Put and call options: Light at the end of the tunnel?

The Law Ministry is reported to have approved a proposal by the Securities and Exchange Board of India (SEBI) to permit the use of put and call options for corporate restructuring and non-speculative purposes. This development should finally bring some clarity over the use of these tools, favoured by those active in the spheres of private equity, and mergers and acquisitions.

Strategic tools

Put and call options are widely used around the world in structuring transactions to attain certain objectives. Typically, put options are granted by promoters of companies to investment funds which have a determinate term and require an alternative exit route, should a primary market offering or strategic sale not prove feasible. Call options facilitate an increase in stake at a later date, enabling consolidation by the joint-venture partner or the original promoters.

These options may also be handy in various scenarios, such as events of default, breach of contractual obligations, or even to resolve a deadlock between shareholders and investors. By linking the exercise of options to the achievement of certain milestones, put and call options can also be deployed by parties as positive or negative incentives in the management of a company.

Siddharth Hariani is a partner and Davis Kanjamala is an associate at the Mumbai office of Phoenix Legal.