; and (b) contracts in SHA or AOA for purchase or sale of securities pursuant to exercise of an option contained in the SHA or AOA to buy or sell the securities, provided (i) the title and ownership of the underlying securities are held continuously by the selling party to such contract for a minimum of one year from the date of entering into the contract; (ii) the price or consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained in the SHA or AOA is in compliance with all the laws for the time being in force; and (iii) the contract is settled by way of actual delivery of the underlying securities.

The new notification is prospective in nature and requires contracts to comply with foreign exchange regulations.

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Ranjana Roy Gawai is the managing partner and Krishna Keshav is a partner at RRG & Associates.

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Email: contact@rrgassociates.com

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