Forum Views - May 2024

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FORUM VIEWS - MAY 2024

purchase of securities, other than spot delivery contracts,

contracts for cash/hand delivery/ special delivery, and

derivatives contracts.

On 3rd October, 2013 by Notification No. G.S.R 219(E), issued

under section 16 of SCRA, SEBI inter alia rescinded the 1969

Notification and for the first time inter alia permitted contracts

in shareholders agreements or provisions in the articles of

association, providing for purchase or sale of securities

pursuant to the exercise of an option contained therein to buy

or sell the securities, on the terms and conditions set out

therein (i.e. put/ call options). The above Notification also

provided that nothing contained in the said notification shall

affect or validate any contract which has been entered prior to

the date of the said notification. The explanation to the said

Notification clarified that the above contracts will be valid

notwithstanding anything contained in section 18A.

The above legislative history finally culminated into the

landmark judgement dated 2nd February, 2023 passed by the

Division Bench of the Bombay High Court, in Percept

Finserve Private Limited v. Edelweiss Financial Services

Limited (2023 SCC OnLine Bom 319) which finally put to rest

the controversy surrounding enforceability of put options.

Edelweiss Financial Services Limited (“Edelweiss”) entered

into a share purchase agreement (”SPA”) with Percept

Finserve Private Limited (“Percept Finserve”) for purchase of

certain shares of Percept Limited in 2007 i.e. much before the

2013 Notification. The SPA contained certain conditions

subsequent that had to be fulfilled by Percept Limited and

Percept Finserve. The SPA contained a Put Option whereby an

option was given to Edelweiss to re-sell the shares of Percept

Ltd. to Percept Finserve for a purchase consideration of INR 20

crores along with 10% of internal return of rate, if there was a

breach of certain conditions subsequent as per the SPA.

As the conditions subsequent were not fulfilled, Edelweiss

exercised its Put Option, and issued a letter calling upon

Percept Finserve to give effect to the Put Option. As Percept

Finserve did not honour the exercise of the Put Option,

Edelweiss commenced arbitration proceedings. The sole

arbitrator in his award concluded that Percept Finserve and

Limited had in fact breached their obligations under the SPA,

but rejected Edelweiss's Put Option claim on the ground that

the same was illegal. The arbitrator held that the Put Option

was illegal as a) it constituted a forward contract, which is

prohibited under Section 16 of SCRA read with SEBI’s March

2000 circular; and Put Option being a contract in derivatives

and not being traded on recognised stock exchange in

accordance with Section 18-A of the SCRA was illegal.

The Award was challenged by Edelweiss under Section 34 of

the Arbitration and Conciliation Act, 1996 (“Act”) and was set

aside by the Bombay High Court on 27th March 2019. An

Appeal was thereafter filed before the Division Bench by

3. What was the landmark judgement passed by the

Bombay High Court in the matter of Percept Finserve

Private Limited v. Edelweiss Financial Services Limited?

Percept Finserve under Section 37 of the Act against the order

of the single bench. The division bench expressed complete

agreement with the views of the single judge in holding that

the Put Option was legal and enforceable. The Court placed

reliance on a previous discussion in MCX Stock Exchange

Limited v. SEBI (2012 SCC OnLine Bom 397), which held that

an ‘option’ is in the nature of a privilege, the exercise of which

is dependent on the discretion of the person who has been

granted the option. In case of an option, a concluded contract

arises only upon exercise of the option. It was thus held that

contract for repurchase of shares by Percept Finserve will

arise only on the exercise of the Put Option by Edelweiss upon

non - fulfilment of the conditions subsequent.

A further question that came up before the Bombay High Court

was whether the options contained in the SPA were contrary

to section 18 A of the SCRA. The Court held that Section 18 A

never prohibited entering into a call or put option but only

regulated trading or dealing in such option as a security. It was

also reiterated by the Court that put option clauses like the Put

Option in this case will be enforceable under the scheme of the

SCRA, irrespective of whether the underlying agreement is

executed prior to, or post the Notification issued by SEBI in

2013.

By the aforesaid judgement a crucial aspect of securities and

commercial law which plagued parties and the regulator in

equal proportion for decades was finally answered. This

judgement ensures that put and call options are considered

valid and enforceable irrespective of the change in law and

passing of several notifications.

Zerick Dastur is Proprietor of the Law Firm, practicing in the field of Court

litigation, Dispute Resolution, Arbitration, Securities law and Competition Law.

He is a triple Gold Medalist from Mumbai University having topped the Mumbai

University in Law. His practice covers diverse areas of Corporate, Commercial,

Securities law and Regulatory disputes. He is representing a number of clients in

the Port Sector, Infrastructure and Mining Sectors. He has represented clients in

domestic and international, commercial arbitration matters. He handles a

number of cases relating to securities law litigation and SEBI. He was a former

Partner at the Law Firm, J. Sagar Associates.

He has litigation experience before the Hon’ble Supreme Court, various State

High Courts Statutory Tribunals and Regulators. He has been involved in a

number of matters involving issues of Constitution Law. He has been involved in

landmark matters involving defence of Auditors and Corporate clients before

various Regulators/Civil/Criminal Courts and Tribunals in connection with

Corporate frauds. He has also advised various clients in matters involving

shareholder disputes and minority actions before the NCLT and CLB.

He also practices Securities Law and appears before the Securities Appellate

Tribunal and the SEBI. He has advised clients in connection with Competition

Law issues in everyday business operations including issues relating to anti-

competitive agreements and abuse of dominance by enterprises.

He writes for various newspapers and publications on issues relating to

Corporate law, Arbitration, Commercial and Competition Law. He regularly

writes on securities law for the publication run by the Bombay Stock Exchange

Brokers Forum. He is a regular speaker at events organised by Economic Times,

VC Circle, Indian Merchant Chambers, Consumer Resources, Corporate

Knowledge Foundation and the World Zoroastrian Chamber of Commerce.

He is a Member of the Law Committee of Indian Merchant Chambers and was

involved in the drafting of the Rules for the IMC International Arbitration Centre.

Views of the author are personal and do not constitute legal advice.

(Advocate Zerick Dastur and Advocate Smriti Singh)

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